As filed with the Securities and Exchange Commission on February 28, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

 

 

 

Commission File No. 1-6571

 

 

 

 

Merck & Co., Inc.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000

 

 

Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2011: 3,083,080,697.

 

Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2010 based on closing price on June 30, 2010: $107,724,000,000.

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

 

 

Table of Contents

 

 

recognized by the Merck/Schering-Plough Partnership (the “MSP Partnership”) and the results of Old Merck’s interest in the MSP Partnership were recorded in Equity income from affiliates . As a result of the Merger, the MSP Partnership is wholly-owned by the Company and therefore revenues from these products are now reflected in Sales . Additionally, the Company recognized a full year of sales in 2010 from legacy Schering-Plough animal health and consumer care products. Sales for 2009 only include revenue from legacy Schering-Plough and MSP Partnership products for the post-Merger period through December 31, 2009. Also contributing to the sales increase was growth in Januvia (sitagliptin phosphate) and Janumet (sitagliptin phosphate and metformin hydrochloride) for the treatment of type 2 diabetes, Isentress (raltegravir), an antiretroviral therapy for use in combination therapy for the treatment of HIV-1 infection in adult patients, and Singulair (montelukast sodium), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis. These increases were partially offset by lower sales of Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide) for the treatment of hypertension, which lost patent protection in the United States in April 2010 and in a number of major European markets in March 2010. Revenue was also negatively affected by lower sales of Fosamax (alendronate sodium) and Fosamax Plus D (alendronate sodium/cholecalciferol) for the treatment and, in the case of Fosamax , prevention of osteoporosis, which have lost market exclusivity in the United States and in several major European markets, and lower revenue from the Company’s relationship with AstraZeneca LP (“AZLP”), as well as by lower sales of Gardasil [human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant], a vaccine to help prevent cervical, vulvar, vaginal and anal cancers, precancerous or dysplastic lesions, and genital warts caused by the human papillomavirus (“HPV”) types contained in the vaccine, and lower sales of Zocor (simvastatin) , the Company’s statin for modifying cholesterol. In addition, the implementation of certain provisions of U.S. health care reform legislation during 2010 resulted in increased Medicaid rebates and other impacts that reduced revenues by approximately $170 million. Additionally, many countries in the European Union (“EU”) have undertaken austerity measures aimed at reducing costs in health care and have implemented pricing actions that negatively impacted sales in 2010.

 

Sales of Remicade and a follow-on product, Simponi , were $2.8 billion in the aggregate in 2010. The Company is involved in an arbitration with Centocor Ortho Biotech, Inc. (“Centocor”), a subsidiary of Johnson & Johnson, in which Centocor is seeking to terminate the Company’s rights to continue to market Remicade and Simponi . The arbitration hearing has concluded and the Company is awaiting the arbitration panel’s decision. See Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below. An unfavorable outcome in the arbitration would have a material adverse effect on the Company’s financial position, liquidity and results of operations.

 

Since the Merger, the Company has continued the advancement of drug candidates through its pipeline. During 2010, the U.S. Food and Drug Administration (“FDA”) approved Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a new fixed-dose combination asthma treatment for patients 12 years of age and older. In addition, the intravenous formulation of Brinavess (vernakalant), for which Merck has exclusive marketing rights outside of the United States, Canada and Mexico, was granted marketing approval in the EU for the rapid conversion of recent onset atrial fibrillation to sinus rhythm in adults: for non-surgery patients with atrial fibrillation of seven days or less and for post-cardiac surgery patients with atrial fibrillation of three days or less.

 

Also during 2010, the FDA approved a new indication for Gardasil for the prevention of anal cancer caused by HPV types 16 and 18 and for the prevention of anal intraepithelial neoplasia grades 1, 2 and 3 (anal dysplasias and precancerous lesions) caused by HPV types 6, 11, 16 and 18, in males and females 9 through 26 years of age. Additionally, in September 2010, two supplemental New Drug Applications (“sNDA”) for Saphris (asenapine) for the treatment of schizophrenia in adults and acute treatment of bipolar I disorder in adults were approved in the United States to expand the product’s indications. Also during 2010, the Company entered into a co-promotion agreement for the commercialization of Daxas , a treatment for symptomatic chronic obstructive pulmonary disease, which the Company launched in certain European markets.

 

The Company currently has three candidates under review with the FDA: boceprevir, an investigational oral hepatitis C protease inhibitor; MK-0431A XR, the Company’s investigational extended-release formulation of Janumet ; and MK-0431D, an investigational combination of Januvia and Zocor for the treatment of diabetes and dyslipidemia. In addition, SCH 900121, NOMAC/E2, an oral contraceptive that combines a selective progestin with 17-beta estradiol, is currently under review in the EU. Additionally, MK-3009, Cubicin daptomycin for injection, is

currently under review in Japan where the Company has marketing rights. Also, the Company currently has 19 candidates in Phase III development and anticipates making a New Drug Application (“NDA”) with respect to certain of these candidates in 2011 including MK-8669, ridaforolimus, a novel mTOR inhibitor being evaluated for the treatment of metastatic soft tissue and bone sarcomas; MK-2452, Saflutan (tafluprost), for the reduction of elevated intraocular pressure in appropriate patients with primary open-angle glaucoma and ocular hypertension; MK-0653C, ezetimibe combined with atorvastatin, which is an investigational medication for the treatment of dyslipidemia; and MK-0974, telcagepant, the Company’s investigational medication for acute treatment of migraine. Another Phase III candidate is vorapaxar with respect to which the Company was recently informed by the chairman of one of the studies to discontinue study drug and that investigators were to begin to close out the study in a timely and orderly fashion. The Company recorded a material impairment charge on the related intangible asset. See “Research and Development” below.

 

The Company continues to make progress in achieving cost savings across all areas, including from consolidation in both sales and marketing and research and development, the application of the Company’s lean manufacturing and sourcing strategies to the expanded operations, and the full integration of the MSP Partnership. These savings result from various actions, including the Merger Restructuring Program discussed below, previously announced ongoing cost reduction activities at both legacy companies, as well as from non-restructuring-related activities such as the Company’s procurement savings initiative. During 2010, the Company realized more than $2.0 billion in net cost savings from all of these activities.

 

In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. As part of the restructuring actions taken thus far under the Merger Restructuring Program, the Company expects to reduce its total workforce measured at the time of the Merger by approximately 17% across the Company worldwide. In addition, the Company has eliminated over 2,500 positions which were vacant at the time of the Merger. These workforce reductions will primarily come from the elimination of duplicative positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions. During this period, the Company also will continue to hire new employees in strategic growth areas of the business as necessary. In connection with the Merger Restructuring Program, separation costs under the Company’s existing severance programs worldwide were recorded in the fourth quarter of 2009 to the extent such costs were probable and reasonably estimable. The Company commenced accruing costs related to enhanced termination benefits offered to employees under the Merger Restructuring Program in the first quarter of 2010 when the necessary criteria were met. The Company recorded total pretax restructuring costs of $1.8 billion in 2010 and $1.5 billion in 2009 related to this program. The restructuring actions taken thus far under the Merger Restructuring Program are expected to be substantially completed by the end of 2012, with the exception of certain manufacturing facilities actions, with the total cumulative pretax costs estimated to be approximately $3.8 billion to $4.6 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects the restructuring actions taken thus far under the Merger Restructuring Program to result in annual savings in 2012 of approximately $2.7 billion to $3.1 billion.

 

In March 2010, the United States enacted health care reform legislation. Important market reforms began during 2010 and will continue through full implementation in 2014. During 2010, Merck incurred costs as a result of the legislation, including increased Medicaid rebates and other impacts that reduced revenues. The Company also recorded a charge in 2010 associated with this legislation that changed tax law to require taxation of the prescription drug subsidy of the Company’s retiree health benefit plans for which companies receive reimbursement under Medicare Part D. Additional provisions of the legislation will come into effect in 2011, including the assessment of an annual health care reform fee on all branded prescription drug manufacturers and importers and the requirement that drug manufacturers pay a 50% discount on Medicare Part D utilization incurred by beneficiaries when they are

in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). These new provisions will decrease revenues and increase costs.

 

Earnings per common share (“EPS”) assuming dilution for 2010 were $0.28, which reflect a net unfavorable impact resulting from the amortization of purchase accounting adjustments, in-process research and development (“IPR&D”) impairment charges, including a charge related to the vorapaxar clinical development program, restructuring and merger-related costs, as well as a legal reserve relating to Vioxx (the “ Vioxx Liability Reserve”) discussed below, partially offset by the gain recognized on AstraZeneca’s exercise of its option to acquire certain assets from the Company. Non-GAAP EPS in 2010 were $3.42 excluding these items (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — “Non-GAAP Income and Non-GAAP EPS” below).

 

In December 2010, Merck announced that its Board of Directors had elected Kenneth C. Frazier, then Merck’s president, as chief executive officer and president, as well as a member of the board, effective January 1, 2011. Mr. Frazier succeeds Richard T. Clark, who will continue to serve as chairman of the board.

 

 

Pharmaceutical

The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are:

 

Bone, Respiratory, Immunology and Dermatology:   Singulair ; Remicade ; Nasonex ; Fosamax; Clarinex ; Arcoxia (etoricoxib) for the treatment of arthritis and pain; Asmanex Twisthaler (mometasone furoate inhalation powder), an oral dry-powder corticosteroid inhaler for first-line maintenance treatment of asthma in patients 4 and older; and Proventil HFA (albuterol sulfate) inhalation aerosol for the relief of bronchospasm in patients 12 years or older.

 

Cardiovascular:   Zetia (marketed as Ezetrol outside the United States); Vytorin (marketed as Inegy outside the United States); and Integrilin (eptifibatide) Injection, a platelet receptor GP IIb/IIIa inhibitor for the treatment of patients with acute coronary syndrome and those undergoing percutaneous coronary intervention in the United States, as well as for the prevention of early myocardial infarction in patients with acute coronary syndrome in most countries.

 

Diabetes and Obesity:   Januvia and Janumet for the treatment of type 2 diabetes.

 

Diversified Brands:   Cozaar ; Hyzaar ; Zocor; Propecia (finasteride), a product for the treatment of male pattern hair loss; Claritin Rx; Vasotec (enalapril maleate) and Vaseretic (enalapril maleate-hydrochlorothiazide) , hypertension and/or heart failure products ; Proscar (finasteride), a urology product for the treatment of symptomatic benign prostate enlargement ; and Remeron (mirtazapine), an antidepressant.

 

Infectious Disease:   Isentress ; PegIntron ; Primaxin (imipenem and cilastatin sodium) ; Cancidas (caspofungin acetate), an anti-fungal product; Invanz (ertapenem sodium) for the treatment of certain infections; Avelox (moxifloxacin), which the Company only markets in the United States, a broad-spectrum fluoroquinolone antibiotic for certain respiratory and skin infections; Rebetol (ribavirin, USP) Capsules and Oral Solution for use in combination with PegIntron or Intron A (interferon alpha-2b, recombinant) for treating chronic hepatitis C; and Crixivan (indinavir sulfate) and Stocrin (efavirenz), antiretroviral therapies for the treatment of HIV infection.

 

Neurosciences and Ophthalmology:   Maxalt (rizatriptan benzoate) , a product for acute treatment of migraine; and Cosopt (dorzolamide hydrochloride and timolol maleate ophthalmic solution) and Trusopt (dorzolamide hydrochloride ophthalmic solution).

 

Oncology:   Temodar ; Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting; and Intron A for Injection, marketed for chronic hepatitis B and C and numerous anticancer indications worldwide, including as adjuvant therapy for malignant melanoma.

 

Vaccines:   ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help prevent 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); Gardasil; RotaTeq (Rotavirus Vaccine, Live, Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children ; Pneumovax (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease ; and Zostavax (Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster) in patients aged 60 or older.

 

Women’s Health and Endocrine:   NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive ring ; Follistim AQ (follitropin beta injection), a fertility treatment; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant; and Cerazette , a progestin only oral contraceptive.

 

Animal Health

The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal marketed products in this segment include:

 

Livestock Products:   Nuflor antibiotic range for use in cattle and swine; Bovilis / Vista vaccine lines for infectious diseases in cattle; Banamine bovine and swine anti-inflammatory; Estrumate for treatment of fertility disorders in cattle; Regumate / Matrix fertility management for swine and horses; Resflor combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zilmax and Revalor to

improve production efficiencies in beef cattle; M+Pac swine pneumonia vaccine; and Porcilis vaccine line for infectious diseases in swine.

 

Poultry Products:   Nobilis / Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis vaccines.

 

Companion Animal Products:   Nobivac / Continuum vaccine lines for flexible dog and cat vaccination; Otomax / Mometamax / Posatex ear ointments for acute and chronic otitis; Caninsulin / Vetsulin diabetes mellitus treatment for dogs and cats; Panacur / Safeguard broad-spectrum anthelmintic (de-wormer) for use in many animals; and Scalibor / Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.

 

Aquaculture Products:   Slice parasiticide for sea lice in salmon; Aquavac / Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor antibiotic for farm-raised fish.

 

Consumer Care

The Consumer Care segment develops, manufactures and markets over-the-counter, foot care and sun care products. Principal products in this segment include:

 

Over-the-Counter Products:   Claritin non-drowsy antihistamines; MiraLAX treatment for occasional constipation; Coricidin HBP decongestant-free cold/flu medicine for people with high blood pressure; Afrin nasal decongestant spray; and Zegerid OTC treatment for frequent heartburn.

 

Foot Care:   Dr. Scholl’s foot care products; Lotrimin topical antifungal products; and Tinactin topical antifungal products and foot and sneaker odor/wetness products.

 

Sun Care:   Coppertone sun care lotions, sprays and dry oils; and Solarcaine sunburn relief products.

 

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.

 

Product Approvals

 

In June 2010, the FDA approved Dulera Inhalation Aerosol, a new fixed-dose combination asthma treatment for patients 12 years of age and older. Dulera combines an inhaled corticosteroid with a long-acting beta ₂ -agonist.

 

In September 2010, the intravenous formulation of Brinavess was granted marketing approval in the EU, Iceland and Norway for the rapid conversion of recent onset atrial fibrillation to sinus rhythm in adults: for non-surgery patients with atrial fibrillation of seven days or less and for post-cardiac surgery patients with atrial fibrillation of three days or less. Brinavess acts preferentially in the atria and is the first product in a new class of pharmacologic agents for cardioversion of atrial fibrillation to launch in the EU. In April 2009, Cardiome Pharma Corp. and Merck announced a collaboration and license agreement for the development and commercialization of vernakalant. The agreement provides Merck exclusive rights outside of the United States, Canada and Mexico to vernakalant intravenous formulation.

 

In August 2009, the FDA approved Saphris (asenapine) for the acute treatment of schizophrenia in adults and for the acute treatment of manic or mixed episodes associated with bipolar I disorder with or without psychotic features in adults. In September 2010, two sNDAs for Saphris were approved in the United States to expand the product’s indications to the treatment of schizophrenia in adults, as monotherapy for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults, and as adjunctive therapy with either lithium or valproate for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults. In September 2010, asenapine, to be sold under the brand name Sycrest , received marketing approval in the EU for the treatment of moderate to severe manic episodes associated with bipolar I disorder in adults; the marketing approval did not include an indication for schizophrenia. The marketing approval applies to all EU member states. In October 2010, Merck and H. Lundbeck A/S (“Lundbeck”) announced a worldwide commercialization agreement for Sycrest sublingual tablets (5 mg, 10 mg). Under the terms of the agreement, Lundbeck paid a fee and will make product supply payments in exchange for exclusive commercial rights to Sycrest in all markets outside the United States, China and Japan. Merck will retain exclusive commercial rights to asenapine in the United States, China and Japan. Concurrently, Merck is continuing to pursue regulatory approval for asenapine in other parts of the world.

Joint Ventures

 

AstraZeneca LP

In 1982, Old Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products in the United States. In 1994, Old Merck and Astra formed an equally owned joint venture that developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec (omeprazole), the first in a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.

 

In 1998, Old Merck and Astra restructured the joint venture whereby Old Merck acquired Astra’s interest in the joint venture, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership named Astra Pharmaceuticals, L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc (the “AstraZeneca merger”), became the exclusive distributor of the products for which KBI retained rights.

