10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File No. 1-3305
MERCK
& CO., INC.
P. O.
Box 100
One
Merck Drive
Whitehouse
Station, N.J. 08889-0100
(908) 423-1000
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Incorporated in New Jersey
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I.R.S. Employer Identification |
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No. 22-1109110 |
The number of shares of common stock outstanding as of the close of business on April 28, 2006:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,182,507,131 |
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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
þ Accelerated
filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No
þ
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited, $ in millions except per share amounts)
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Three Months |
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Ended March 31, |
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2006 |
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2005 |
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Sales |
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$ |
5,409.8 |
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$ |
5,362.2 |
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Costs, Expenses and Other |
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Materials and production |
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1,342.7 |
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1,271.4 |
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Marketing and administrative |
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1,715.0 |
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1,605.5 |
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Research and development |
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942.0 |
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846.6 |
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Restructuring costs |
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43.7 |
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7.8 |
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Equity income from affiliates |
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(503.4 |
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(316.3 |
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Other (income) expense, net |
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(100.6 |
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26.5 |
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3,439.4 |
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3,441.5 |
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Income Before Taxes |
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1,970.4 |
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1,920.7 |
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Taxes on Income |
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450.4 |
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550.6 |
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Net Income |
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$ |
1,520.0 |
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$ |
1,370.1 |
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Basic Earnings per Common Share |
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$ |
.70 |
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$ |
.62 |
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Earnings per Common Share Assuming Dilution |
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$ |
.69 |
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$ |
.62 |
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Dividends Declared per Common Share |
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$ |
.38 |
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$ |
.38 |
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The accompanying notes are an integral part of this consolidated financial statement.
2
MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2006 AND DECEMBER 31, 2005
(Unaudited, $ in millions)
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March 31, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
10,187.2 |
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$ |
9,585.3 |
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Short-term investments |
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2,214.3 |
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6,052.3 |
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Accounts receivable |
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3,040.7 |
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2,927.3 |
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Inventories (excludes inventories of $734.6 in 2006 and
$753.8 in 2005 classified in Other assets see Note 5) |
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1,664.3 |
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1,658.1 |
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Prepaid expenses and taxes |
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905.4 |
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826.3 |
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Total current assets |
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18,011.9 |
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21,049.3 |
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Investments |
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3,102.4 |
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1,107.9 |
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Property, Plant and Equipment, at cost, net of allowance for
depreciation of $9,886.3 in 2006 and $9,315.1 in 2005 |
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13,979.9 |
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14,398.2 |
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Goodwill |
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1,085.7 |
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1,085.7 |
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Other Intangibles, net |
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483.1 |
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518.7 |
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Other Assets |
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6,755.0 |
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6,686.0 |
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$ |
43,418.0 |
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$ |
44,845.8 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Loans payable and current portion of long-term debt |
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$ |
1,952.0 |
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$ |
2,972.0 |
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Trade accounts payable |
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457.4 |
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471.1 |
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Accrued and other current liabilities |
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4,953.4 |
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5,277.8 |
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Income taxes payable |
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3,102.9 |
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3,691.5 |
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Dividends payable |
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833.3 |
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830.0 |
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Total current liabilities |
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11,299.0 |
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13,242.4 |
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Long-Term Debt |
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4,762.6 |
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5,125.6 |
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Deferred Income Taxes and Noncurrent Liabilities |
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6,074.5 |
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6,092.9 |
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Minority Interests |
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2,435.7 |
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2,407.2 |
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Stockholders Equity |
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Common Stock |
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Authorized - 5,400,000,000 shares
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Issued - 2,976,223,337 shares |
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29.8 |
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29.8 |
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Other paid-in capital |
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6,997.6 |
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6,900.0 |
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Retained earnings |
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38,666.8 |
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37,980.0 |
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Accumulated other comprehensive income |
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47.7 |
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52.3 |
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45,741.9 |
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44,962.1 |
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Less treasury stock, at cost
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791,563,622
shares - March 31, 2006
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794,299,347
shares - December 31, 2005 |
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26,895.7 |
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26,984.4 |
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Total stockholders equity |
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18,846.2 |
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17,977.7 |
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$ |
43,418.0 |
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$ |
44,845.8 |
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The accompanying notes are an integral part of this consolidated financial statement.