 

The Company earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, variable returns based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return representing the Company’s share of undistributed Partnership AZLP generally accepted accounting principles (“GAAP”) earnings. The AstraZeneca merger triggered a partial redemption in March 2008 of Old Merck’s interest in certain AZLP product rights. Upon this redemption, Old Merck received $4.3 billion from AZLP. This amount was based primarily on a multiple of Old Merck’s average annual variable returns derived from sales of the former Astra USA, Inc. products for the three years prior to the redemption (the “Limited Partner Share of Agreed Value”). Old Merck recorded a $1.5 billion pretax gain on the partial redemption in 2008. The partial redemption of Old Merck’s interest in the product rights did not result in a change in Old Merck’s 1% limited partnership interest. As described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, after certain adjustments, Old Merck recorded an aggregate pretax gain of $2.2 billion in 2008.

 

In conjunction with the 1998 restructuring discussed above, Astra purchased an option (the “Asset Option”) for a payment of $443 million, which was recorded as deferred income, to buy Old Merck’s interest in the KBI products, excluding the gastrointestinal medicines Nexium and Prilosec (the “Non-PPI Products”). In April 2010, AstraZeneca exercised the Asset Option. Merck received $647 million from AstraZeneca representing the net present value as of March 31, 2008 of projected future pretax revenue to be received by Old Merck from the Non-PPI Products (the “Appraised Value”), which was recorded as a reduction to the Company’s investment in AZLP. The Company recognized the $443 million of deferred income in 2010 as a component of Other (income) expense, net . In addition, in 1998, Old Merck granted Astra an option (the “Shares Option”) to buy Old Merck’s common stock interest in KBI and, therefore, Old Merck’s interest in Nexium and Prilosec, exercisable in 2012. The exercise price for the Shares Option will be based on the net present value of estimated future net sales of Nexium and Prilosec as determined at the time of exercise, subject to certain true-up mechanisms. The Company believes that it is likely that AstraZeneca will exercise the Shares Option.

 

Sanofi Pasteur MSD

In 1994, Old Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then existing EU and the European Free Trade Association. Old Merck and Sanofi Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD, S.N.C. (now Sanofi Pasteur MSD, S.N.C.). The joint venture maintains a presence, directly or through affiliates or branches, in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden, Portugal, the Netherlands, Switzerland and the United Kingdom and through distributors in the rest of its territory.

 

Johnson & Johnson ^o Merck Consumer Pharmaceuticals Company

In 1989, Old Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of nonprescription medicines for U.S. consumers. This 50% owned joint venture also includes Canada. Significant

joint venture products are Pepcid AC (famotidine), an over-the-counter form of Old Merck’s ulcer medication Pepcid (famotidine), as well as Pepcid Complete, an over-the-counter product that combines the Company’s ulcer medication with antacids (calcium carbonate and magnesium hydroxide).

 

Licenses

 

In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor, a Johnson & Johnson company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi , a fully human monoclonal antibody. The Company has exclusive marketing rights to both products outside the United States, Japan and certain other Asian markets. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi , extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi . In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi ’s auto-injector delivery system. On October 6, 2009, the European Commission (“EC”) approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations – a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi within the EU following the receipt of pricing and reimbursement approval within the EU. After operating expenses and subject to certain adjustments, the Company was entitled to receive an approximate 60% share of profits on the Company’s distribution in the Company’s marketing territory through December 31, 2009. Beginning in 2010, the Company’s share of profits change over time to a 50% share of profits by 2014 for both products and the share of profits will remain fixed thereafter for the remainder of the term. The Company may independently develop and market Simponi for a Crohn’s disease indication in its territories, with an option for Centocor to participate. Centocor has instituted an arbitration proceeding to terminate this agreement and the Company’s rights to distribute these products. See Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below.

 

Competition

 

The markets in which the Company conducts its business and the pharmaceutical industry 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, and generic drug and consumer health care manufacturers. The Company’s operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as the Company’s products mature. In addition, patent positions 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 recognition of an impairment charge with respect to certain products. Competitive pressures have intensified as pressures in the industry have grown. The effect on operations of competitive factors and patent disputes cannot be predicted.

 

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 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 joint ventures and licenses, and has been refining its sales and marketing efforts to further 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 for the Company’s products in that therapeutic category.

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In 2010, this pressure was particularly intense in several European countries which implemented austerity measures aimed at reducing costs in areas such as health care. 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 “disproportionate share” hospitals (hospitals meeting certain criteria). Under the Federal Vaccines for Children entitlement program, the U.S. Centers for Disease Control and Prevention (“CDC”) funds and purchases recommended pediatric vaccines at a public sector price for the immunization of Medicaid-eligible, uninsured, Native American and certain underinsured children. Merck was awarded a CDC contract in 2010 for the supply of pediatric vaccines for the Vaccines for Children program.

 

Against this backdrop, the United States enacted major health care reform legislation in 2010. Various insurance market reforms began last year and will continue through full implementation in 2014. The new law is expected to expand access to health care to more than 32 million Americans by the end of the decade that did not previously have regular access to health care. 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 requires pharmaceutical manufacturers to pay a 50% discount on Medicare Part D utilization by beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, beginning in 2011, pharmaceutical manufacturers will be required to pay an annual health care reform fee. The total annual industry fee, which will be $2.5 billion in 2011, will be assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid.

 

Although not included in the health care reform law, Congress has also considered, and may consider again, proposals to increase the government’s role in pharmaceutical pricing in the Medicare program. These proposals may include removing the current legal prohibition against the Secretary of the Health and Human Services intervening in price negotiations between Medicare drug benefit program plans and pharmaceutical companies. They may also include mandating the payment of rebates for some or all of the pharmaceutical utilization in Medicare drug benefit plans. In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries.

 

The full impact of U.S. health care reform, as well as continuing budget pressures on governments around the world, cannot be predicted at this time.

 

In addressing cost containment pressures, the Company makes a continuing effort to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company works in markets with historically low rates of government spending on health care to encourage those governments to increase their investments and thereby improve their citizens’ access to appropriate health care, including medicines.

 

In the animal health business, there is intense competition which 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.

 

The Company’s consumer care operations face competition from other consumer health care businesses as well as retailers who carry their own private label brands. The Company’s competitive position is affected by several factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the Company’s products, promotional efforts and the growth of lower cost private label brands.

 

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.

Government Regulation

 

The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tends to focus on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.

 

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 many 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. U.S. health care reform legislation which passed in 2010 with a full implementation date of 2014, significantly expands access to health care, but also contains a number of provisions imposing new obligations on the pharmaceutical industry, including, for example, an increase in the mandated rebate under the Medicaid program and a new discount requirement in the Medicare Part D program.

 

The EU has adopted Directives and other legislation concerning the classification, labeling, advertising, wholesale distribution 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. 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.

 

In January 2008, the EC launched a sector inquiry in the pharmaceutical industry under the rules of EU competition law. A sector inquiry allows the EC to gather information about the general operation of market competition and is not an investigation into suspected anti-competitive behavior of specific firms. As part of this inquiry, Old Merck’s offices in Germany were inspected by the authorities beginning in January 2008. The preliminary report of the EC was issued in November 2008, and following the public consultation period, the final report was issued in July 2009. The final report confirmed that there has been a decline in the number of novel medicines reaching the market and instances of delayed market entry of generic medicines and discussed industry practices that may have contributed to these phenomena. Among other things, the final report expressed concern over settlements of patent disputes between originator and generic companies and suggested that the EC should monitor any anti-competitive effects. While the EC has issued further inquiries with respect to the subject of the investigation, including to the Company, the EC has not alleged that the Company or any of its subsidiaries have engaged in any unlawful practices.

 

The Company believes that it will continue to be able to conduct its operations, including launching new drugs into the market, in this regulatory environment.

 

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 products around the world. The Company’s efforts in this regard are wide-ranging. For example, the Company has been recognized for pricing many of its products through a differential pricing framework, taking into consideration such factors as a country’s level of economic development and public health need.

 

Building on the Company’s own efforts, Merck has undertaken collaborations with many stakeholders to improve access to medicines and enhance the quality of life for people around the world.

 

For example, in 2010, through a partnership of Merck, the Government of Bhutan, and the Australian Cervical Cancer Foundation, Bhutan became the first low-income country in the world to successfully implement a national HPV vaccination program. Under this program, Merck is providing Gardasil free of charge for the first year of the program and will provide Gardasil at the Company’s access price for five more years.

 

Also in 2010, Merck worked with its partner, the Wellcome Trust, to further develop the Hillemann Laboratories which was established in September 2009. This initiative will focus on developing affordable vaccines to prevent diseases that commonly affect low-income countries.

Merck has also in the past provided funds to The Merck Company Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is The African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana and the Bill & Melinda Gates Foundation, that was renewed in 2010, and supports Botswana’s response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment, and support.

 

Privacy and Data Protection

 

The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing attention to privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws and regulations in the United States and internationally requiring notification to individuals and government authorities of security breaches involving certain categories of personal information.

 

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 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. The Company’s over-the-counter, foot care and sun care products are sold through wholesale and retail drug, food chain and mass merchandiser outlets in the United States and Canada.

 

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

 

The Food and Drug Administration Modernization Act (the “FDA Modernization Act”) includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. These exclusivity provisions were re-authorized by the Prescription Drug User Fee Act passed in September 2007. Current U.S. patent law provides additional patent term under Patent Term Restoration for periods when the patented product was under regulatory review before the FDA.

Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key U.S. patent protection (including Patent Term Restoration and Pediatric Exclusivity) for major marketed products:

 

 

 

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

requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.

 

The patents that provided U.S. market exclusivity for Cozaar and Hyzaar expired in April 2010. In addition, Cozaar and Hyzaar lost patent protection in a number of major European markets in March 2010. Accordingly, the Company is experiencing a significant decline in Cozaar/Hyzaar worldwide sales and the Company expects such decline to continue. In addition, the patent that provides U.S. market exclusivity for Singulair , the Company’s largest selling product, expires in August 2012. The Company expects that within the two years following patent expiration, it will lose substantially all U.S. sales of Singulair , with most of those declines coming in the first full year following patent expiration. Also, the patent for Singulair will expire in a number of major European markets in August 2012 and the Company expects sales of Singulair in those markets will decline significantly thereafter (although the six month Pediatric Market Exclusivity may extend this date in some markets to February 2013). The compound patent that provides market exclusivity for Maxalt in the United States expires in June 2012 (although the six month Pediatric Market Exclusivity may extend this date to December 2012). In addition, the patent for Maxalt will expire in a number of major European markets in 2013. The Company anticipates that sales in the United States and in these European markets will decline significantly after these patent expiries.

 

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

 

For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. Financial Statements and Supplementary Data, Note 12. “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 2010 on patent and know-how licenses and other rights amounted to $347 million. Merck also incurred royalty expenses amounting to $1.38 billion in 2010 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. Approximately 15,500 people are employed in the Company’s research activities. Research and development expenses were $11.0 billion in 2010, $5.8 billion in 2009 and $4.8 billion in 2008 (which included restructuring costs in all years, as well as $2.4 billion of IPR&D impairment charges in 2010). The Company maintains its ongoing commitment to research over a broad range of therapeutic areas and clinical development in support of new products.

 

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 Company’s research and development resources on disease areas of unmet medical needs, scientific opportunity and commercial opportunity. Merck is managing its research and development portfolio across diverse approaches to discovery and development by balancing investments appropriately on novel, innovative targets with the potential to have a major impact on human health, on developing best-in-class approaches, and on delivering maximum value of its new medicines and vaccines through new indications and new formulations. Another important component of the Company’s science-based diversification is based on expanding the Company’s portfolio of modalities to include not only small molecules and vaccines, but also biologics (peptides, small proteins, antibodies) and RNAi. Further, Merck has moved to diversify its portfolio through its Merck BioVentures division which has the potential to harness the market opportunity presented by biological medicine patent expiries

by delivering high quality follow-on biologic products to enhance access for patients worldwide. The Company will continue to pursue appropriate external licensing opportunities.

 

The integration efforts for research and development continue to focus on integrating the research operations of the legacy companies, including providing an effective transition for employees, realizing projected merger synergies in the form of cost savings and revenue growth opportunities, and maintaining momentum in the Company’s late-stage pipeline. Overall, the Company’s global operating model will align franchise and function as well as align resources with disease area priorities and balance capacity across discovery phases and allow the Company to act upon those programs with the highest probability of success. Additionally, across all disease area priorities, the Company’s strategy is designed to expand access to worldwide external science and incorporate external research as a key component of the Company’s early discovery pipeline in order to translate basic research productivity into late-stage clinical success.

 

The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, insomnia, migraine, neurodegenerative diseases, ophthalmics, osteoporosis, psychiatric diseases, respiratory diseases and women’s health. The Company supplements its internal research with an aggressive licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies.

 

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 preclinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on preclinical 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 biologics molecule that they believe has promise to treat a medical condition, the Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase I studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase II 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. If data from the Phase II trials are satisfactory, the Company commences large-scale Phase III trials to confirm the compound’s efficacy and safety. Upon completion of those 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. Preclinical 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 I clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase II studies are dose-ranging studies. Finally, Phase III trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies. Also during this stage, the proposed manufacturing facility undergoes a pre-approval inspection during which production of the vaccine as it is in progress is examined in detail.

 

In the United States, the FDA review process begins once a complete NDA is submitted and received by the FDA. Pursuant to the Prescription Drug User Fee Act, the FDA review period targets for NDAs or supplemental NDAs is either six months, for priority review, or ten months, for a standard review. Within 60 days after receipt of an NDA, 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. Once the review timelines are defined, 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 180 days. Extensions to the review period are communicated to the Company. The FDA can act on an application by issuing an approval letter or a complete response letter.

 

Research and Development Update

The Company currently has a number of candidates under regulatory review in the United States and internationally.

 

Boceprevir is an investigational oral hepatitis C virus protease inhibitor currently under development. Full data results for two pivotal late-stage studies for boceprevir were presented in November 2010 at the annual meeting of the American Association for the Study of Liver Disease which showed that boceprevir demonstrated significantly higher sustained virologic response rates in adult patients who previously failed treatment and in adult patients who were new to treatment for chronic hepatitis C virus genotype 1 compared to control, the primary objective of the studies. Based on these data, regulatory applications for boceprevir were submitted in 2010 and have been accepted for expedited review in both the United States and the EU.

 

MK-0431A XR, the Company’s investigational extended-release formulation of Janumet , was accepted for standard review by the FDA in 2010. The Company is also moving forward as planned with regulatory filings in countries outside the United States. The extended-release formulation of Janumet is an investigational treatment for type 2 diabetes that combines sitagliptin, which is the active component of Januvia , with metformin extended release, a commonly-prescribed medication for type 2 diabetes, into a single tablet. This formulation is designed to provide a new treatment option for health care providers and patients who need two or more oral agents to help control their blood sugar with the convenience of once daily dosing.

 

SCH 900121, NOMAC/E2, is an oral contraceptive that combines a selective progestin with 17-beta estradiol, an estrogen that is identical to the one naturally present in a women’s body. The drug is currently under review in the EU. It is also in Phase III development for the U.S. market.

 

MK-3009, Cubicin daptomycin for injection, is currently under review in Japan. As previously disclosed, in 2007, Cubist Pharmaceuticals, Inc. (“Cubist”) entered into a license agreement with Old Merck for the development and commercialization of Cubicin, for the treatment of staph infection, in Japan where the Company has the commercial rights to the drug candidate. Merck will develop and commercialize Cubicin through its wholly-owned subsidiary in Japan. Cubist commercializes Cubicin in the United States.

 

MK-0431D is a combination of Januvia and Zocor for the treatment of diabetes and dyslipidemia which was accepted for standard review by the FDA in 2011.

 

In addition to the candidates under regulatory review, the Company has 19 drug candidates in Phase III development.

 

Vorapaxar is a thrombin receptor antagonist or antiplatelet protease activated receptor-1 inhibitor being studied for the prevention and treatment of thrombosis. Merck was studying vorapaxar in two major clinical endpoint trials to evaluate the investigational medicine for the prevention of cardiac events: TRACER, a study in patients with acute coronary syndrome which has ended, and TRA-2P (also known as TIMI 50), a study in patients with prior heart attack, stroke and peripheral artery disease which is continuing in large part. Both studies were designed as event-driven trials in which patients were planned to be followed for a minimum of one year, and both had completed enrollment. In January 2011, Merck announced that the combined Data and Safety Monitoring Board (“DSMB”) for the two studies had reviewed the available safety and efficacy data, and made recommendations for study changes to the chairpersons of the steering committees for the two studies. The study chairpersons agreed to implement these changes, and as a result: in the TRACER study, patients were to discontinue study drug and investigators were to begin to close out the study in a timely and orderly fashion. In the TRA-2P study, study drug was continued in patients who had experienced a previous heart attack or peripheral arterial disease (approximately 75% of the patients enrolled in the study), and was immediately discontinued in patients who experienced a stroke prior to entry into the study or during the course of the study. Merck subsequently announced that the chairman of the TRA-2P study reported to investigators that the DSMB had communicated that based on all

of the data (safety and efficacy) available to them from both trials, they recommended that subjects with a history of stroke not receive vorapaxar. The DSMB had observed an increase in intracranial hemorrhage in patients with a history of stroke that is not outweighed by their considerations of potential benefit.

 

Merck plans to update its projections for regulatory filings for vorapaxar once the Company has received the efficacy and safety data from TRACER and can determine an updated completion date for TRA-2P. TRACER has accumulated the pre-defined number of primary and major secondary endpoints, although not all patients will continue to receive study drug through the pre-specified one-year follow up. Merck continues to expect that the efficacy and safety data from TRACER will become available later in 2011 and will be submitted for presentation at appropriate medical meetings.

 

As a result of these developments, the Company concluded there was a 2010 impairment triggering event related to the vorapaxar intangible asset. Although there is a great deal of information related to these developments that remains unknown to the Company, utilizing market participant assumptions and considering several different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to vorapaxar was $350 million, which resulted in the recognition of an impairment charge of $1.7 billion during 2010. The Company will continue to monitor the remaining asset value for further impairment.

 

MK-8669, ridaforolimus, is a novel mTOR (mammalian target of rapamycin) inhibitor being evaluated for the treatment of cancer. Merck is currently developing ridaforolimus in multiple cancer indications under an exclusive license and collaboration agreement with ARIAD Pharmaceuticals, Inc. (“ARIAD”). In January 2011, ARIAD announced top-line data showing that ridaforolimus met the primary endpoint of improved progression-free survival compared to placebo in the Phase III SUCCEED trial conducted in patients with metastatic soft tissue or bone sarcomas who previously had a favorable response to chemotherapy. Complete findings from the SUCCEED trial will be submitted for presentation at an upcoming medical meeting in 2011. This trial remains active, and study participants continue to be followed to gather additional data on secondary endpoints, including overall survival and the safety profile of ridaforolimus. Merck currently plans to file an NDA with the FDA for oral ridaforolimus in 2011, subject to final collection and analysis of all available data from the trial.

 

MK-2452, Saflutan (tafluprost), is a preservative free, synthetic analogue of the prostaglandin F2α for the reduction of elevated intraocular pressure in appropriate patients with primary open-angle glaucoma and ocular hypertension. In April 2009, Old Merck and Santen Pharmaceutical Co., Ltd. announced a worldwide licensing agreement for tafluprost. The Company continues to anticipate filing an NDA with the FDA for Saflutan in 2011.

 

As previously disclosed, Old Merck submitted for filing an NDA with the FDA for MK-0653C, ezetimibe combined with atorvastatin, which is an investigational medication for the treatment of dyslipidemia, and the FDA refused to file the application in 2009. The FDA has identified additional manufacturing and stability data that are needed; the Company anticipates filing an NDA in 2011.

 

As previously disclosed, in 2009, Old Merck announced it was delaying the filing of the U.S. application for MK-0974, telcagepant, the Company’s investigational calcitonin gene-related peptide (“CGRP”)-receptor antagonist for the acute treatment of migraine. The decision was based on findings from a Phase IIa exploratory study in which a small number of patients taking telcagepant twice daily for three months for the prevention of migraine were found to have marked elevations in liver transaminases. The daily dosing regimen in the prevention study was different than the dosing regimen used in Phase III studies in which telcagepant was intermittently administered in one or two doses to treat individual migraine attacks as they occurred. Following meetings with regulatory agencies at the end of 2009, Merck is conducting an additional safety study as part of the overall Phase III program for telcagepant. The Company continues to anticipate filing an NDA with the FDA in 2011.

 

SCH 900616, Bridion (sugammadex), is a medication designed to rapidly reverse the effects of certain muscle relaxants used as part of general anesthesia to ensure patients remain immobile during surgical procedures. Bridion has received regulatory approval in the EU, Australia, New Zealand, Japan and a number of other markets. Prior to the Merger, Schering-Plough received a complete response letter from the FDA for Bridion. Following

further communication from the FDA, the Company is assessing the agency’s feedback in order to determine a new timetable for response.

 

SCH 697243 is an investigational allergy immunotherapy sublingual tablet (“AIT”) for grass pollen allergy for which the Company has North American rights. In March 2010, data from a Phase III study in children and adolescents (ages 5-17 years) with grass pollen allergic rhinoconjunctivitis were presented at the American Academy of Allergy, Asthma & Immunology Annual Meeting. Allergic rhinoconjunctivitis, or runny nose and itchy, watery eyes due to allergies, is a common condition in children and adolescents. AIT is a dissolvable oral tablet that is designed to prevent allergy symptoms by inducing a protective immune response against allergies, thereby treating the underlying cause of the disease. Merck is investigating AIT for the treatment of grass pollen allergic rhinoconjunctivitis in both children and adults. The anticipated U.S. filing date for SCH 697243 is under assessment.

 

SCH 039641, an AIT for ragweed allergy, is also in Phase III development for the North American market. The anticipated filing date for SCH 039641 is under assessment.

 

SCH 418131, Zenhale , is a fixed dose combination of two previously approved drugs for the treatment of asthma: mometasone furoate and formoterol fumarate dehydrate. In November 2010, the Company advised the European Medicines Agency (“EMA”) that it was withdrawing the application for marketing authorization for Zenhale , which has been approved for use in asthma patients 12 years of age and older in the United States as Dulera Inhalation Aerosol. The Company decided to withdraw the application for Zenhale to address questions outstanding between the Company and the Committee for Medicinal Products for Human Use of the EMA. The Company expects to resubmit the application in the future.

 

MK-0431C, a candidate currently in Phase III clinical development, combines Januvia with pioglitazone, another type 2 diabetes therapy. The Company expects it will file an NDA for MK-0431C with the FDA in 2012.

 

MK-0822, odanacatib, is an oral, once-weekly investigational treatment for osteoporosis in post-menopausal women. Osteoporosis is a disease which reduces bone density and strength and results in an increased risk of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. Four-year data on odanacatib were presented in October 2010 at the American Society for Bone and Mineral Research annual meeting. Clinical and preclinical studies continue to provide data on the potential of odanacatib to increase bone density, cortical thickness and bone strength when treating osteoporosis. The Company continues to anticipate filing an NDA with the FDA in 2012.

 

V503 is a nine-valent HPV vaccine in development to expand protection against cancer-causing HPV types. The Phase III clinical program is underway and Merck anticipates filing a BLA with the FDA in 2012.

 

MK-0524A is a drug candidate that combines extended-release niacin and a novel flushing inhibitor, laropiprant. MK-0524A has demonstrated the ability to lower LDL-cholesterol (“LDL-C” or “bad” cholesterol), raise HDL-cholesterol (“HDL-C” or “good” cholesterol) and lower triglycerides with significantly less flushing than traditional extended release niacin alone. High LDL-C, low HDL-C and elevated triglycerides are risk factors associated with heart attacks and strokes. In April 2008, Old Merck received a non-approvable action letter from the FDA in response to its NDA for MK-0524A. At a meeting to discuss the letter, the FDA stated that additional efficacy and safety data were required and suggested that Old Merck wait for the results of the Treatment of HDL to Reduce the Incidence of Vascular Events (“HPS2-THRIVE”) cardiovascular outcomes study, which is expected to be completed in 2012. The Company anticipates filing an NDA with the FDA for MK-0524A in 2012. MK-0524A has been approved in more than 55 countries outside the United States for the treatment of dyslipidemia, particularly in patients with combined mixed dyslipidemia (characterized by elevated levels of LDL-C and triglycerides and low HDL-C) and in patients with primary hypercholesterolemia (heterozygous familial and non-familial) and is marketed as Tredaptive (or as Cordaptive in certain countries). Tredaptive should be used in patients in combination with statins, when the cholesterol lowering effects of statin monotherapy is inadequate. Tredaptive can be used as monotherapy only in patients in whom statins are considered inappropriate or not tolerated.

MK-0524B is a drug candidate that combines the novel approach to raising HDL-C and lowering triglycerides from extended-release niacin combined with laropiprant with the proven benefits of simvastatin in one combination product. Merck will not seek approval for MK-0524B in the United States until it files its complete response relating to MK-0524A.

 

MK-4305 is an investigational dual orexin receptor antagonist, a potential new approach to the treatment of chronic insomnia, currently in Phase III development. In June 2010, clinical results from a Phase IIb study were presented at the Annual Meeting of the Associated Professional Sleep Societies which showed MK-4305 was significantly more effective than placebo in improving overall sleep efficiency at night one and at the end of week four in patients with primary insomnia. MK-4305 was generally well-tolerated in the study. Orexins are neuropeptides (chemical messengers) that are released by specialized neurons in the hypothalamus region of the brain and are believed to be an important regulator of the brain’s sleep-wake process. Phase III trials studying the efficacy and safety of MK-4305 in elderly and non-elderly insomnia patients are ongoing. Merck anticipates filing regulatory applications for MK-4305 in 2012.

 

SCH 900962, Elonva , corifollitropin alpha injection, which has been approved in the EU for controlled ovarian stimulation in combination with a GnRH antagonist for the development of multiple follicles in women participating in an assisted reproductive technology program, is currently in Phase III development in the United States. The Company continues to anticipate filing an NDA with the FDA in 2012.

 

SCH 420814, preladenant, is a selective adenosine 2a receptor antagonist in Phase III development for treatment of Parkinson’s disease. The Company continues to anticipate filing an NDA with the FDA beyond 2012.

 

V212 is an inactivated varicella-zoster virus vaccine in Phase III development for prevention of herpes zoster. The Company anticipates filing an NDA with the FDA beyond 2012.

 

MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated in lipid management to raise HDL-C and reduce LDL-C. In November 2010, researchers presented results from the Phase III DEFINE (Determining the EFficacy and Tolerability of CETP INhibition with AnacEtrapib) study with anacetrapib at the American Heart Association Scientific Sessions. In the trial of 1,623 patients with coronary heart disease (“CHD”) or CHD risk equivalents, anacetrapib showed no significant differences from placebo in the primary safety measures studied. There were no significant differences in mean changes in blood pressure between the anacetrapib and placebo treatment groups, nor were there any significant differences in serum electrolytes or aldosterone levels. During the 76-week treatment phase, the pre-specified adjudicated cardiovascular endpoint (defined as cardiovascular death, myocardial infarction, unstable angina or stroke) occurred in 16 anacetrapib-treated patients (2.0%) compared with 21 placebo-treated patients (2.6%). At 24 weeks, anacetrapib decreased LDL-C by 40% and increased HDL-C by 138% in patients already treated with a statin and at guideline-recommended LDL-C goal. Based on these results, the Company intends to move forward and study anacetrapib in a large cardiovascular clinical outcomes trial. The Company anticipates filing an NDA with the FDA beyond 2015.

The chart below reflects the Company’s current research pipeline as of February 16, 2011. Candidates shown in Phase III include specific products. Candidates shown in Phase II include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number or SCH-number designations and vaccine candidates are given V-number designations. Candidates in Phase I, additional indications in the same therapeutic area and additional claims, line extensions or formulations for in-line products are not shown.

 

 

(1)	North American rights only.
(2)	Japanese rights only.

 

Employees

 

As of December 31, 2010, the Company had approximately 94,000 employees worldwide, with approximately 37,600 employed in the United States, including Puerto Rico. Approximately 30% of worldwide employees of the Company are represented by various collective bargaining groups.

 

In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. As part of the restructuring actions taken thus far

under the Merger Restructuring Program, which the Company anticipates will be substantially completed by the end of 2012 (with the exception of certain manufacturing facilities actions), the Company expects to reduce its total workforce measured at the time of the Merger by approximately 17% across the Company worldwide. In addition, the Company has eliminated over 2,500 positions which were vacant at the time of the Merger. These workforce reductions will primarily come from the elimination of duplicative positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. Since inception of the program through December 31, 2010, the Company has eliminated 11,550 positions under this program. These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions.

 

In October 2008, Old Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide by the end of 2011. About 40% of these reductions will occur in the United States. Since inception of the program through December 31, 2010, the Company has eliminated 5,800 positions, including vacancies, under this program.

 

Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program, which was designed to reduce and avoid costs and increase productivity. The position eliminations associated with this program are largely complete.

 

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 $16 million in 2010, $17 million in 2009 and $35 million in 2008, and are estimated at $81 million for the years 2011 through 2015. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in management’s opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $185 million at December 31, 2010. Although it is not possible to predict with certainty the outcome of these environmental 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 $150 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position, 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 were 56% of sales in 2010, 47% of sales in 2009 and 44% of sales in 2008. The increase in proportion of sales outside the United States in 2010 is primarily due to the inclusion of results of Schering-Plough following the close of the Merger.

 

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.

As a result of the Merger, Merck has expanded its 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.

 

Financial information about geographic areas of the Company’s business is discussed in Item 8. “Financial Statements and Supplementary Data” below.

 

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 Securities and Exchange Commission (“SEC”).

 

The Company’s corporate governance guidelines and the charters of the Board of Directors’ six 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 stockholder who requests it from the Company.

 

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

 

Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. 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 infringement and similar claims against the Company. The Company aggressively defends its important 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 12. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated New Drug Applications (“ANDA”) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. The Company normally responds by vigorously 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, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, recent court decisions relating to other companies’ U.S. patents, potential U.S. legislation relating to patent reform, as well as regulatory initiatives may result in further erosion of intellectual property protection.

 

If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain legacy Schering-Plough or MSP Partnership products, such a loss could result in a material non-cash impairment charge. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.

 

The patent that provides U.S. market exclusivity for the Company’s largest selling product, Singulair, expires in August 2012. The Company expects that within the two years following patent expiration, it will lose substantially all U.S. sales of Singulair , with most of those declines coming in the first full year following patent expiration. Also, the patent for Singulair will expire in a number of major European markets in August 2012 and the Company expects sales of Singulair in those markets will decline significantly thereafter (although the six month Pediatric Market Exclusivity may extend this date in some markets to February 2013).

 

Key Company 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 and negative impact on results of operations and cash flows.

 

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 Singulair , Remicade , Vytorin, Zetia, Januvia, Nasonex, Isentress, and Temodar . 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 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, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. If any of these events had a material adverse effect on the sales of certain legacy Schering-Plough or MSP Partnership products, such an event could result in a material non-cash impairment charge.

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 each year. Declines in sales of products, such as Cozaar , Hyzaar and Fosamax, after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, 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 to develop new drugs to treat diseases. 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 “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, and accordingly 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; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the FDA for its intended use; it may not be possible to obtain a patent for a new drug; or sales of a new product may be disappointing.

 

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, such as Cozaar, Hyzaar and Singular in 2012 , lose patent protection or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position 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 market for numerous reasons, including the following:

 

 

In connection with the Merger, the Company assessed and prioritized its pipeline to identify the most promising, high-potential compounds for development. In the future, if certain legacy Schering-Plough 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 the Merger. These non-cash impairment charges, which the Company anticipates

would be excluded from the Company’s non-GAAP earnings, could be material to the Company’s future GAAP earnings. For example, as discussed below, the Company recognized a non-cash impairment charge of $1.7 billion in 2010 with respect to vorapaxar, which is a legacy Schering-Plough pipeline program.

 

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

 

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

 

Even if 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 new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.

 

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 the EU. In the United States, political pressure to reduce spending on prescription drugs has led to legislation which encourages the use of generic products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and it may not be able to prevent the emergence of generic competition for its products.