3
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited, $ in millions)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income |
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$ |
1,520.0 |
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$ |
1,370.1 |
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Adjustments to reconcile net income to cash provided from operations: |
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Depreciation and amortization |
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623.4 |
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379.8 |
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Deferred income taxes |
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(200.2 |
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4.2 |
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Equity income from affiliates |
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(503.4 |
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(316.3 |
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Dividends and distributions from equity affiliates |
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473.5 |
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188.2 |
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Share-based compensation |
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121.3 |
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9.7 |
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Other |
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29.6 |
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111.4 |
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Net changes in assets and liabilities |
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(757.4 |
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(407.7 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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1,306.8 |
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1,339.4 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(197.6 |
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(343.2 |
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Purchase of securities, subsidiaries and other investments |
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(5,808.2 |
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(20,334.5 |
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Proceeds from sale of securities, subsidiaries and other investments |
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7,511.1 |
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19,469.1 |
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Other |
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(0.4 |
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(0.3 |
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES |
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1,504.9 |
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(1,208.9 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net change in short-term borrowings |
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(1,348.5 |
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(49.7 |
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Proceeds from issuance of debt |
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1,000.0 |
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Payments on debt |
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(0.8 |
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(515.6 |
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Purchase of treasury stock |
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(247.2 |
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(253.2 |
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Dividends paid to stockholders |
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(829.8 |
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(841.1 |
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Proceeds from exercise of stock options |
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301.2 |
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99.4 |
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Other |
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(96.6 |
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(1.5 |
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NET CASH USED BY FINANCING ACTIVITIES |
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(2,221.7 |
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(561.7 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
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11.9 |
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(58.0 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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601.9 |
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(489.2 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
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$ |
9,585.3 |
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$ |
2,878.8 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
10,187.2 |
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$ |
2,389.6 |
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The accompanying notes are an integral part of this consolidated financial statement.
4
Notes to Consolidated Financial Statements
1. |
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The accompanying unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and disclosures required by accounting principles generally accepted in the United
States for complete consolidated financial statements are not included herein. The interim
statements should be read in conjunction with the financial statements and notes thereto
included in the Companys latest Annual Report on Form 10-K. |
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The results of operations of any interim period are not necessarily indicative of the results
of operations for the full year. In the Companys opinion, all adjustments necessary for a
fair presentation of these interim statements have been included and are of a normal and
recurring nature. |
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Certain reclassifications have been made to prior year amounts to conform with current year
presentation. |
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Effective January 1, 2006, the Company began recognizing revenue from the sale of vaccines to
the Federal government for placement into stockpiles related to the Pediatric Vaccine
Stockpile in accordance with SEC Interpretation, Commission Guidance Regarding Accounting for
Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into
the Pediatric Vaccine Stockpile or the Strategic National Stockpile. The Company
retrospectively applied the impacts of adopting the Interpretation to the Companys
consolidated financial statements by reducing Accrued and other current liabilities by $103.4
million and increasing Income taxes payable by $42.3 million and Retained earnings by $61.1
million, respectively, in its December 31, 2005 consolidated
balance sheet. There was no impact to the Companys results of
operations for the periods ending March 31, 2006 and 2005,
respectively. |
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2. |
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In November 2005, the Company commenced the initial phase of its global restructuring
program designed to reduce the Companys cost structure, increase efficiency and enhance
competitiveness. As part of this program, the Company plans to sell or close five
manufacturing sites and two preclinical sites by the end of 2008 and eliminate approximately
7,000 positions company-wide. Through the end of 2008, when the initial phase of the global
restructuring program is expected to be substantially complete, the cumulative pre-tax costs
are expected to range from $1.8 billion to $2.2 billion. Approximately 70% of the cumulative
pre-tax costs are estimated as non-cash, relating primarily to accelerated depreciation for
those facilities scheduled for closure. |
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For the three months ended March 31, 2006, the Company recorded pre-tax restructuring costs of
$304.1 million related primarily to the global restructuring program as follows: (1) $254.0
million of these costs pertained to accelerated depreciation related to the five Merck owned
manufacturing facilities worldwide and two preclinical sites, of which $198.6 million was
recorded to Materials and production and $55.4 million was recorded to Research and
development; (2) $27.8 million was recorded to Restructuring costs representing separation
costs associated with the global restructuring program as well as remaining costs associated
with earlier programs. In the first quarter of 2006, approximately 1,800 positions were
eliminated throughout the Company (which is comprised of actual headcount reductions and the
elimination of contractors and vacant positions) and; (3) $22.3 million of these costs
primarily include amounts related to the Companys pension and other postretirement plans,
asset impairments and other exit costs. Of the $22.3 million, $6.4 million was recorded to Materials
and production and $15.9 million was recorded to Restructuring costs. Since the inception of
the global restructuring program through March 31, 2006, the Company has recorded total
pre-tax accumulated costs of $685.3 million. |
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The Company recorded Restructuring costs of $7.8 million for the three months ended March 31,
2005 associated with earlier restructuring programs. |
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The following table summarizes the charges and spending relating to restructuring activities
during the first quarter of 2006. |
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($ in millions) |
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Separation |
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Accelerated |
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Costs |
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Depreciation |
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Other |
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Total |
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Restructuring accrual as of January 1, 2006 * |
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$ |
240.3 |
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$ |
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$ |
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$ |
240.3 |
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Expense |
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27.8 |
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254.0 |
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22.3 |
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304.1 |
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Payments |
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(84.8 |
) |
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(14.9 |
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(99.7 |
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Non-cash activity |
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(254.0 |
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(7.4 |
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(261.4 |
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Restructuring accrual as of March 31, 2006 |
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$ |
183.3 |
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$ |
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$ |
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$ |
183.3 |
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5
Notes to Consolidated Financial Statements (continued)
*
The restructuring accrual at January 1, 2006 includes separation costs associated with the
global restructuring program as well as amounts from previously announced restructuring
programs. The previously announced restructuring programs were substantially complete as of
March 31, 2006.
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3. |
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The Company has share-based compensation plans under which employees, non-employee
directors and employees of certain of the Companys equity method investees may be granted
options to purchase shares of Company common stock at the fair market value at the time of
grant. In addition to stock options, the Company grants performance share units (PSUs) and
restricted stock units (RSUs) to certain management level employees. These plans were
approved by the Companys shareholders. At March 31, 2006, 26.8 million shares were
authorized for future grants under the Companys share-based compensation plans. The Company
settles employee share-based compensation awards primarily with treasury shares. |
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Generally, employee stock options are granted to purchase shares of Company stock at the fair
market value at the time of grant. These awards generally vest one-third each year over a
three year period, with a contractual term of 10 years. RSUs are stock awards that are granted
to employees and entitle the holder to shares of common stock as the awards vest, as well as
non-forfeitable dividend equivalents. The fair value of the awards is determined and fixed on
the grant date based on the Companys stock price. PSUs are stock awards where the ultimate
number of shares issued will be contingent on the Companys performance against a pre-set
objective or set of objectives. The fair value of each PSU is determined on the date of grant
based on the Companys stock price. Over the performance period, the number of shares of stock
that are expected to be issued will be adjusted based on the probability of achievement of a
performance target and final compensation expense will be recognized based on the ultimate
number of shares issued. Both PSU and RSU payouts will be in shares of Company stock after the
end of a three-year period, subject to the terms applicable to such awards. |
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Effective January 1, 2006, the Company adopted Financial Accounting Standards No. 123R,
Share-Based Payments (FAS 123R). Employee share-based compensation expense was previously
recognized using the intrinsic value method which measures share-based compensation expense as
the amount at which the market price of the stock at the date of grant exceeds the exercise
price. FAS 123R requires the recognition of the fair value of share-based compensation in net
income, which the Company will recognize on a straight-line basis over the requisite service
period. Additionally, the Company elected the modified prospective transition method for
adopting FAS 123R, and therefore, prior periods were not restated. Under this method, the
provisions for FAS 123R apply to all awards granted or modified after January 1, 2006. In
addition, the unrecognized expense of awards that have not yet vested at the date of adoption
shall be recognized in net income in the relevant period after the
date of adoption. Also effective January 1, 2006, the Company
adopted
Financial Accounting Standards Board Staff Position 123R-3,
Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards, which provides the Company an optional
short cut method for calculating the historical pool of windfall tax
benefits upon adopting FAS 123R. |
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The Company recognized share-based compensation cost in the amount of $121.3 million and $9.7
million in the first quarter of 2006 and 2005, respectively, as well as tax benefits of $37.3
million and $3.4 million, respectively. Substantially all of the 2005 amount was related to
RSUs. As a result of the adoption of FAS 123R, effective January 1, 2006, the incremental
impact on the Companys share based compensation expense caused Income Before Taxes and Net
Income for the quarter ended March 31, 2006 to be $98.6 million and $68.9 million lower,
respectively, than if the Company had continued to account for its share-based compensation
programs under the intrinsic value method. Additionally, earnings per share assuming dilution
were $.04 per share lower. |
6
Notes to Consolidated Financial Statements (continued)
|
|
FAS 123R requires the Company to present pro forma information for periods prior to the
adoption as if the Company had accounted for employee share-based compensation under the fair
value method of that Statement. For purposes of pro forma disclosure, the estimated fair value
at the date of grant, including those granted to retirement-eligible employees, is amortized
to expense over the requisite service period. The following table illustrates the effect on
net income and earnings per common share if the Company had applied the fair value method for
recognizing employee share-based compensation in the prior year quarter: |
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2005 |
|
Net income, as reported |
|
$ |
1,370.1 |
|
Compensation expense, net of tax: |
|
|
|
|
Reported |
|
|
6.3 |
|
Fair value method |
|
|
(108.4 |
) |
|
|
|
|
Pro forma net income |
|
$ |
1,268.0 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
Basic as reported |
|
$ |
.62 |
|
Basic pro forma |
|
$ |
.57 |
|
|
|
|
|
|
Assuming dilution as reported |
|
$ |
.62 |
|
Assuming dilution pro forma |
|
$ |
.57 |
|
|
|
The pro forma amounts and the fair value of each option grant were estimated on the date of
grant using the Black-Scholes option pricing model. Upon the adoption of FAS 123R,
compensation expense is being recognized immediately for awards granted to retirement-eligible
employees or over the period from the grant date to the date retirement eligibility is
achieved. This approach is known as the non-substantive vesting period approach. If the
Company had been applying this approach for stock options granted to retirement-eligible
employees, the effect on pro forma earnings per share assuming dilution for the three months
ended March 31, 2005, as provided in the above table, would not have been significant. |
|
|
|
The Company continues to use the Black-Scholes option pricing model for option grants after