 

Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing 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 position and prospects.

 

The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.

 

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 or 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 position and prospects. In addition, if legacy Schering-Plough products that were measured at fair value and capitalized in connection with the Merger, such as Saphris, or former MSP Partnership products, Vytorin or Zetia , 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. These non-cash impairment charges, which the Company anticipates would be excluded from the Company’s non-GAAP earnings, could be material to the Company’s future GAAP earnings.

The current uncertainty in global economic conditions together with austerity measures being taken by governments in Europe could negatively affect the Company’s operating results.

 

The current uncertainty in global economic conditions may result in a further 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 position and prospects.

 

While many of the Company’s brands experienced positive growth trends in the EU during 2010, the environment in the EU and across Europe is now more challenging. Many countries have announced austerity measures aimed at reducing costs in areas such as health care. The implementation of pricing actions varies by country and many have announced measures to reduce prices of generic and patented drugs. While the Company is taking steps to mitigate the immediate impact in the EU, it is possible that the austerity measures could negatively affect the Company’s revenue performance in 2011 and beyond more than the Company anticipates.

 

The Company faces pricing pressure with respect to its products.

 

The Company faces increasing pricing pressure globally from managed care organizations, institutions and 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, 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 Patient Protection and Affordable Care Act. 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. The increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures.

 

Outside the United States, numerous major markets 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.

 

The Company expects pricing pressures to increase in the future.

 

The health care industry 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 Congress and state legislatures. In 2010, major health care reform was adopted into law in the United States.

 

Important market reforms began last year and will continue through full implementation in 2014. The new law is expected to expand access to health care to more than 32 million Americans by the end of the decade. In 2010, Merck incurred additional costs as a result of the new law, including increased Medicaid rebates and other impacts that reduced revenues. In 2010, the minimum rebate to states participating in the Medicaid program increased from 15.1% to 23.1% on the Company’s branded prescription drugs; the Medicaid rebate was extended to Medicaid Managed Care Organizations; and eligibility for the federal 340B drug discount program was extended to rural referral centers, sole community hospitals, critical access hospitals, certain free standing cancer hospitals, and certain additional children’s hospitals.

 

Beginning in 2011, the law requires drug manufacturers to pay a 50% discount on Medicare Part D utilization incurred by beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, beginning in 2011, the Company will incur an annual health care reform fee, which is being assessed on all branded prescription drug manufacturers and importers. The fee will be calculated based on the industry’s total sales of branded prescription drugs to specified government programs. The percentage of a manufacturer’s sales that are included is determined by a tiered scale based on the manufacturer’s individual revenues. Each

manufacturer’s portion of the total annual fee (the fee for 2011 is $2.5 billion) will be based on the manufacturer’s proportion of the total includable sales in the prior year.

 

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

 

The Company is experiencing difficulties and delays in the manufacturing of certain of its products.

 

As previously disclosed, Old Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. These issues are continuing, in particular, with respect to the manufacture of the Company’s varicella zoster virus-containing vaccines, such as Varivax, ProQuad and Zostavax . Similarly, the Company has, in the past, experienced difficulties manufacturing certain of its animal health products and is currently experiencing difficulty manufacturing certain women’s health products. The Company is working on these issues, but there can be no assurance of when or if these issues will be finally resolved.

 

In addition to the difficulties that the Company is experiencing currently, the Company may 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) construction 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. Manufacturing difficulties can result in product shortages, leading to lost sales.

 

The Company faces significant litigation related to Vioxx.

 

On September 30, 2004, Old Merck voluntarily withdrew Vioxx , its arthritis and acute pain medication, from the market worldwide. Although Old Merck has settled the major portion of the U.S. Product Liability litigation, the Company still faces material litigation arising from the voluntary withdrawal of Vioxx .

 

In addition to the Vioxx Product Liability Lawsuits, various purported class actions and individual lawsuits have been brought against Old Merck and several current and former officers and directors of Old Merck alleging that Old Merck made false and misleading statements regarding Vioxx in violation of the federal and state securities laws (all of these suits are referred to as the “ Vioxx Securities Lawsuits”). The Vioxx Securities Lawsuits have been transferred by the Judicial Panel on Multidistrict Litigation (the “JPML”) to the U.S. District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL (the “Shareholder MDL”), and have been consolidated for all purposes. On June 18, 2010, Old Merck moved to dismiss the Fifth Amended Class Action Complaint in the consolidated securities class action. Plaintiffs filed their opposition on August 9, 2010, and Old Merck filed its reply on September 17, 2010. The motion is currently pending before the district court. In addition, several individual securities lawsuits filed by foreign institutional investors also are consolidated with the Vioxx Securities Lawsuits; by stipulation, defendants are not required to respond to these complaints until the resolution of any motions to dismiss in the consolidated securities class action. In addition, various putative class actions have been brought against Old Merck and several current and former employees, officers, and directors of the Company alleging violations of ERISA. (All of these suits are referred to as the “ Vioxx ERISA Lawsuits” and, together with the Vioxx Securities Lawsuits the “ Vioxx Shareholder Lawsuits”. The Vioxx Shareholder Lawsuits are discussed more fully in Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below.) Old Merck has also been named as a defendant in actions in various countries outside the United States. (All of these suits are referred to as the “ Vioxx Foreign Lawsuits”.) Old Merck has also been sued by 12 states, one county and a private citizen as a qui tam lawsuit with respect to the marketing of Vioxx.

 

The U.S. Department of Justice (“DOJ”) has issued subpoenas requesting information relating to Old Merck’s research, marketing and selling activities with respect to Vioxx in a federal health care investigation under criminal statutes. This investigation includes subpoenas for witnesses to appear before a grand jury. As previously disclosed, in March 2009, Old Merck received a letter from the U.S. Attorney’s Office for the District of

Massachusetts identifying it as a target of the grand jury investigation regarding Vioxx . In 2010, the Company established a $950 million reserve (the “ Vioxx Liability Reserve”) in connection with the anticipated resolution of the DOJ’s investigation. The Company’s discussions with the government are ongoing. Until they are concluded, there can be no certainty about a definitive resolution. There are also ongoing investigations by local authorities in Europe. The Company is cooperating with authorities in all of these investigations. (All of these investigations, including the DOJ investigation, are referred to as the “ Vioxx Investigations”.) The Company cannot predict the outcome of any of these investigations; however, they could result in potential civil and/or criminal remedies.

 

The Vioxx product liability litigation is discussed more fully in Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below. The Company currently anticipates that three U.S.  Vioxx Product Liability Lawsuits will be tried in 2011. The Company cannot predict the timing of any other trials related to the Vioxx Litigation. The Company believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits (collectively, the “ Vioxx Lawsuits”) and will vigorously defend against them. The Company’s insurance coverage with respect to the Vioxx Lawsuits will not be adequate to cover its defense costs and any losses.

 

During 2010, Merck spent approximately $140 million in the aggregate in legal defense costs worldwide related to (i) the Vioxx Lawsuits, and (ii) the Vioxx Investigations (collectively, the “ Vioxx Litigation”). In 2010, Merck recorded charges of $106 million to add to the reserve solely for its future legal defense costs related to the Vioxx Litigation, which was $110 million at December 31, 2009 and $76 million at December 31, 2010 (the “ Vioxx Legal Defense Costs Reserve”). The amount of the Vioxx Legal Defense Costs Reserve is based on certain assumptions, described below under Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities,” and is the best estimate of the minimum amount of defense costs that the Company believes will be incurred in connection with the remaining aspects of the Vioxx Litigation, however, events such as additional trials in the Vioxx Litigation and other events that could arise in the course of the Vioxx Litigation could affect the ultimate amount of defense costs to be incurred by the Company. In addition, as mentioned above, in 2010 the Company established the Vioxx Liability Reserve in connection with the anticipated resolution of the DOJ’s investigation.

 

The Company is not currently able to estimate any additional amounts that it may be required to pay in connection with the Vioxx Lawsuits or Vioxx Investigations. These proceedings are still expected to continue for years and the Company cannot predict the course the proceedings will take. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek unspecified damages, the Company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the Vioxx Lawsuits not included in the Settlement Program. Other than the Vioxx Liability Reserve, the Company has not established any reserves for any potential liability relating to the Vioxx Lawsuits not included in the Settlement Program or the Vioxx Investigations.

 

A series of unfavorable outcomes in the Vioxx Lawsuits or the Vioxx Investigations, resulting in the payment of substantial damages or fines or resulting in criminal penalties, could have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.

 

Issues concerning Vytorin and the ENHANCE clinical trial have had an adverse effect on sales of Vytorin and Zetia in the United States and results from ongoing trials could have an adverse effect on such sales.

 

The Company sells Vytorin and Zetia. As previously disclosed, in January 2008, the legacy companies announced the results of the ENHANCE clinical trial, an imaging trial in 720 patients with heterozygous familial hypercholesterolemia, a rare genetic condition that causes very high levels of LDL “bad” cholesterol and greatly increases the risk for premature coronary artery disease. As previously reported, despite the fact that ezetimibe/simvastatin 10/80 mg ( Vytorin ) significantly lowered LDL “bad” cholesterol more than simvastatin 80 mg alone, there was no significant difference between treatment with ezetimibe/simvastatin and simvastatin alone on the pre-specified primary endpoint, a change in the thickness of carotid artery walls over two years as measured by ultrasound. The IMPROVE-IT trial is underway and is designed to provide cardiovascular outcomes data for ezetimibe/simvastatin in patients with acute coronary syndrome. No incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin has been established.

In January 2009, the FDA announced that it had completed its review of the final clinical study report of ENHANCE. The FDA stated that the results from ENHANCE did not change its position that elevated LDL cholesterol is a risk factor for cardiovascular disease and that lowering LDL cholesterol reduces the risk for cardiovascular disease. For a discussion concerning shareholder litigation arising out of the ENHANCE study, see Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below.

 

The IMPROVE-IT trial is scheduled for completion in 2013. In the IMPROVE-IT trial, a blinded interim efficacy analysis was conducted by the DSMB for the trial when approximately 50% of the endpoints were accrued. The DSMB recommended continuing the trial with no changes in the study protocol. Another blinded interim efficacy analysis is planned by the DSMB when approximately 75% of the primary events have been accrued. If, based on the results of the interim analysis, the trial were to be halted because of concerns related to Vytorin , that could have a material adverse effect on sales of Vytorin and Zetia .

 

Following the announcements of the ENHANCE clinical trial results, sales of Vytorin and Zetia declined in 2008, 2009 and 2010 in the United States. These issues concerning the ENHANCE clinical trial have had an adverse effect on sales of Vytorin and Zetia and could continue to have an adverse effect on such sales. If sales of such products are materially adversely affected, the Company’s business, cash flow, results of operations, financial position and prospects could also be materially adversely affected. In addition, unfavorable outcomes resulting from the litigation concerning the sale and promotion of these products could have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.

 

An arbitration proceeding commenced by Centocor against Schering-Plough may result in the Company’s loss of the rights to market Remicade and Simponi.

 

A subsidiary of the Company is a party to a Distribution Agreement with Centocor, a wholly owned subsidiary of Johnson & Johnson, under which the Schering-Plough subsidiary has rights to distribute and commercialize the rheumatoid arthritis treatment Remicade and Simponi , a next-generation treatment, in certain territories.

 

Under Section 8.2(c) of the Distribution Agreement, “If either party is acquired by a third party or otherwise comes under Control (as defined in Section 1.4 [of the Distribution Agreement]) of a third party, it will promptly notify the other party not subject to such change of control. The party not subject to such change of control will have the right, however not later than thirty (30) days from such notification, to notify in writing the party subject to the change of Control of the termination of the Agreement taking effect immediately. As used herein ‘Change of Control’ shall mean (i) any merger, reorganization, consolidation or combination in which a party to this Agreement is not the surviving corporation; or (ii) any ‘person’ (within the meaning of Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934), excluding a party’s Affiliates, is or becomes the beneficial owner, directly or indirectly, of securities of the party representing more than fifty percent (50%) of either (A) the then-outstanding shares of common stock of the party or (B) the combined voting power of the party’s then-outstanding voting securities; or (iii) if individuals who as of the Effective Date [April 3, 1998] constitute the Board of Directors of the party (the ‘Incumbent Board’) cease for any reason to constitute at least a majority of the Board of Directors of the party; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the party’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or (iv) approval by the shareholders of a party of a complete liquidation or the complete dissolution of such party.”

 

Section 1.4 of the Distribution Agreement defines “Control” to mean “the ability of any entity (the ‘Controlling’ entity), directly or indirectly, through ownership of securities, by agreement or by any other method, to direct the manner in which more than fifty percent (50%) of the outstanding voting rights of any other entity (the ‘Controlled’ entity), whether or not represented by securities, shall be cast, or the right to receive over fifty percent (50%) of the profits or earnings of, or to otherwise control the management decisions of, such other entity (also a ‘Controlled’ entity).”

On May 27, 2009, Centocor delivered to Schering-Plough a notice initiating an arbitration proceeding to resolve whether, as a result of the then proposed Merger, Centocor is permitted to terminate the Distribution Agreement and related agreements. As part of the arbitration process, Centocor has taken the position that it has the right to terminate the Distribution Agreement on the grounds that, in the Merger, Schering-Plough and the Schering-Plough subsidiary party to the Distribution Agreement were (i) “acquired by a third party or otherwise come[ing] under “Control’ (as defined in Section 1.4) of a third party” and/or (ii) undergoing a “Change of Control” (as defined in Section 8.2(c)).

 

The Company is vigorously contesting Centocor’s attempt to terminate the Distribution Agreement as a result of the Merger. A hearing in the arbitration was completed in late December 2010. If the arbitration panel were to conclude that Centocor is permitted to terminate the Distribution Agreement as a result of the Merger and Centocor in fact terminates the Distribution Agreement, the Company’s subsidiary would not be able to distribute Remicade or Simponi . In addition, in the arbitration, Centocor is claiming damages, “in an amount to be determined”, that result from Merck’s alleged non-termination of the Distribution Agreement. If Centocor were to prevail in the arbitration, Merck could be liable for the net damages, including any offsets or mitigation, that the arbitration panel finds Centocor incurred as a result of non-termination. Sales of Remicade and Simponi in 2010 were $2.7 billion and $97 million, respectively. An unfavorable outcome in the arbitration would have a material adverse effect on the Company’s financial position, liquidity and results of operations. In addition, the Company would be required to record a material, non-cash impairment charge with respect to the termination of those marketing rights.

 

Finally, due to the uncertainty surrounding the outcome of the arbitration, the parties may choose to settle the dispute under mutually agreeable terms but any agreement reached with Centocor to resolve the dispute under the Distribution Agreement may result in the terms of the Distribution Agreement being modified in a manner that may reduce the benefits of the Distribution Agreement to the Company.

 

Pharmaceutical products can develop unexpected safety or efficacy concerns.

 

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

 

Changes in laws and regulations could adversely affect the Company’s business.

 

All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.

 

Reliance on third party relationships and outsourcing arrangements could 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 information technology 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.

 

The Company is increasingly dependent on sophisticated information technology and infrastructure.

 

The Company is increasingly dependent on sophisticated information technology and infrastructure. Any significant breakdown, intrusion, interruption or corruption of these systems or data breaches could have a material adverse effect on our business. In addition, the Company currently is proceeding with a multi-year implementation of an enterprise wide resource planning system, which was implemented in the United States in 2010 and which includes modification to the design, operation and documentation of its internal controls over financial reporting. The Company intends to implement the resource planning system in major European markets and Canada in 2011. Any material problems in the implementation could have a material adverse effect on the Company’s business.

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

 

Even after a product reaches market, certain developments following regulatory approval, including results in post-marketing Phase IV trials, may decrease demand for the Company’s products, including the following:

 

 

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

 

In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and the Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.

 

If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of 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 claims for its products.

 

Negative events in the animal health industry could have a negative impact on future results of operations.

 

Future sales of key animal health products could be adversely impacted 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 Bovine Spongiform Encephalopathy (“BSE”) or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact 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.

 

The Company is working with sanofi-aventis to create an animal health joint venture.