adoption of FAS 123R. In applying this model, the Company uses both historical data and
current market data to estimate the fair value of its options. The Black-Scholes model
requires several assumptions including expected term of the options, risk-free rate,
volatility, and dividend yield. The expected term represents the expected amount of time that
options granted are expected to be outstanding, based on historical
and forecasted exercise behavior. The risk-free rate is based on the rate at
grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the
option. Expected volatility is estimated using a blend of historical and implied volatility. The
historical component is based on historical monthly price changes. The implied volatility is
obtained from market data on the Companys traded options. |
|
|
|
The weighted average fair value of options granted in the first quarter of 2006 were $6.90 per
option, determined using the following assumptions: |
|
|
|
|
|
Expected dividend yield |
|
|
4.34 |
% |
Risk-free interest rate |
|
|
4.58 |
% |
Expected volatility |
|
|
26.40 |
% |
Expected life (years) |
|
|
5-6 |
|
7
Notes to Consolidated Financial Statements (continued)
Summarized information relative to the Companys stock option plans (options in thousands) is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Value |
|
|
|
of Options |
|
|
Price (1) |
|
|
Term |
|
|
($000s) |
|
Balance at December 31, 2005 |
|
|
250,088.0 |
|
|
$ |
54.52 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
27,785.6 |
|
|
|
35.06 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9,864.0 |
) |
|
|
30.53 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,879.2 |
) |
|
|
59.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
262,130.4 |
|
|
$ |
53.25 |
|
|
|
5.74 |
|
|
$ |
175,341.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
197,363.1 |
|
|
$ |
58.47 |
|
|
|
4.68 |
|
|
$ |
80,701.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Weighted average exercise price
|
|
The total intrinsic values of stock options exercised were
$38.4 million and $50.7 million during the three month
periods ended March 31, 2006 and 2005, respectively. The fair
values of stock options vested were
$801.0 million and $877.3 million during the three month
periods ended March 31, 2006 and 2005, respectively. Cash
received from the exercise of stock options was $301.2 million
and $99.4 million for the periods ended March 31,
2006 and 2005, respectively. |
|
|
|
A summary of the Companys nonvested RSUs and PSUs (shares in thousands) at March 31, 2006 is as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
PSUs |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
Number |
|
|
Grant Date |
|
|
|
of Shares |
|
|
Fair Value |
|
|
of Shares |
|
|
Fair Value |
|
Nonvested at December 31, 2005 |
|
|
4,765.1 |
|
|
$ |
35.93 |
|
|
|
1,022.2 |
|
|
$ |
39.73 |
|
Granted |
|
|
1,408.7 |
|
|
|
35.03 |
|
|
|
520.7 |
|
|
|
35.09 |
|
Vested |
|
|
(16.1 |
) |
|
|
37.12 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(64.9 |
) |
|
|
35.05 |
|
|
|
(21.6 |
) |
|
|
38.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
6,092.8 |
|
|
$ |
35.73 |
|
|
|
1,521.3 |
|
|
$ |
38.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006, there was $357.4 million of total pre-tax unrecognized compensation expense
related to nonvested stock option, RSU and PSU awards which will be recognized over a weighted
average period of 2.2 years. |
|
4. |
|
Merck continues its strategy of establishing strong external alliances to complement its
substantial internal research capabilities, including research collaborations, licensing
pre-clinical and clinical compounds and technology transfers to drive both near-and
long-term growth. |
|
|
|
In March 2006, Merck and Paratek Pharmaceuticals, Inc. (Paratek) announced they entered into
an exclusive, worldwide collaborative development and license agreement for PTK 0796, a novel,
broad-spectrum aminomethylcycline (AMC) antibiotic with oral and intravenous (IV) formulations
currently in Phase I clinical testing. Under the terms of the agreement, Merck provided
upfront funding, will assume primary responsibility for clinical development of the IV and
oral formulations of PTK 0796 and has the right to market such products worldwide. Paratek
will participate in clinical development and be eligible to receive payments upon achievement
of certain milestones; these payments could total as much as $127 million once PTK 0796 is
approved for marketing. Paratek will also receive royalties on net sales and have the
opportunity to co-promote the IV formulation of PTK 0796 in the United States. |
|
|
|
In March 2006, Neuromed Pharmaceuticals Ltd. (Neuromed) and Merck signed a research
collaboration and license agreement to research, develop and commercialize novel compounds for
the treatment of pain and other neurological disorders, including Neuromeds lead compound,
NMED-160, which is currently in Phase II development for the treatment of pain. Under the
terms of the agreement, Neuromed received an upfront payment |
8
Notes to Consolidated Financial Statements (continued)
|
|
of $25 million which the Company recorded as Research and development expense. The successful
development and launch of NMED-160 for an initial single indication on a worldwide basis would
trigger milestone payments totaling $202 million. Milestones could increase to approximately
$450 million if a further indication for NMED-160 is developed and approved and an additional
compound is developed and approved for two indications. Neuromed would also receive royalties
on worldwide sales of NMED-160 and any additional compounds developed under this agreement. |
|
|
|
Also in March 2006, Merck signed an agreement with NicOx S.A. (NicOx) to collaborate on the
development of new antihypertensive drugs using NicOxs proprietary nitric oxide-donating
technology. Under the terms of the agreement, NicOx received an upfront payment of
approximately $11.2 million, which the Company recorded as Research and development expense,
and is eligible for potential further milestone payments of approximately $340.2 million.
Merck will also pay NicOx royalties on the sales of all products resulting from the
collaboration. |
|
5. |
|
Inventories consisted of: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
March |
|
|
December |
|
|
|
31, 2006 |
|
|
31, 2005 |
|
Finished goods |
|
$ |
392.8 |
|
|
$ |
400.0 |
|
Raw materials and work in process |
|
|
1,919.2 |
|
|
|
1,929.8 |
|
Supplies |
|
|
86.9 |
|
|
|
82.1 |
|
|
|
|
|
|
|
|
Total (approximates current cost) |
|
|
2,398.9 |
|
|
|
2,411.9 |
|
Reduction to LIFO cost for domestic inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,398.9 |
|
|
$ |
2,411.9 |
|
|
|
|
|
|
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,664.3 |
|
|
$ |
1,658.1 |
|
Other assets |
|
|
734.6 |
|
|
|
753.8 |
|
|
|
Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include inventories produced in preparation for product launches,
principally Gardasil and Januvia, and inventories for other products, principally vaccines and
Arcoxia, not expected to be sold within one year. |
|
6. |
|
During the first quarter of 2006, the Company entered into a pay-floating, receive-fixed
interest rate swap contract that effectively converts $250 million of its $1.0 billion,
4.75% fixed-rate notes to floating rate instruments. The interest rate swap is designated
as a hedge of the fair value changes in the notes attributable to changes in the benchmark
London Interbank Offered Rate (LIBOR) swap rate and will mature in 2015. The fair value
changes in the notes are fully offset in interest expense by the fair value changes in the
swap contract. |
|
7. |
|
The Company is involved in various claims and legal proceedings of a nature considered
normal to its business, including product liability, intellectual property, and commercial
litigation, as well as additional matters such as antitrust actions. |
|
|
|
Vioxx Litigation |
|
|
|
Product Liability Lawsuits |
|
|
|
As previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as putative class actions, have been filed against the Company with respect to
Vioxx. As of March 31, 2006, the Company has been served or is aware that it has been named
as a defendant in approximately 11,500 lawsuits, which include approximately 23,350 plaintiff
groups, alleging personal injuries resulting from the use of Vioxx. Of these lawsuits,
approximately 5,175 lawsuits representing approximately 14,850 plaintiff groups are or are
slated to be in the federal MDL (discussed below) and approximately 5,250 lawsuits
representing approximately 5,250 plaintiff groups are included in a coordinated proceeding in
New Jersey Superior Court before Judge Carol E. Higbee. Certain of these lawsuits include
allegations regarding gastrointestinal bleeding, cardiovascular events, thrombotic events or
kidney damage. The Company has also been named as a defendant in approximately 190 putative
class actions alleging personal injuries or seeking (i) medical monitoring as a result of the
putative class members use of Vioxx, (ii) disgorgement of certain profits under common law
unjust enrichment theories, and/or (iii) various remedies under state consumer fraud and fair
business practice statutes, including recovering the cost of Vioxx purchased by individuals
and third-party payors such as union health plans (all of the actions discussed in this
paragraph are collectively referred to as the Vioxx Product Liability Lawsuits). The actions filed in the
state courts of California, |
9
Notes to Consolidated Financial Statements (continued)
|
|
Texas, New Jersey, and Philadelphia, Pennsylvania, respectively,
have been transferred to a single judge in each state for coordinated proceedings. |
|
|
|
On February 16, 2005, the Judicial Panel on Multidistrict Litigation (the JPML) transferred
all Vioxx Product Liability Lawsuits pending in federal courts nationwide into one
Multidistrict Litigation (MDL) for coordinated pre-trial proceedings. The MDL has been
transferred to the United States District Court for the Eastern District of Louisiana before
District Judge Eldon E. Fallon. |
|
|
|
Judge Fallon has indicated that he intends to try a series of cases during the period November
2005 through 2006, in the following categories: (i) heart attack with short term use; (ii)
heart attack with long term use; (iii) stroke; and (iv) cardiovascular injury involving a
prescription written after April 2002 when the labeling for Vioxx was revised to include the
results of the VIGOR trial. |
|
|
|
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of
limitations (tolling) as to certain categories of claims allegedly arising from the use of
Vioxx by non-New Jersey citizens. The Tolling Agreement applies to individuals who have not
filed lawsuits and may or may not eventually file lawsuits and only to those claimants who
seek to toll claims alleging injuries resulting from a thrombotic cardiovascular event that
results in a myocardial infarction or ischemic stroke. The Tolling Agreement provides counsel
additional time to evaluate potential claims. The Tolling Agreement requires any tolled
claims to be filed in federal court. As of March 31, 2006, approximately 4,450 claimants had