 

As previously disclosed, the Company has agreed to create an animal health joint venture with sanofi-aventis. Under the agreement, both companies will contribute their respective animal health businesses to the new

equally-owned joint venture. The transaction is expected to close in the third quarter of 2011. Once the animal health joint venture is established, there will be a period of integration during which the animal health business could suffer. It is possible that the integration process could result in the loss of key employees, result in the disruption of each company’s ongoing animal health business or identify inconsistencies in standards, controls, procedures and policies that adversely affect the joint venture’s ability to maintain relationships with customers, suppliers, distributors or other parties.

 

Disruption from the integration process could have a material adverse effect on the joint venture’s business which is expected to be an important contributor to the Company’s business and results of operations. The formation of the animal health joint venture is expected to be dilutive to the Company’s earnings for the first 12 months after the transaction closes.

 

Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.

 

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

 

 

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

 

The Company operates in multiple jurisdictions and, as such, virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, 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 and interest rates could negatively affect the Company’s results of operations, financial position and cash flows.

 

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 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.

 

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

 

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 February 2010, President Obama’s administration proposed significant changes to the U.S. international tax laws, including changes that would limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. We cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted, they could have a significant impact on the financial results of the Company.

 

In addition, the Company may be impacted by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.

 

The Company may fail to realize the anticipated cost savings, revenue enhancements and other benefits expected from the Merger, which could adversely affect the value of the Company’s common stock.

 

The success of the Merger will depend, in part, on the Company’s ability to successfully combine the businesses of Old Merck and Schering-Plough and realize the anticipated benefits and cost savings from the combination of the two companies. If the combined company is not able to achieve these objectives within the anticipated time frame, or at all, the value of the Company’s common stock may be adversely affected.

 

It is possible that the integration process could result in the loss of key employees, result in the disruption of each legacy company’s ongoing businesses or identify inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, suppliers, distributors, creditors, lessors, clinical trial investigators or managers or to achieve the anticipated benefits of the Merger.

 

Specifically, issues that must be addressed in integrating the operations of the two legacy companies in order to realize the anticipated benefits of the Merger include, among other things:

 

 

Integration efforts between the two companies will also divert management attention and resources. An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays encountered in the

integration process, could have an adverse effect on the Company’s business and results of operations, which may affect the value of the shares of Company common stock.

 

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual cost and sales synergies may be lower than the Company expects and may take longer to achieve than anticipated. If the Company is not able to adequately address these challenges, it may be unable to successfully integrate the operations of the two legacy companies, or to realize the anticipated benefits of the integration of the two legacy companies.

 

Delays encountered in the integration process could have a material adverse effect on the revenues, expenses, operating results and financial condition of the Company. Although the Company expects significant benefits, such as increased cost savings, to result from the Merger, there can be no assurance that the Company will realize all of these anticipated benefits.

 

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

 

As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, 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 certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. 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.

 

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 presence in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in emerging 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 we cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.

 

For all these reasons, sales within emerging markets carry significant risks. However, a failure to continue to expand the Company’s business in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.

 

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

 

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

 

 

As discussed below, in 2010 the Company was required to remeasure its local currency operations in Venezuela to U.S. dollars as the Venezuelan economy was determined to be hyperinflationary. Also, in January and again in December 2010, the Venezuelan government devalued its currency. These actions have had, and will continue to have, an adverse effect on the Company’s results of operations, financial position and cash flows.

 

Furthermore, the Company believes the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the EU, have deteriorated during 2010. These conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on the accounts receivable outstanding in these countries. As of December 31, 2010, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.4 billion of which hospital and public sector receivables in Greece were approximately 15%. During 2010, the Greek government announced it would exchange zero coupon bonds for outstanding 2007-2009 accounts receivable related to certain government sponsored institutions.

 

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.

 

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

 

This report, including the Annual Report, and other written reports and oral statements made from time to time by 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. 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:

 

 

 

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

 

 

their intended purposes and have capacities and projected capacities 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.

 

 

JOHN CANAN — Age 54

 

November 2009 — Senior Vice President Finance-Global Controller, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Company’s global controller’s organization including all accounting, controls, external reporting and financial standards and policies

 

January 2008 — Senior Vice President and Controller, Old Merck— responsible for the Corporate Controller’s Group

 

September 2006 — Vice President, Controller, Old Merck — responsible for the Corporate Controller’s Group

 

WILLIE A. DEESE — Age 55

 

November 2009 — Executive Vice President and President, Merck Manufacturing Division (“MMD”), Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions

 

January 2008 — Executive Vice President and President, MMD, Old Merck — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions

 

May 2005 — President, MMD, Old Merck — responsible for the Company’s global manufacturing, procurement, and operational excellence functions

 

January 2004 — Senior Vice President, Global Procurement, Old Merck

 

MIRIAN M. GRADDICK-WEIR — Age 56

 

November 2009 — Executive Vice President, Human Resources, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Global Human Resources organization

 

January 2008 — Executive Vice President, Human Resources, Old Merck — responsible for the Global Human Resources organization

 

September 2006 — Senior Vice President, Human Resources, Old Merck

 

Prior to September 2006, Dr. Graddick-Weir was Executive Vice President of Human Resources and Employee Communications at AT&T (communications services provider), and held several other senior Human Resources leadership positions at AT&T for more than 20 years.

 

BRIDGETTE P. HELLER — Age 49

 

March 2010 — Executive Vice President and President, Merck Consumer Care, Merck & Co., Inc. — responsible for the Merck Consumer Care organization

 

Prior to March 2010, Ms. Heller was President, Johnson & Johnson’s Baby Global Business Unit (2007 — 2010) and Global President for Baby, Kids and Wound Care (2005 — 2007).

 

Prior to joining Johnson & Johnson, Ms. Heller was founder and managing partner at Heller Associates from 2004 to 2005.

 

PETER N. KELLOGG — Age 54

 

November 2009 — Executive Vice President and Chief Financial Officer, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Company’s worldwide financial organization, investor relations, corporate development and licensing, and the Company’s joint venture relationships

 

August 2007 — Executive Vice President and Chief Financial Officer, Old Merck — responsible for the Company’s worldwide financial organization, investor relations, corporate development and licensing, and the Company’s joint venture relationships

 

Prior to August 2007, Mr. Kellogg was Executive Vice President, Finance and Chief Financial Officer of Biogen Idec (biotechnology company) since November 2003, from the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation.

 

PETER S. KIM — Age 52

 

November 2009 — Executive Vice President and President, Merck Research Laboratories, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Company’s research and development efforts worldwide

 

January 2008 — Executive Vice President and President, Merck Research Laboratories, Old Merck — responsible for the Company’s research and development efforts worldwide

 

January 2003 — President, Merck Research Laboratories, Old Merck — responsible for the Company’s research and development efforts worldwide

 

RAUL E. KOHAN — Age 58

 

November 2009 — Executive Vice President and President, Animal Health, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for the Company’s Animal Health organization

 

October 2008 — Senior Vice President and President, Intervet/Schering-Plough Animal Health, Schering-Plough Corporation

 

October 2007 — Deputy Head, Animal Health and Senior Vice President, Corporate Excellence and Administrative Services, Schering-Plough Corporation

 

February 2007 — Senior Vice President and President, Animal Health, Schering-Plough Corporation

 

Prior to February 2007, Mr. Kohan was Group Head of Global Specialty Operations and President, Animal Health, Schering-Plough Corporation since 2003.

 

BRUCE N. KUHLIK — Age 54

 

November 2009 — Executive Vice President and General Counsel, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for legal, communications, and public policy functions and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company)

 

January 2008 — Executive Vice President and General Counsel, Old Merck — responsible for legal, communications, and public policy functions and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company)

 

August 2007 — Senior Vice President and General Counsel, Old Merck — responsible for legal, communications, and public policy functions and The Merck Company Foundation (a not-for-profit charitable organization affiliated with the Company)

 

May 2005 — Vice President and Associate General Counsel, Old Merck — primary responsibility for the Company’s Vioxx litigation defense

 

Prior to May 2005, Mr. Kuhlik was Senior Vice President and General Counsel for the Pharmaceutical Research and Manufacturers of America since October, 2002.

 

MICHAEL ROSENBLATT, M.D. — Age 63

 

December 2009 — Executive Vice President and Chief Medical Officer, Merck & Co., Inc. — the Company’s primary voice to the global medical community on critical issues such as patient safety and will oversee the Company’s Global Center for Scientific Affairs

 

Prior to December 2009, Dr. Rosenblatt was the Dean of Tufts University School of Medicine since 2003.

 

J. CHRIS SCALET — Age 52

 

November 2009 — Executive Vice President, Global Services, and Chief Information Officer (“CIO”), Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for Global Shared Services across the human resources, finance, site services and information services function; and the enterprise business process redesign initiative

 

January 2008 — Executive Vice President, Global Services, and CIO, Old Merck — responsible for Global Shared Services across the human resources, finance, site services and information services function; and the enterprise business process redesign initiative

 

January 2006 — Senior Vice President, Global Services, and CIO, Old Merck — responsible for Global Shared Services across the human resources, finance, site services and information services function; and the enterprise business process redesign initiative

 

March 2003 — Senior Vice President, Information Services, and CIO, Old Merck — responsible for all areas of information technology and services including application development, technical support, voice and data communications, and computer operations worldwide

 

ADAM H. SCHECHTER — Age 46

 

May 2010 — Executive Vice President and President, Global Human Health, Merck & Co., Inc. — responsible for the Company’s pharmaceutical and vaccine marketing and sales organizations worldwide

 

November 2009 — President, Global Human Health, U.S. Market-Integration Leader, Merck & Co., Inc. (formerly Schering-Plough Corporation) — commercial responsibility in the United States for the Company’s portfolio of prescription medicines. Leader for the integration efforts for the Merck/Schering-Plough merger across all divisions and functions.

 

August 2007 — President, Global Pharmaceuticals, Global Human Health — global responsibilities for the Company’s atherosclerosis/cardiovascular, diabetes/obesity, oncology, specialty/neuroscience, respiratory, bone, arthritis and analgesia franchises as well as commercial responsibility in the United States for the Company’s portfolio of prescription medicines

 

July 2006 — President, U.S. Human Health — commercial responsibility in the United States for the Company’s portfolio of prescription medicines

 

October 2005 — General Manager, U.S. Human Health — responsible for the Neuro-Psychiatry, Osteoporosis, Migraine, Respiratory, and New Products franchises

 

MERVYN TURNER — Age 64

 

December 2010 — Chief Strategy Officer and Senior Vice President, Merck Research Laboratories, Merck & Co., Inc. — responsible for leading the formulation and execution of the Company’s long term strategic plan and additional responsibilities within Merck Research Laboratories

 

November 2009 — Chief Strategy Officer and Senior Vice President, Emerging Markets Research & Development, Merck Research Laboratories, Merck & Co., Inc. (formerly Schering-Plough Corporation) — responsible for leading the formulation and execution of the Company’s long term strategic plan and additional responsibilities in Emerging Markets Research & Development within Merck Research Laboratories

 

November 2008 — Chief Strategy Officer and Senior Vice President, Worldwide Licensing and External Research, Merck Research Laboratories, Old Merck

 

October 2002 — Senior Vice President, Worldwide Licensing and External Research, Old Merck

 

All officers listed above 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 the Board.

 

 

 

Performance Graph

 

The following graph assumes a $100 investment on December 31, 2005, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: Abbott Laboratories, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.

 

 

 

 

 

 

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.

 

 

 

Description of Merck’s Business

 

The Company is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, which are the Pharmaceutical, Animal Health, Consumer Care and Alliances segments, and one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets in the United States and Canada.

 

On November 3, 2009, Merck & Co., Inc. (“Old Merck”) and Schering-Plough Corporation (“Schering-Plough”) merged (the “Merger”). In the Merger, Schering-Plough acquired all of the shares of Old Merck, which became a wholly-owned subsidiary of Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the surviving public company and was renamed Merck & Co., Inc. (“New Merck” or the “Company”). However, for accounting purposes only, the Merger was treated as an acquisition with Old Merck considered the accounting acquirer. Accordingly, the accompanying financial statements reflect Old Merck’s stand-alone operations as they existed prior to the completion of the Merger. The results of Schering-Plough’s business have been included in New Merck’s financial statements only for periods subsequent to the completion of the Merger. Therefore, New Merck’s financial results for 2009 do not reflect a full year of legacy Schering-Plough operations. References in this report and in the accompanying financial statements to “Merck” for periods prior to the Merger refer to Old Merck and for periods after the completion of the Merger to New Merck.

 

Overview

 

During 2010, the Company made progress driving revenue growth for key products, expanding its global reach including within emerging markets, improving its cost structure, making strategic investments in its business and advancing its late-stage pipeline, while continuing the task of integrating the legacy companies post-Merger.

 

Sales increased to $46.0 billion in 2010 driven largely by incremental revenue resulting from the inclusion of a full year of results for legacy Schering-Plough products such as Remicade, a treatment for inflammatory diseases, Nasonex , an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, Temodar, a treatment for certain types of brain tumors, PegIntron for treating chronic hepatitis C and Clarinex , a non-sedating antihistamine, as well as by the inclusion of a full year of results for Zetia and Vytorin , cholesterol modifying medicines. Prior to the Merger, substantially all sales of Zetia and Vytorin were recognized by the Merck/Schering-Plough Partnership (the “MSP Partnership”) and the results of Old Merck’s interest in the MSP Partnership were recorded in Equity income from affiliates . As a result of the Merger, the MSP Partnership is wholly-owned by the Company and therefore revenues from these products are now reflected in Sales . Additionally, the Company recognized a full year of sales in 2010 from legacy Schering-Plough animal health and consumer care products. Sales for 2009 only include revenue from legacy Schering-Plough and MSP Partnership products for the post-Merger period through December 31, 2009. Also contributing to the sales increase was growth in Januvia and Janumet for the treatment of type 2 diabetes, Isentress , an antiretroviral therapy for use in combination therapy for the treatment of HIV-1 infection in adult patients, and Singulair , a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis. These increases were partially offset by lower sales of Cozaar

and Hyzaar for the treatment of hypertension, which lost patent protection in the United States in April 2010 and in a number of major European markets in March 2010. Revenue was also negatively affected by lower sales of Fosamax and Fosamax Plus D for the treatment and, in the case of Fosamax , prevention of osteoporosis, which have lost market exclusivity in the United States and in several major European markets, and lower revenue from the Company’s relationship with AstraZeneca LP (“AZLP”), as well as by lower sales of Gardasil , a vaccine to help prevent cervical, vulvar, vaginal and anal cancers, precancerous or dysplastic lesions, and genital warts caused by the human papillomavirus (“HPV”) types contained in the vaccine, and lower sales of Zocor, the Company’s statin for modifying cholesterol. In addition, the implementation of certain provisions of U.S. health care reform legislation during 2010 resulted in increased Medicaid rebates and other impacts that reduced revenues by approximately $170 million. Additionally, many countries in the European Union (“EU”) have undertaken austerity measures aimed at reducing costs in health care and have implemented pricing actions that negatively impacted sales in 2010.

 

Sales of Remicade and a follow-on product, Simponi , were $2.8 billion in the aggregate in 2010. The Company is involved in an arbitration with Centocor Ortho Biotech, Inc. (“Centocor”), a subsidiary of Johnson & Johnson, in which Centocor is seeking to terminate the Company’s rights to continue to market Remicade and Simponi . The arbitration hearing has concluded and the Company is awaiting the arbitration panel’s decision. See Note 12 to the consolidated financial statements. An unfavorable outcome in the arbitration would have a material adverse effect on the Company’s financial position, liquidity and results of operations.

 

Since the Merger, the Company has continued the advancement of drug candidates through its pipeline. During 2010, the U.S. Food and Drug Administration (“FDA”) approved Dulera Inhalation Aerosol, a new fixed-dose combination asthma treatment for patients 12 years of age and older. In addition, the intravenous formulation of Brinavess , for which Merck has exclusive marketing rights outside of the United States, Canada and Mexico, was granted marketing approval in the EU for the rapid conversion of recent onset atrial fibrillation to sinus rhythm in adults: for non-surgery patients with atrial fibrillation of seven days or less and for post-cardiac surgery patients with atrial fibrillation of three days or less.

 

Also during 2010, the FDA approved a new indication for Gardasil for the prevention of anal cancer caused by HPV types 16 and 18 and for the prevention of anal intraepithelial neoplasia grades 1, 2 and 3 (anal dysplasias and precancerous lesions) caused by HPV types 6, 11, 16 and 18, in males and females 9 through 26 years of age. Additionally, in September 2010, two supplemental New Drug Applications (“sNDA”) for Saphris for the treatment of schizophrenia in adults and acute treatment of bipolar I disorder in adults were approved in the United States to expand the product’s indications. Also during 2010, the Company entered into a co-promotion agreement for the commercialization of Daxas , a treatment for symptomatic chronic obstructive pulmonary disease, which the Company launched in certain European markets.

 

The Company currently has three candidates under review with the FDA: boceprevir, an investigational oral hepatitis C protease inhibitor; MK-0431A XR, the Company’s investigational extended-release formulation of Janumet and MK-431D, an investigational combination of Januvia and Zocor for the treatment of diabetes and dyslipidemia. In addition, SCH 900121, NOMAC/E2, an oral contraceptive that combines a selective progestin with 17-beta estradiol, is currently under review in the EU. Additionally, MK-3009, Cubicin daptomycin for injection, is currently under review in Japan where the Company has marketing rights. Also, the Company currently has 19 candidates in Phase III development and anticipates making a New Drug Application (“NDA”) with respect to certain of these candidates in 2011 including MK-8669, ridaforolimus, a novel mTOR inhibitor being evaluated for the treatment of metastatic soft tissue and bone sarcomas; MK-2452, Saflutan (tafluprost), for the reduction of elevated intraocular pressure in appropriate patients with primary open-angle glaucoma and ocular hypertension; MK-653C, ezetimibe combined with atorvastatin, which is an investigational medication for the treatment of dyslipidemia; and MK-0974, telcagepant, the Company’s investigational medication for acute treatment of migraine. Another Phase III candidate is vorapaxar with respect to which the Company was recently informed by the chairman of one of the studies to discontinue study drug and that investigators were to begin to close out the study in a timely and orderly fashion. The Company recorded a material impairment charge on the related intangible asset. See “Research and Development” below.

 

The Company continues to make progress in achieving cost savings across all areas, including from consolidation in both sales and marketing and research and development, the application of the Company’s lean

manufacturing and sourcing strategies to the expanded operations, and the full integration of the MSP Partnership. These savings result from various actions, including the Merger Restructuring Program discussed below, previously announced ongoing cost reduction activities at both legacy companies, as well as from non-restructuring-related activities such as the Company’s procurement savings initiative. During 2010, the Company realized more than $2.0 billion in net cost savings from all of these activities.

 

In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. As part of the restructuring actions taken thus far under the Merger Restructuring Program, the Company expects to reduce its total workforce measured at the time of the Merger by approximately 17% across the Company worldwide. In addition, the Company has eliminated over 2,500 positions which were vacant at the time of the Merger. These workforce reductions will primarily come from the elimination of duplicative positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions. During this period, the Company also will continue to hire new employees in strategic growth areas of the business as necessary. In connection with the Merger Restructuring Program, separation costs under the Company’s existing severance programs worldwide were recorded in the fourth quarter of 2009 to the extent such costs were probable and reasonably estimable. The Company commenced accruing costs related to enhanced termination benefits offered to employees under the Merger Restructuring Program in the first quarter of 2010 when the necessary criteria were met. The Company recorded total pretax restructuring costs of $1.8 billion in 2010 and $1.5 billion in 2009 related to this program. The restructuring actions taken thus far under the Merger Restructuring Program are expected to be substantially completed by the end of 2012, with the exception of certain manufacturing facilities actions, with the total cumulative pretax costs estimated to be approximately $3.8 billion to $4.6 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects the restructuring actions taken thus far under the Merger Restructuring Program to result in annual savings in 2012 of approximately $2.7 billion to $3.1 billion.

 

In March 2010, the United States enacted health care reform legislation. Important market reforms began during 2010 and will continue through full implementation in 2014. During 2010, Merck incurred costs as a result of the legislation, including increased Medicaid rebates and other impacts that reduced revenues. The Company also recorded a charge in 2010 associated with this legislation that changed tax law to require taxation of the prescription drug subsidy of the Company’s retiree health benefit plans for which companies receive reimbursement under Medicare Part D. Additional provisions of the legislation will come into effect in 2011, including the assessment of an annual health care reform fee on all branded prescription drug manufacturers and importers and the requirement that drug manufacturers pay a 50% discount on Medicare Part D utilization incurred by beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). These new provisions will decrease revenues and increase costs.

 

Earnings per common share (“EPS”) assuming dilution for 2010 were $0.28, which reflect a net unfavorable impact resulting from the amortization of purchase accounting adjustments, in-process research and development (“IPR&D”) impairment charges, including a charge related to the vorapaxar clinical development program, restructuring and merger-related costs, as well as a legal reserve relating to Vioxx (the “ Vioxx Liability Reserve”) discussed below, partially offset by the gain recognized on AstraZeneca’s exercise of its option to acquire certain assets from the Company. Non-GAAP EPS in 2010 were $3.42 excluding these items (see “Non-GAAP Income and Non-GAAP EPS” below).

 

In December 2010, Merck announced that its Board of Directors had elected Kenneth C. Frazier, then Merck’s president, as chief executive officer and president, as well as a member of the board, effective January 1, 2011. Mr. Frazier succeeds Richard T. Clark, who will continue to serve as chairman of the board.

Competition and the Health Care Environment

 

Competition

The markets in which the Company conducts its business and the pharmaceutical industry 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, and generic drug and consumer health care manufacturers. The Company’s operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as the Company’s products mature. In addition, patent positions 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 recognition of an impairment charge with respect to certain products. Competitive pressures have intensified as pressures in the industry have grown. The effect on operations of competitive factors and patent disputes cannot be predicted.

 

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 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 joint ventures and licenses, and has been refining its sales and marketing efforts to further 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 for the Company’s products in that therapeutic category.

 

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In 2010, this pressure was particularly intense in several European countries which implemented austerity measures aimed at reducing costs in areas such as health care. 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 “disproportionate share” hospitals (hospitals meeting certain criteria). Under the Federal Vaccines for Children entitlement program, the U.S. Centers for Disease Control and Prevention (“CDC”) funds and purchases recommended pediatric vaccines at a public sector price for the immunization of Medicaid-eligible, uninsured, Native American and certain underinsured children. Merck was awarded a CDC contract in 2010 for the supply of pediatric vaccines for the Vaccines for Children program.

 

Against this backdrop, the United States enacted major health care reform legislation in 2010. Various insurance market reforms began last year and will continue through full implementation in 2014. The new law is expected to expand access to health care to more than 32 million Americans by the end of the decade that did not previously have regular access to health care. 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 requires pharmaceutical manufacturers to pay a 50% discount on Medicare Part D utilization by beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, beginning in 2011, pharmaceutical manufacturers will be required to pay an annual health care reform fee. The total annual industry fee, which will be $2.5 billion in 2011, will be assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid.

 

Although not included in the health care reform law, Congress has also considered, and may consider again, proposals to increase the government’s role in pharmaceutical pricing in the Medicare program. These proposals may include removing the current legal prohibition against the Secretary of the Health and Human Services intervening in price negotiations between Medicare drug benefit program plans and pharmaceutical

companies. They may also include mandating the payment of rebates for some or all of the pharmaceutical utilization in Medicare drug benefit plans. In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries.

 

The full impact of U.S. health care reform, as well as continuing budget pressures on governments around the world, cannot be predicted at this time.

 

In addressing cost containment pressures, the Company makes a continuing effort to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company works in markets with historically low rates of government spending on health care to encourage those governments to increase their investments and thereby improve their citizens’ access to appropriate health care, including medicines.

 

In the animal health business, there is intense competition which 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.

 

The Company’s consumer care operations face competition from other consumer health care businesses as well as retailers who carry their own private label brands. The Company’s competitive position is affected by several factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the Company’s products, promotional efforts and the growth of lower cost private label brands.

 

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.

 

Government Regulation

The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tends to focus on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.

 

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 many 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. U.S. health care reform legislation which passed in 2010 with a full implementation date of 2014, significantly expands access to health care, but also contains a number of provisions imposing new obligations on the pharmaceutical industry, including, for example, an increase in the mandated rebate under the Medicaid program and a new discount requirement in the Medicare Part D program.

 

The EU has adopted Directives and other legislation concerning the classification, labeling, advertising, wholesale distribution 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. 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.

 

In January 2008, the European Commission (“EC”) launched a sector inquiry in the pharmaceutical industry under the rules of EU competition law. A sector inquiry allows the EC to gather information about the general operation of market competition and is not an investigation into suspected anti-competitive behavior of specific firms. As part of this inquiry, Old Merck’s offices in Germany were inspected by the authorities beginning in January 2008. The preliminary report of the EC was issued in November 2008, and following the public consultation period, the final report was issued in July 2009. The final report confirmed that there has been a decline in the number of novel medicines reaching the market and instances of delayed market entry of generic medicines and discussed industry practices that may have contributed to these phenomena. Among other things, the final

report expressed concern over settlements of patent disputes between originator and generic companies and suggested that the EC should monitor any anti-competitive effects. While the EC has issued further inquiries with respect to the subject of the investigation, including to the Company, the EC has not alleged that the Company or any of its subsidiaries have engaged in any unlawful practices.

 

The Company believes that it will continue to be able to conduct its operations, including launching new drugs into the market, in this regulatory environment.

 

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 products around the world. The Company’s efforts in this regard are wide-ranging. For example, the Company has been recognized for pricing many of its products through a differential pricing framework, taking into consideration such factors as a country’s level of economic development and public health need.

 

Building on the Company’s own efforts, Merck has undertaken collaborations with many stakeholders to improve access to medicines and enhance the quality of life for people around the world.

 

For example, in 2010, through a partnership of Merck, the Government of Bhutan, and the Australian Cervical Cancer Foundation, Bhutan became the first low-income country in the world to successfully implement a national HPV vaccination program. Under this program, Merck is providing Gardasil free of charge for the first year of the program and will provide Gardasil at the Company’s access price for five more years.

 

Also in 2010, Merck worked with its partner, the Wellcome Trust, to further develop the Hillemann Laboratories which was established in September 2009. This initiative will focus on developing affordable vaccines to prevent diseases that commonly affect low-income countries.

 

Merck has also in the past provided funds to The Merck Company Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is The African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana and the Bill & Melinda Gates Foundation, that was renewed in 2010, and supports Botswana’s response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment, and support.

 

Privacy and Data Protection

The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing attention to privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws and regulations in the United States and internationally requiring notification to individuals and government authorities of security breaches involving certain categories of personal information.

 

Operating Results

 

Sales

Worldwide sales totaled $46.0 billion for 2010 compared with $27.4 billion in 2009. Foreign exchange favorably affected global sales performance by 1%. The revenue increase over 2009 was driven largely by incremental sales resulting from the inclusion of a full year of results for legacy Schering-Plough products such as Remicade, Nasonex , Temodar, PegIntron and Clarinex , as well as by the inclusion of a full year of results for Zetia and Vytorin . Prior to the Merger, substantially all sales of Zetia and Vytorin were recognized by the MSP Partnership and the results of Old Merck’s interest in the MSP Partnership were recorded in Equity income from affiliates . As a result of the Merger, the MSP Partnership is wholly-owned by the Company and therefore revenues from these products are now reflected in Sales . Additionally, the Company recognized a full year of sales in 2010 from legacy Schering-Plough animal health and consumer care products. Sales for 2009 only include revenue from legacy Schering-Plough and MSP Partnership products for the post-Merger period through December 31, 2009. Also contributing to the sales increase was growth in Januvia and Janumet, Isentress, and Singulair . These increases

were partially offset by lower sales of Cozaar and Hyzaar which lost patent protection in the United States in April 2010 and in a number of major European markets in March 2010. Revenue was also negatively affected by lower sales of Fosamax and Fosamax Plus D , which have lost market exclusivity in the United States and in several major European markets, and lower revenue from the Company’s relationship with AZLP, as well as by lower sales of Gardasil and Zocor . In addition, the implementation of certain provisions of U.S. health care reform legislation during 2010 resulted in increased Medicaid rebates and other impacts that reduced revenues by approximately $170 million.

 

Domestic sales were $20.2 billion in 2010 compared with $14.4 billion in 2009. Foreign sales were $25.8 billion in 2010 compared with $13.0 billion in 2009. The increases were driven primarily by incremental sales resulting from the inclusion of a full year of legacy Schering-Plough and MSP Partnership products in 2010. The domestic sales increase was also driven by higher sales of Januvia, Janumet, Singulair and Isentress . These increases were partially offset by lower sales of Cozaar, Hyzaar, Fosamax and Fosamax Plus D, Gardasil and RotaTeq , as well as by lower revenue from the Company’s relationship with AZLP. Foreign sales growth reflects the strong performance of Januvia, Janumet, Isentress and Singulair, partially offset by lower sales of Cozaar, Hyzaar, Fosamax and Fosamax Plus D . Foreign sales represented 56% of total sales in 2010.

 

While many of the Company’s brands experienced positive growth trends in the EU during 2010, the environment in the EU and across Europe is now more challenging. Many countries have announced austerity measures aimed at reducing costs in areas such as health care. The implementation of pricing actions varies by country and many have announced measures to reduce prices of generic and patented drugs. While the Company is taking steps to mitigate the immediate impact in the EU, the austerity measures negatively affected the Company’s revenue performance in 2010 and the Company anticipates they will continue to negatively affect revenue performance in 2011.

 

Worldwide sales totaled $27.4 billion for 2009, an increase of 15% compared with 2008. Foreign exchange unfavorably affected global sales performance by 2%. The revenue increase over 2008 largely reflects incremental sales resulting from the inclusion of legacy Schering-Plough and MSP Partnership products for the post-Merger period in 2009. Also contributing to the sales increase was growth in Januvia and Janumet, Isentress, Singulair, Varivax and Pneumovax . These increases were partially offset by lower sales of Fosamax and Fosamax Plus D , Gardasil , Cosopt and Trusopt (which lost U.S. market exclusivity in October 2008), and lower revenue from the Company’s relationship with AZLP. Other products that experienced declines include RotaTeq, Zocor and Primaxin .

Sales ⁽¹⁾ of the Company’s products were as follows:

 

 

 

Pharmaceutical Segment Sales

 

Bone, Respiratory, Immunology and Dermatology

Worldwide sales of Singulair, a once-a-day oral medicine indicated for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, grew 7% reaching $5.0 billion in 2010 reflecting price increases and positive performance in Japan. Global sales of Singulair rose 7% to $4.7 billion in 2009 primarily driven by favorable pricing and strong performance in Japan and Asia Pacific. Singulair continues to be the number one prescribed product in the U.S. respiratory market. U.S. sales of Singulair were $3.2 billion in 2010. The patent that provides U.S. market exclusivity for Singulair expires in August 2012. The Company expects that within the two years following patent expiration, it will lose substantially all U.S. sales of Singulair , with most of those declines coming in the first full year following patent expiration. In addition, the patent for Singulair will expire in a number of major European markets in August 2012 and the Company expects sales of Singulair in those markets will decline significantly thereafter (although the six month Pediatric Market Exclusivity may extend this date in some markets to February 2013).

 

Sales of Remicade, a treatment for inflammatory diseases, were $2.7 billion in 2010 and $431 million for the post-Merger period in 2009. Remicade is marketed by the Company outside of the United States (except in Japan and certain other Asian markets). Products that compete with Remicade have been launched over the past several years. In October 2009, the EC approved Simponi , a once-monthly subcutaneous treatment for certain inflammatory diseases. In January 2011, Simponi was approved in the EU for use in combination with methotrexate in adults with severe, active and progressive rheumatoid arthritis not previously treated with methotrexate and for the reduction in the rate of progression of joint damage as measured by X-ray in rheumatoid arthritis patients. The Company has launched Simponi in 18 countries and launches in other international markets are planned. Sales of Simponi were $97 million in 2010. See Note 12 to the consolidated financial statements for a discussion of arbitration proceedings involving the Company’s rights to market Remicade and Simponi .

 

Global sales of Nasonex , an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $1.2 billion in 2010 and were $165 million for the post-Merger period in 2009.