entered into Tolling Agreements. |
|
|
|
The Company has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits
that were tried prior to March 31, 2006. In April 2006, in
a trial involving two plaintiffs,
Thomas Cona and John McDarby, in Superior Court of New Jersey, Law Division, Atlantic County,
the jury returned a split verdict. The jury determined that Vioxx did not substantially
contribute to the heart attack of Mr. Cona, but did substantially contribute to the heart
attack of Mr. McDarby. In addition, the jury concluded that, in each case, Merck violated New
Jerseys consumer fraud statute, which allows plaintiffs to receive their expenses for
purchasing the drug, trebled, as well as reasonable attorneys fees. The jury awarded $4.5
million in compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that
case, as well as punitive damages of $9 million. The Company intends to appeal this verdict
after the completion of post-trial proceedings in the trial court. |
|
|
|
Also in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas
returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a total
of $7 million in compensatory damages to Mr. Garzas
widow and three sons. The jury also
purported to award $25 million in punitive damages. Under Texas law, in this case the
punitive damages are capped at $750,000. The Company intends to appeal this verdict after
completion of post-trial proceedings in the trial court. |
|
|
|
Other Lawsuits |
|
|
|
As previously disclosed, on July 29, 2005, a New Jersey state trial court certified a
nationwide class of third-party payors (such as unions and health insurance plans) that paid
in whole or in part for the Vioxx used by their plan members or insureds. The named plaintiff
in that case seeks recovery of certain Vioxx purchase costs (plus penalties) based on
allegations that the purported class members paid more for Vioxx than they would have had they
known of the products alleged risks. Merck believes that the class was improperly certified.
The trial courts ruling is procedural only; it does not address the merits of plaintiffs
allegations, which the Company intends to defend vigorously. On March 31, 2006, the New
Jersey state Superior Court, Appellate Division, affirmed the class certification order.
Merck intends to seek further appellate review in the New Jersey Supreme Court. |
|
|
|
As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, and Texas. The Attorney
General of Montana has also recently filed a lawsuit. These actions allege that the Company
misrepresented the safety of Vioxx and seek (i) recovery of the cost of Vioxx purchased or
reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by the state and
its agencies for medical services for the treatment of persons injured by Vioxx; (iii) damages
under various common law theories; and/or (iv) remedies under various state statutory
theories, including state consumer fraud and/or fair business practices or Medicaid fraud
statutes, including civil penalties. |
|
|
|
Shareholder Lawsuits |
|
|
|
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, the Company,
along with various current and former officers and directors of the Company, are defendants in
a number of putative class actions and |
10
Notes to Consolidated Financial Statements (continued)
|
|
individual lawsuits filed in (or removed to) federal
court by shareholders under the federal securities laws (the Vioxx Securities Lawsuits), all
of which have been transferred by the JPML, along with related lawsuits discussed below, to
the United States District Court for the District of New Jersey before District Judge Stanley
R. Chesler for inclusion in a nationwide MDL for coordinated pretrial proceedings (the
Shareholder MDL). Judge Chesler has consolidated the Vioxx Securities Lawsuits for all
purposes. On June 9, 2005, plaintiffs in the Vioxx Securities Lawsuits filed a Fourth
Consolidated and Amended Class Action Complaint superseding prior complaints in the various
cases (the Complaint). Plaintiffs request certification of a class of purchasers of Company
stock between May 21, 1999 and October 29, 2004. The Complaint alleges that the defendants
made false and misleading statements regarding Vioxx in violation of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and seeks unspecified compensatory damages and the
costs of suit, including attorneys fees. The Complaint also asserts a claim under Section
20A of the Securities and Exchange Act against certain defendants relating to their sales of
Merck stock. In addition, the Complaint includes allegations under Sections 11, 12 and 15 of
the Securities Act of 1933 that certain defendants made incomplete and misleading statements
in a registration statement and certain prospectuses filed in connection with the Merck Stock
Investment Plan, a dividend reinvestment plan. Defendants have filed a motion to dismiss the
Complaint, which is pending. |
|
|
|
As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by
the State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors.
The complaint, which was brought under Oregon securities law, alleges that plaintiff has
suffered damages in connection with its purchases of Merck common stock at artificially
inflated prices due to the Companys alleged violations of law related to disclosures about
Vioxx. The Company has moved to dismiss the complaint, which motion is pending. |
|
|
|
As previously disclosed, a number of shareholder derivative actions have been filed in federal
court and in New Jersey Superior Court naming the Company as a nominal defendant and certain
members of the Board (past and present), together with certain executive officers, as
defendants. The complaints arise out of substantially the same factual allegations that are
made in the Vioxx Securities Lawsuits. The derivative suits, which are purportedly brought to
assert rights of the Company, assert claims against the Board members and officers for breach
of fiduciary duty, waste of corporate assets, unjust enrichment, abuse of control and gross
mismanagement. All of the actions discussed in this paragraph are collectively referred to as
the Vioxx Derivative Lawsuits. The JPML has transferred the Vioxx Derivative Lawsuits
pending in federal court to the Shareholder MDL. Judge Chesler consolidated the Vioxx
Derivative Lawsuits for all purposes. On June 20, 2005, the federal derivative plaintiffs
filed a Verified Consolidated Shareholders Derivative Complaint superseding prior complaints
in the various cases. Defendants filed a motion to dismiss this
complaint. On May 5, 2006, Judge Chesler granted
defendants motion to dismiss and denied plaintiffs
request for leave to amend their complaint. |
|
|
|
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage to the Company with
respect to the allegedly improper marketing of Vioxx. In response to that demand letter, the
Board of Directors determined at its November 23, 2004 meeting that the Board would take the
shareholders request under consideration and it remains under consideration. |
|
|
|
In addition, as previously disclosed, a number of putative class actions have been filed
against the Company and certain current and former officers and directors of the Company in
federal court (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities Lawsuits and
the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits) on behalf of certain of the
Companys current and former employees who are participants in certain of the Companys
retirement plans asserting claims under the Employee Retirement Income Security Act (ERISA).
The lawsuits make similar allegations to the allegations contained in the Vioxx Securities
Lawsuits and claim that the defendants breached their duties as plan fiduciaries. The JPML
has transferred all Vioxx ERISA Lawsuits to the Shareholder MDL. Judge Chesler has
consolidated the Vioxx ERISA Lawsuits for all purposes. A consolidated and amended complaint
was filed in the Vioxx ERISA Lawsuits on August 2, 2005. Defendants have filed a motion to
dismiss this complaint, which is pending. |
|
|
|
International Lawsuits |
|
|
|
As previously disclosed, in addition to the lawsuits discussed above, the Company has been
named as a defendant in litigation relating to Vioxx in various countries (collectively, the
Vioxx Foreign Lawsuits) in Europe as well as Canada, Brazil, Australia, Turkey, and Israel. |
|
|
|
Additional Lawsuits |
|
|
|
Based on media reports and other sources, the Company anticipates that additional Vioxx
Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits
(collectively, the Vioxx Lawsuits) will be filed against it and/or certain of its current
and former officers and directors in the future. |
11
Notes to Consolidated Financial Statements (continued)
|
|
Insurance |
|
|
|
As previously disclosed, the Company has product liability insurance for claims brought in the
Vioxx Product Liability Lawsuits with stated upper limits of approximately $630 million after
deductibles and co-insurance. This insurance provides coverage for legal defense costs and
potential damage amounts that have been or will be incurred in connection with the Vioxx
Product Liability Lawsuits. The Company believes that this insurance coverage extends to
additional Vioxx Product Liability Lawsuits that may be filed in the future. The Company has
Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits and
Vioxx Derivative Lawsuits with stated upper limits of approximately $190 million. The Company
has fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper limits of
approximately $275 million. Additional insurance coverage for these claims may also be
available under upper-level excess policies that provide coverage for a variety of risks.
There are disputes with certain insurers about the availability of some or all of this
insurance coverage and there are likely to be additional disputes. At this time, the Company
believes that its insurance coverage with respect to the Vioxx Lawsuits will not be adequate
to cover its defense costs and any losses. |
|
|
|
As previously disclosed, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the Vioxx Lawsuits) have commenced an arbitration
seeking, among other things, to cancel those policies, to void all of their obligations under
those policies and to raise other coverage issues with respect to the Vioxx Lawsuits. A
second arbitration against one of the Companys upper level excess insurers has also been
commenced. Merck intends to contest vigorously the insurers claims and will attempt to
enforce its rights under applicable insurance policies. The amounts actually recovered under
the policies discussed in this section may be less than the amounts specified in the preceding
paragraph. |
|
|
|
Investigations |
|
|
|
As previously disclosed, in November 2004, the Company was advised by the staff of the SEC
that it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect
to Vioxx in a federal health care investigation under criminal statutes. As previously
disclosed, the Companys U.K. subsidiary has been notified by the Medicines and Healthcare
Products Regulatory Agency in the United Kingdom (the MHRA) of an investigation by the MHRA
of compliance by the Company with EU adverse experience reporting requirements in connection
with Vioxx. Recently, the MHRA advised the Company that its investigation has been completed
and no enforcement action will be taken with respect to the matter. In addition, as
previously disclosed, investigations are being conducted by local authorities in certain
cities in Europe in order to determine whether any criminal charges should be brought
concerning Vioxx. The Company is cooperating with these governmental entities in their
respective investigations (the Vioxx Investigations). The Company cannot predict the
outcome of these inquiries; however, they could result in potential civil and/or criminal
dispositions. |
|
|