 

Worldwide sales of Fosamax and Fosamax Plus D (marketed as Fosavance throughout the EU and as Fosamac in Japan) for the treatment and, in the case of Fosamax , prevention of osteoporosis, decreased 16% in 2010 to $926 million and declined 29% in 2009 to $1.1 billion. These medicines have lost market exclusivity in the United States and have also lost market exclusivity in several major European markets. Accordingly, the Company is experiencing significant sales declines within the Fosamax product franchise and the Company expects the declines to continue.

 

Global sales of Clarinex (marketed as Aerius in many countries outside the United States), a non-sedating antihistamine, were $659 million in 2010 and were $101 million for the post-Merger period in 2009.

 

Other products included in the Bone, Respiratory, Immunology and Dermatology franchise include among others, Arcoxia, for the treatment of arthritis and pain; Proventil inhalation aerosol for the relief of bronchospasm; and Asmanex , an inhaled corticosteroid for asthma.

 

In June 2010, the FDA approved Dulera Inhalation Aerosol, a new fixed-dose combination asthma treatment for patients 12 years of age and older. Dulera combines an inhaled corticosteroid with a long-acting beta ₂ -agonist.

 

Cardiovascular

Sales of Zetia , a cholesterol absorption inhibitor also marketed as Ezetrol outside the United States, and Vytorin, a combination product containing the active ingredients of both Zetia and Zocor marketed outside the United States as Inegy , were $2.3 billion and $2.0 billion, respectively, in 2010 and were $403 million and $441 million, respectively, for the post-Merger period in 2009. Prior to the Merger, substantially all sales of these products were recognized by the MSP Partnership and the results of Old Merck’s interest in the MSP Partnership were recorded in Equity income from affiliates . As a result of the Merger, the MSP Partnership is wholly-owned by the Company and therefore revenues from these products are now reflected in Sales . Total sales of Zetia and Vytorin

in 2009, including the sales recognized through the MSP Partnership, were $2.2 billion and $2.1 billion, respectively.

 

In November 2010, the Oxford University Clinical Trial Service Unit presented the results of the SHARP (Study of Heart and Renal Protection) study at the American Society of Nephrology meeting in which Vytorin 10/20 mg reduced the incidence of first major vascular events — defined as non-fatal heart attacks or cardiac death, stroke or any revascularization procedure — by a highly statistically significant 16.1% compared to placebo. This was the pre-specified primary endpoint of the study. The SHARP study involved more than 9,000 patients who, on average, had advanced or end-stage chronic kidney disease. Merck plans to seek regulatory approvals for the use of Vytorin in patients with chronic kidney disease based on the results from the SHARP study in 2011.

 

IMPROVE-IT, a large cardiovascular outcomes study evaluating Zetia/Vytorin in patients with acute coronary syndrome, is fully enrolled with approximately 18,000 patients. During 2010, a blinded interim efficacy analysis was conducted by the Data and Safety Monitoring Board (“DSMB”) for the trial when approximately 50% of the primary events had been accrued. The DSMB recommended continuing the trial with no changes in the study protocol. Another blinded interim efficacy analysis is planned by the DSMB when approximately 75% of the primary events have been accrued. The IMPROVE-IT trial is scheduled for completion in 2013.

 

Global sales of Integrilin Injection, a treatment for patients with acute coronary syndrome, which is sold by the Company in the United States and Canada, were $266 million in 2010 and were $46 million for the post-Merger period in 2009.

 

In September 2010, the intravenous formulation of Brinavess (vernakalant) was granted marketing approval in the EU, Iceland and Norway for the rapid conversion of recent onset atrial fibrillation to sinus rhythm in adults: for non-surgery patients with atrial fibrillation of seven days or less and for post-cardiac surgery patients with atrial fibrillation of three days or less. Brinavess acts preferentially in the atria and is the first product in a new class of pharmacologic agents for cardioversion of atrial fibrillation to launch in the EU. In April 2009, Cardiome Pharma Corp. and Merck announced a collaboration and license agreement for the development and commercialization of vernakalant. The agreement provides Merck exclusive rights outside of the United States, Canada and Mexico to vernakalant intravenous formulation.

 

Diabetes and Obesity

Global sales of Januvia , Merck’s dipeptidyl peptidase-4 (“DPP-4”) inhibitor for the treatment of type 2 diabetes, were $2.4 billion in 2010, $1.9 billion in 2009 and $1.4 billion in 2008, reflecting continued growth both in the United States and internationally due in part to the launch of new indications. In addition, growth in 2010 reflects apparent safety concerns that limited sales of a competing product. DPP-4 inhibitors represent a class of prescription medications that improve blood sugar control in patients with type 2 diabetes by enhancing a natural body system called the incretin system, which helps to regulate glucose by affecting the beta cells and alpha cells in the pancreas.

 

Worldwide sales of Janumet , Merck’s oral antihyperglycemic agent that combines sitagliptin ( Januvia) with metformin in a single tablet to target all three key defects of type 2 diabetes, were $954 million in 2010, $658 million in 2009 and $351 million in 2008 reflecting growth both in the United States and internationally due to ongoing launches in certain markets.

 

MK-0431A XR, the Company’s investigational extended-release formulation of Janumet , was accepted for standard review by the FDA in 2010. The Company is also moving forward as planned with regulatory filings in countries outside the United States. The extended-release formulation of Janumet is an investigational treatment for type 2 diabetes that combines sitagliptin with metformin extended release, a commonly-prescribed medication for type 2 diabetes, into a single tablet. This formulation is designed to provide a new treatment option for health care providers and patients who need two or more oral agents to help control their blood sugar with the convenience of once daily dosing.

 

Diversified Brands

Merck’s diversified brands are human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.

Global sales of Cozaar and its companion agent Hyzaar (a combination of Cozaar and hydrochlorothiazide) for the treatment of hypertension fell 41% in 2010 to $2.1 billion. The patents that provided U.S. market exclusivity for Cozaar and Hyzaar expired in April 2010. In addition, Cozaar and Hyzaar lost patent protection in a number of major European markets in March 2010. Accordingly, the Company is experiencing a significant decline in Cozaar/Hyzaar worldwide sales and the Company expects such decline to continue. Global sales of Cozaar and Hyzaar were $3.6 billion in 2009 which were comparable to sales in 2008 reflecting the unfavorable effect of foreign exchange, offset by strong performance of both products in the United States and of Hyzaar in Japan (marketed as Preminent ).

 

Other products contained in the Diversified Brands franchise include among others, Zocor , a statin for modifying cholesterol; Propecia , a product for the treatment of male pattern hair loss; prescription Claritin for the treatment of seasonal outdoor allergies and year-round indoor allergies; Vasotec/Vaseretic for hypertension and/or heart failure; Remeron , an antidepressant; and Proscar, a urology product for the treatment of symptomatic benign prostate enlargement. Remeron lost market exclusivity in the United States in January 2010 and in certain markets in the EU in September 2010.

 

Infectious Disease

Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection in treatment-naïve and treatment-experienced adults, were $1.1 billion in 2010, $752 million in 2009 and $361 million in 2008. Sales growth in both periods reflects positive performance in the United States, as well as internationally, resulting from continued uptake since launch. Isentress works by inhibiting the insertion of HIV DNA into human DNA by the integrase enzyme. Inhibiting integrase from performing this essential function helps to limit the ability of the virus to replicate and infect new cells.

 

In November 2010, the Company reported initial results from the Phase III study investigating the efficacy and safety of a treatment regimen including Isentress tablets once daily in treatment-naïve adult patients infected with HIV-1. In the study, although the treatment regimen that included Isentress once daily enabled more than 80% of patients to achieve viral suppression, Isentress once daily did not demonstrate non-inferiority to the treatment regimen that included Isentress twice daily. Based on the initial results and following the recommendation of an independent Data Monitoring Committee, Merck terminated the study.

 

Worldwide sales of PegIntron for treating chronic hepatitis C were $737 million in 2010 and were $149 million for the post-Merger period in 2009. In September 2010, the Company initiated a voluntary recall of PegIntron single dose RediPen injection in the United States after consultation with the FDA, as well as other recalls globally, resulting in a reduction to revenue in 2010 of approximately $20 million representing estimated sales returns. In addition, the Company recognized a charge of approximately $40 million in Materials and production primarily for inventory discard costs. The recall was conducted as a precautionary measure due to a third-party manufacturing issue that could have affected a small number of RediPens. The recall was specific to PegIntron RediPen and did not affect PegIntron vial products.

 

Sales of Primaxin , an anti-bacterial product, decreased 11% in 2010 to $610 million and declined 9% in 2009 to $689 million. These results reflect competitive pressures and in 2009 also reflect supply constraints. Patents on Primaxin have expired worldwide and multiple generics have been approved in Europe. Accordingly, the Company is experiencing a decline in sales of this product and the Company expects the decline to continue.

 

Other products contained in the Infectious Diseases franchise include among others, Cancidas , an anti-fungal product; Invanz for the treatment of certain infections; Avelox, a fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections; Rebetol for use in combination with PegIntron for treating chronic hepatitis C; and Crixivan and Stocrin , antiretroviral therapies for the treatment of HIV infection. The compound patent that provides U.S. market exclusivity for Crixivan expires in 2012.

 

Neurosciences and Ophthalmology

Global sales of Maxalt , Merck’s tablet for the acute treatment of migraine, declined 4% in 2010 to $550 million reflecting the generic availability of a competing product. Sales of Maxalt grew 9% in 2009 to $575 million. The compound patent that provides market exclusivity for Maxalt in the United States expires in

June 2012 (although the six month Pediatric Market Exclusivity may extend this date to December 2012). In addition, the patent for Maxalt will expire in a number of major European markets in 2013. The Company anticipates that sales in the United States and in these European markets will decline significantly after these patent expiries.

 

Worldwide sales of ophthalmic products Cosopt and Trusopt declined 4% in 2010 to $484 million and fell 36% to $503 million in 2009. The patent that provided U.S. market exclusivity for Cosopt and Trusopt expired in October 2008. Trusopt has also lost market exclusivity in a number of major European markets. The patent for Cosopt will expire in a number of major European markets in March 2013 and the Company expects sales in those markets to decline significantly thereafter.

 

In August 2009, the FDA approved Saphris (asenapine) for the acute treatment of schizophrenia in adults and for the acute treatment of manic or mixed episodes associated with bipolar I disorder with or without psychotic features in adults. In September 2010, two sNDAs for Saphris were approved in the United States to expand the product’s indications to the treatment of schizophrenia in adults, as monotherapy for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults, and as adjunctive therapy with either lithium or valproate for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults. In September 2010, asenapine, to be sold under the brand name Sycrest , received marketing approval in the EU for the treatment of moderate to severe manic episodes associated with bipolar I disorder in adults; the marketing approval did not include an indication for schizophrenia. The marketing approval applies to all EU member states. In October 2010, Merck and H. Lundbeck A/S (“Lundbeck”) announced a worldwide commercialization agreement for Sycrest sublingual tablets (5 mg, 10 mg). Under the terms of the agreement, Lundbeck paid a fee and will make product supply payments in exchange for exclusive commercial rights to Sycrest in all markets outside the United States, China and Japan. Merck will retain exclusive commercial rights to asenapine in the United States, China and Japan. Concurrently, Merck is continuing to pursue regulatory approval for asenapine in other parts of the world.

 

Merck continues to focus on building the brand awareness of Saphris in the United States. Merck launched a black cherry flavor of the sublingual tablet to provide an additional taste option. Merck continues to monitor and assess Saphris/Sycrest and the related intangible asset. If increasing the brand awareness, the additional flavor option, or Lundbeck’s launch of the product in the EU is not successful, the Company may take a non-cash impairment charge with respect to Saphris/Sycrest , and such charge could be material.

 

Bridion, for the reversal of certain muscle relaxants during surgery, is currently approved in more than 60 countries and has launched in more than 40 countries outside of the United States. Bridion is in Phase III development in the United States. Sales of Bridion were $103 million in 2010.

 

The Neurosciences and Ophthalmology franchise also includes the products Subutex/Suboxone for the treatment of opiate addiction. In March 2010, Merck sold the rights to Subutex/Suboxone in nearly all markets back to Reckitt Benckiser Group PLC (“Reckitt”). The rights to the products in most major markets reverted to Reckitt on July 1, 2010; the remainder will revert to Reckitt during 2011. Sales for Subutex/Suboxone were $111 million in 2010.

 

Oncology

Sales of Temodar (marketed as Temodal outside the United States) , a treatment for certain types of brain tumors, were $1.1 billion during 2010 and were $188 million for the post-Merger period in 2009. In November 2010, Merck announced that a federal appellate court ruled in its favor in a Temodar patent infringement suit against Barr Laboratories (“Barr”), an affiliate of Teva Pharmaceuticals (“Teva”). The appellate court rejected Barr’s arguments and reversed a lower court ruling that the U.S. patent was unenforceable. Teva had been seeking FDA approval to sell a generic version of Temodar . In connection with Teva’s prior agreement not to launch during the appeal, Merck agreed that it will not object to Teva’s launch of a generic version of Temodar in August 2013. The U.S. patent and exclusivity periods otherwise will expire on February 2014. Temodar lost patent exclusivity in the EU in 2009 and generic products are being marketed.

 

Global sales of Emend , a treatment for chemotherapy-induced nausea and vomiting, grew 19% in 2010 to $378 million driven by increases in the United States and due to the launch in Japan. Emend sales increased 20% to $317 million in 2009.

Other products in the Oncology franchise include among others, Caelyx for the treatment of ovarian cancer, metastatic breast cancer and Kaposi’s sarcoma; and Intron A for treating melanoma. Marketing rights for Caelyx reverted to Johnson & Johnson on December 31, 2010. Sales of Caelyx were $284 million in 2010.

 

Vaccines

The following discussion of vaccines does not include sales of vaccines sold in most major European markets through Sanofi Pasteur MSD (“SPMSD”), the Company’s joint venture with Sanofi Pasteur, the results of which are reflected in Equity income from affiliates (see “Selected Joint Venture and Affiliate Information” below). Supply sales to SPMSD, however, are included.

 

Worldwide sales of Gardasil recorded by Merck declined 12% to $988 million in 2010 and decreased 20% to $1.1 billion in 2009. Gardasil, the world’s top-selling HPV vaccine, is indicated for girls and women 9 through 26 years of age for the prevention of cervical, vulvar and vaginal cancers caused by HPV types 16 and 18, precancerous or dysplastic lesions caused by HPV types 6, 11, 16 and 18, and genital warts caused by HPV types 6 and 11. Gardasil is also approved in the United States for use in boys and men ages 9 through 26 years of age for the prevention of genital warts caused by HPV types 6 and 11. In December 2010, the FDA approved a new indication for Gardasil for the prevention of anal cancer caused by HPV types 16 and 18 and for the prevention of anal intraepithelial neoplasia grades 1, 2 and 3 (anal dysplasias and precancerous lesions) caused by HPV types 6, 11, 16 and 18, in males and females 9 through 26 years of age. Sales performance in 2010 and 2009 was driven largely by declines in the United States, as well as in Australia during 2010, which continue to be affected by the saturation of the 13 to 18 year-old female cohort. Sales in 2009 include $51 million of revenue as a result of government purchases for the CDC’s Strategic National Stockpile. The Company is a party to certain third party license agreements with respect to Gardasil (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil sales of 21% to 27% which vary by country and are included in Materials and production costs.

 

In January 2009, the FDA issued a second complete response letter regarding the sBLA for the use of Gardasil in women ages 27 through 45. The FDA completed its review of the response that Old Merck provided in July 2008 to the FDA’s first complete response letter issued in June 2008 and recommended that Old Merck submit additional data when the 48 month study has been completed. Merck provided a response to the FDA in the fourth quarter of 2009. Discussions continue with the FDA to determine how adult women study data may be included in the prescribing information for Gardasil . The complete response letter does not affect current indications for Gardasil in females ages 9 through 26.

 

Global sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, recorded by Merck declined 1% in 2010 to $519 million. Sales during 2010 benefited modestly from a temporary competitor supply issue. Sales declined 21% in 2009 to $522 million reflecting competitive pressures.

 

In recent years the Company has experienced difficulties in producing its varicella zoster virus (“VZV”)-containing vaccines. These difficulties have resulted in supply constraints for ProQuad , Varivax and Zostavax . The Company is manufacturing bulk varicella and is producing doses of Varivax and Zostavax .

 

A limited quantity of ProQuad , a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, one of the VZV-containing vaccines, became available in the United States for ordering in the second quarter of 2010. Actual market demand will dictate how long supply will last. Sales as recorded by Merck for ProQuad were $134 million in 2010 and $9 million in 2008. ProQuad was not available for ordering in 2009 due to supply constraints.

 

Merck’s sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $929 million in 2010, $1.0 billion in 2009 and $925 million in 2008. Sales for 2010 and 2009 reflect $48 million and $64 million, respectively, of revenue as a result of government purchases for the CDC’s Strategic National Stockpile. Merck’s sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $315 million in 2010, $331 million in 2009 and $334 million in 2008. Sales of Varivax and M-M-R II were affected by the unavailability of ProQuad as noted above.

Sales of Zostavax, a vaccine to help prevent shingles (herpes zoster), recorded by Merck were $243 million in 2010, $277 million in 2009 and $312 million in 2008. Sales in all of these years were affected by supply issues. Customers experienced backorders for Zostavax during 2010. Merck began filling backorders in December 2010. The Company expects to continue to release doses in 2011, but product backorders are expected to continue through at least the first quarter of 2011 and the Company anticipates sales in future quarters will be affected by availability of supply. Due to these supply constraints, no new international launches or immunization programs are currently planned for 2011.

 

During 2010, Merck filed a Supplemental Biologics License Application with the FDA for the use of Zostavax to prevent shingles in people 50 to 59 years of age.

 

Sales of Pneumovax , a vaccine to help prevent pneumococcal disease, were $376 million for 2010, $346 million for 2009 and $249 million for 2008. The increase in 2009 as compared with 2008 was due to favorable pricing in the United States and higher demand associated with the flu pandemic.

 

In 2009, Old Merck entered into an exclusive agreement with CSL Biotherapies (“CSL”), a subsidiary of CSL Limited, to market and distribute Afluria , CSL’s seasonal influenza (flu) vaccine, in the United States, for the 2010/2011-2015/2016 flu seasons. Under the terms of the agreement, the Company will assume responsibility for all aspects of commercialization of Afluria in the United States. CSL will supply Afluria to Merck and will retain responsibility for marketing the vaccine outside the United States. Afluria is indicated for the active immunization of persons age 6 months and older against influenza disease caused by influenza virus subtypes A and type B present in the vaccine. Sales of Afluria were $50 million in 2010.

 

In January 2010, PedvaxHIB became fully available in the United States for routine vaccination as well as for booster dose catch-up vaccination. The timing of availability outside the United States is dependent upon local regulatory requirements. Comvax became available in the third quarter of 2010.

 

The pediatric/adolescent formulation of Vaqta, a vaccine against hepatitis A, is available. Merck’s adult formulation will not be available in the United States until after 2011. Outside of the United States, the supply of Vaqta is limited and availability will vary by region. The pediatric/adolescent formulation of Recombivax HB , a vaccine against hepatitis B, is available and the dialysis formulation became available in the third quarter of 2010. The Company currently anticipates availability of the adult formulation of Recombivax HB in the first half of 2012.

 

In April 2010, Merck and MassBiologics (“MBL”) of the University of Massachusetts Medical School entered into an agreement that provides Merck with exclusive rights to market and distribute MBL’s tetanus and diphtheria toxoids adsorbed (“Td”) vaccine in the United States, with the exception of Massachusetts, where MBL will continue distributing the vaccine. Merck began distributing the Td vaccine in June 2010.

 

Women’s Health and Endocrine

Worldwide sales of NuvaRing , a contraceptive product, were $559 million during 2010 and $88 million for the post-Merger period in 2009. Global sales of Follistim AQ (marketed in most countries outside the United States as Puregon ), a fertility treatment, were $528 million during 2010 and were $96 million for the post-Merger period in 2009. Puregon lost market exclusivity in the EU in August 2009.

 

Other products contained in the Women’s Health and Endocrine franchise include among others, Implanon , a single-rod subdermal contraceptive implant; Cerazette , a progestin only oral contraceptive; and Elonva , a fertility treatment.

 

The Company is currently experiencing difficulty manufacturing certain women’s health products. The Company is working to resolve these issues.

 

Other

 

In January 2010, the Company, AZLP and Teva (which acquired IVAX Pharmaceuticals, Inc. (“IVAX”)) entered into a settlement agreement to resolve patent litigation with respect to esomeprazole (Nexium) which provides that Teva/IVAX will not bring its generic esomeprazole product to market in the United States until May 27, 2014. During 2008, Old Merck and AZLP entered into a similar agreement with Ranbaxy Laboratories Ltd.

(“Ranbaxy”) which provides that Ranbaxy will not bring its generic esomeprazole product to market in the United States until May 27, 2014. The Company faces other challenges with respect to outstanding patent infringement matters for esomeprazole (see Note 12 to the consolidated financial statements).

 

AstraZeneca has an option to buy Old Merck’s interest in Nexium and Prilosec, exercisable in 2012, and the Company believes that it is likely that AstraZeneca will exercise that option (see “Selected Joint Venture and Affiliate Information” below).

 

Animal Health

Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by intense competition and the frequent introduction of generic products. Global sales of Animal Health products totaled $2.9 billion during 2010 reflecting continued strong performance among cattle, poultry, companion animal and swine products. Global sales of Animal Health products totaled $494 million for the post-Merger period in 2009. During the first quarter of 2010, sanofi-aventis exercised its option to require the Company to seek to combine its Animal Health business with Merial Limited to form an animal health joint venture. The formation of the animal health joint venture is expected to be dilutive to the Company’s earnings for the first 12 months after the transaction closes. (See “Selected Joint Venture and Affiliate Information” below.)

 

Consumer Care

Consumer Care products include over-the-counter, foot care and sun care products such as Dr. Scholl’s foot care products; Claritin non-drowsy antihistamines; MiraLAX , a treatment for occasional constipation; and Coppertone sun care products. Global sales of Consumer Care products were $1.3 billion during 2010 reflecting strong performance of a number of key brands including Dr. Scholl’s and Coppertone . Consumer Care product sales were $149 million for the post-Merger period in 2009. Consumer Care product sales are affected by competition, frequent competitive product introductions and consumer spending patterns.

 

In April 2010, Zegerid OTC , an over-the-counter option for treating frequent heartburn without prescription, became available in drug stores, grocery stores, mass merchandisers and club stores nationwide. The FDA approved Zegerid in December 2009 for over-the-counter use.

 

 

 

Materials and Production

Materials and production costs were $18.4 billion in 2010, $9.0 billion in 2009 and $5.6 billion in 2008. Materials and production costs in 2010 and in the post-Merger period of 2009 include expenses related to the sale of legacy Schering-Plough and MSP Partnership products. Additionally, these costs were unfavorably affected by $4.6 billion and $0.8 billion in 2010 and 2009, respectively, of expense for the amortization of intangible assets and $2.0 billion and $1.5 billion in 2010 and 2009, respectively, of amortization of purchase accounting adjustments to Schering-Plough’s inventories recognized in the Merger. Also included in materials and production costs in 2010, 2009 and 2008 were $429 million, $115 million and $123 million, respectively, of costs associated with

restructuring activities, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below. (See Note 4 to the consolidated financial statements.)

 

Gross margin was 60.0% in 2010 compared with 67.1% in 2009 and 76.6% in 2008. The amortization of intangible assets and purchase accounting adjustments to inventories recorded in 2010 and 2009 as a result of the Merger and the restructuring charges reflected in all periods as noted above had an unfavorable impact of 15.2 percentage points in 2010, 8.8 percentage points in 2009 and 0.5 percentage points in 2008.

 

Marketing and Administrative

Marketing and administrative expenses were $13.2 billion in 2010, $8.5 billion in 2009 and $7.4 billion in 2008. The increases were driven largely by the inclusion of expenses related to Schering-Plough activities during 2010 and in the post-Merger period of 2009. Additionally, $379 million of merger-related costs were recognized in 2010 consisting largely of integration costs, as well as costs incurred in conjunction with the potential formation of the animal health joint venture with sanofi-aventis, compared with $371 million of merger-related costs recognized in 2009 consisting largely of transaction costs directly related to the Merger (including advisory and legal fees) and integration costs. In addition, expenses for 2010 included $144 million of restructuring costs, primarily related to accelerated depreciation for facilities to be closed or divested. These increases were partially offset by initiatives to reduce the cost base. Separation costs associated with sales force reductions have been incurred and are reflected in Restructuring costs as discussed below. In addition, marketing and administrative expenses benefited from foreign exchange during 2009. Marketing and administrative expenses in 2010, 2009 and 2008 included $106 million, $75 million and $62 million, respectively, of additional reserves solely for future Vioxx legal defense costs. (See Note 12 to the consolidated financial statements for more information on Vioxx litigation related matters).

 

Research and Development

Research and development expenses were $11.0 billion in 2010, $5.8 billion in 2009 and $4.8 billion in 2008. The increases were due in part to the incremental expenditures associated with the inclusion of Schering-Plough’s operations in 2010 and for the post-Merger period of 2009. In addition, during 2010, the Company recorded $2.4 billion of IPR&D impairment charges. Of this amount, $1.7 billion related to the write-down of the intangible asset for vorapaxar resulting from developments in the clinical program for this compound (see “Research and Development” below). The remaining $763 million of IPR&D impairment charges were attributable to compounds that were abandoned and determined to have either no alternative use or were returned to the respective licensor, as well as from expected delays in the launch timing or changes in the cash flow assumptions for certain compounds. The Company may recognize additional non-cash impairment charges in the future for the cancellation or delay of other legacy Schering-Plough pipeline programs that were measured at fair value and capitalized in connection with the Merger and such charges could be material. Additionally, research and development expenses in 2010, 2009 and 2008 reflect $428 million, $232 million and $128 million, respectively, of costs associated with restructuring activities, including accelerated depreciation and asset abandonment costs. (See Note 4 to the consolidated financial statements.) Also, research and development expenses in 2010 include a $50 million payment related to the restructuring of Merck’s agreement with ARIAD Pharmaceuticals, Inc. (“ARIAD”) (see “Research and Development” below), while expenses in 2009 reflect upfront payments associated with external licensing activity. Research and development expenses in 2009 as compared with 2008 also reflect an increase in development spending in support of the continued advancement of the research pipeline, including investments in late-stage clinical trials. For segment reporting, research and development costs are unallocated.

 

Share-Based Compensation

Total pretax share-based compensation expense was $509 million in 2010, $415 million in 2009 and $348 million in 2008. At December 31, 2010, there was $416 million of total pretax unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a weighted average period of 1.8 years. For segment reporting, share-based compensation costs are unallocated expenses.

Restructuring Costs

Restructuring costs were $985 million, $1.6 billion and $1.0 billion for 2010, 2009 and 2008, respectively. Of the restructuring costs recorded in 2010, $915 million related to the Merger Restructuring Program, $77 million related to the 2008 Restructuring Program and the remaining difference related to the legacy Schering-Plough Productivity Transformation Program, which included a gain on the sale of a manufacturing facility. Of the restructuring costs recorded in 2009, $1.4 billion related to the Merger Restructuring Program, $178 million related to the 2008 Restructuring Program and $39 million related to the legacy Schering-Plough Productivity Transformation Program. Of the restructuring costs recorded in 2008, $736 million related to the 2008 Restructuring Program and the remainder was associated with the 2005 Restructuring Program. In 2010, 2009 and 2008, separation costs of $768 million, $1.4 billion and $957 million, respectively, were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Merck eliminated 12,465 positions in 2010 (of which 11,410 related to the Merger Restructuring Program, 890 related to the 2008 Restructuring Program and the remainder to the legacy Schering-Plough Productivity Transformation Program), 3,525 positions in 2009 (most of which related to the 2008 Restructuring Program) and 5,800 positions in 2008 (of which approximately 1,750 related to the 2008 Restructuring Program and 4,050 related to the 2005 Restructuring Program). These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions. Also included in restructuring costs are curtailment, settlement and termination charges on pension and other postretirement benefit plans, as well as contract termination and shutdown costs. For segment reporting, restructuring costs are unallocated expenses. Additional costs associated with the Company’s restructuring activities are included in Materials and production , Marketing and administrative and Research and development .

 

Equity Income from Affiliates

Equity income from affiliates, which reflects the performance of the Company’s joint ventures and other equity method affiliates, declined to $587 million in 2010. Equity income from affiliates no longer includes equity income from the MSP Partnership, which became wholly-owned by the Company as a result of the Merger and therefore its results have been included in the consolidated results of the Company beginning from the date of the Merger, or from Merial Limited (“Merial”) due the sale of Old Merck’s interest in September 2009. In addition, lower partnership returns from AZLP, as well as lower equity income from SPMSD as a result of restructuring charges recorded by the joint venture, also contributed to the decline. In 2009, equity income from affiliates declined to $2.2 billion primarily driven by lower equity income from the MSP Partnership and Merial resulting from the 2009 Merger-related events discussed above, partially offset by higher partnership returns from AZLP. (See “Selected Joint Venture and Affiliate Information” below.)

 

Other (Income) Expense, Net

The change in other (income) expense, net for 2010 as compared with 2009 primarily reflects a $7.5 billion gain in 2009 resulting from recognizing Merck’s previously held equity interest in the MSP Partnership at fair value as a result of obtaining control of the MSP Partnership in the Merger (see Note 3 to the consolidated financial statements), a $3.2 billion gain in 2009 on the sale of Old Merck’s interest in Merial (see Note 10 to the consolidated financial statements), a $950 million charge for the Vioxx Liability Reserve recorded in 2010 (see Note 12 to the consolidated financial statements), lower recognized net gains in 2010 on the Company’s investment portfolio and charges recorded in 2010 related to the settlement of certain pending Average Wholesale Prices litigation (see Note 12 to the consolidated financial statements). Lower interest income and higher interest expense in 2010 as a result of the Merger also contributed to the year-over-year change. In addition, as discussed below, during 2010 the Company recognized exchange losses of $200 million due to two Venezuelan currency devaluations during the year. These items were partially offset by $443 million of income recognized in 2010 upon AstraZeneca’s asset option exercise (see Note 10 to the consolidated financial statements) and $102 million of income recognized in 2010 on the settlement of certain disputed royalties.

 

Effective January 1, 2010, the Company was required to remeasure its local currency operations in Venezuela to U.S. dollars as the Venezuelan economy was determined to be hyperinflationary. Effective January 11, 2010, the Venezuelan government devalued its currency from at BsF 2.15 per U.S. dollar to a two-tiered official exchange rate at (1) “the essentials rate” at BsF 2.60 per U.S. dollar and (2) “the non-essentials rate” at BsF 4.30 per

U.S. dollar. Throughout 2010, the Company settled transactions at the essentials rate and therefore remeasured monetary assets and liabilities utilizing the essentials rate. In December 2010, the Venezuelan government announced it would eliminate the essentials rate and effective January 1, 2011, all transactions would be settled at the official rate of at BsF 4.30 per U.S. dollar. As a result of this announcement, the Company remeasured its December 31, 2010 monetary assets and liabilities at the new official rate.

 

Included in other (income) expense, net in 2009 was the $7.5 billion gain related to Merck’s previously held interest in the MSP Partnership and the $3.2 billion gain recognized on the sale of Old Merck’s interest in Merial. Also included in other (income) expense, net in 2009 was $231 million of investment portfolio recognized net gains, and an $80 million charge related to the settlement of the Vioxx third-party payor litigation in the United States. Included in other (income) expense, net in 2008 was an aggregate gain on distribution from AZLP of $2.2 billion, a gain of $249 million related to the sale of the remaining worldwide rights to Aggrastat , a $300 million expense for a contribution to the Merck Company Foundation, $117 million of investment portfolio recognized net losses and a $58 million charge related to the resolution of an investigation into whether Old Merck violated state consumer protection laws with respect to the sales and marketing of Vioxx . Merck experienced a decline in interest income in 2009 as compared with 2008 primarily as a result of lower interest rates and a change in the investment portfolio mix toward cash and shorter-dated securities in anticipation of the Merger. Merck recognized higher interest expense in 2009 largely due to $173 million of commitment fees and incremental interest expense related to the financing of the Merger.