|
As previously disclosed, the Company has received a Civil Investigative Demand (CID) from a
group of Attorneys General from 31 states and the District of Columbia who are investigating
whether the Company violated state consumer protection laws when marketing Vioxx. The Company
is cooperating with the Attorneys General in responding to the initial CID and additional
requests for information. |
|
|
|
Reserves |
|
|
|
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be
tried in 2006. The Company cannot predict the timing of any trials with respect to the Vioxx
Shareholder Lawsuits. The Company believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of the inherent difficulty of
predicting the outcome of litigation, particularly where there are many claimants and the
claimants seek indeterminate damages, 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. The Company has not established any reserves for any potential
liability relating to the Vioxx Lawsuits or the Vioxx Investigations, including for those
cases in which a verdict or judgment has been entered against the Company, and are now in
post-verdict proceedings or on appeal. In each of those cases the Company believes it has
strong points to raise on appeal and therefore that unfavorable outcomes in such cases are not
probable. |
|
|
|
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2004, the Company had established
a reserve of $675 million solely for its future legal defense costs related to the Vioxx
Litigation. |
|
|
|
During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide
related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits,
(iii) the Vioxx Foreign Lawsuits, and (iv) the |
12
Notes to Consolidated Financial Statements (continued)
|
|
Vioxx Investigations (collectively, the Vioxx
Litigation). In the fourth quarter, the Company recorded a charge of $295 million to
increase the reserve solely for its future legal defense costs related to the Vioxx Litigation
to $685 million at December 31, 2005. This reserve is based on certain assumptions and is the
best estimate of the amount that the Company believes, at this time, it can reasonably
estimate will be spent through 2007. Some of the significant factors considered in the
establishment and ongoing review of the reserve for the Vioxx legal defense costs were as
follows: the actual costs incurred by the Company up to that time; the development of the
Companys legal defense strategy and structure in light of the scope of the Vioxx Litigation;
the number of cases being brought against the Company; the costs and outcomes of completed
trials and the anticipated timing, progression, and related costs of pre-trial activities and
trials in the Vioxx Product Liability Lawsuits. Events such as scheduled trials, that are
expected to occur throughout 2006 and into 2007, and the inherent inability to predict the
ultimate outcomes of such trials, limit the Companys ability to reasonably estimate its legal
costs beyond the end of 2007. The Company will continue to monitor its legal defense costs
and review the adequacy of the associated reserves. Unfavorable outcomes in the Vioxx
Litigation could have a material adverse effect on the Companys financial position, liquidity
and results of operations. |
|
|
|
Governmental Proceedings |
|
|
|
As previously disclosed, the Company has received a subpoena from the DOJ in connection with
its investigation of the Companys marketing and selling activities, including nominal pricing
programs and samples. The Company has been advised that the activities being investigated by
the DOJ are also the subject of a qui tam complaint. The Company has also reported that it
has received a CID from the Attorney General of Texas regarding the Companys marketing and
selling activities relating to Texas. As previously disclosed, the Company received another
CID from the Attorney General of Texas asking for additional information regarding the
Companys marketing and selling activities related to Texas; the second CID includes requests
with respect to nominal pricing programs and samples. In April 2004, the Company received a
subpoena from the office of the Inspector General for the District of Columbia in connection
with an investigation of the Companys interactions with physicians in the District of
Columbia, Maryland, and Virginia. In November 2004, the Company received a letter request
from the DOJ in connection with its investigation of the Companys pricing of Pepcid. In
September 2005, the Company received a subpoena from the Illinois Attorney General. The
subpoena seeks information related to repackaging of prescription drugs. |
|
|
|
As previously disclosed, the Company has received a letter from the DOJ advising it of the
existence of a qui tam complaint alleging that the Company violated certain rules related to
its calculations of best price and other federal pricing benchmark calculations, certain of
which may affect the Companys Medicaid rebate obligation. |
|
|
|
The Company is cooperating with all of these investigations. The Company cannot predict the
outcome of these investigations; however, it is possible that unfavorable outcomes could have
a material adverse effect on the Companys financial position, liquidity and results of
operations. In addition, from time to time, other federal, state or foreign regulators or
authorities may seek information about practices in the pharmaceutical industry or the
Companys business practices in inquiries other than the investigations discussed in this
section. It is not feasible to predict the outcome of any such inquiries. |
|
8. |
|
As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA)
was signed into law. The AJCA created temporary incentives for U.S. multinationals to
repatriate accumulated income earned outside the United States as of December 31, 2002. In
accordance with the AJCA, the Company repatriated $15.9 billion during 2005. The Company
recorded an income tax charge of $766.5 million in the third and fourth quarters of 2005
related to this repatriation, $185.0 million of which was paid in 2005 and the remainder was
paid in the first quarter of 2006. The Company has not changed its intention to
indefinitely reinvest accumulated earnings earned subsequent to December 31, 2002. No
provision will be made for income taxes that would be payable upon the distributions of such
earnings and it is not practicable to determine the amount of the related unrecognized
deferred income tax liability. In addition, the Company has subsidiaries operating in
Puerto Rico and Singapore under tax incentive grants that expire in 2015 and 2026,
respectively. |
|
9. |
|
The Companys federal income tax returns have been audited through 1992. As previously
disclosed, the Internal Revenue Service (IRS) has substantially completed its examination of
the Companys tax returns for the years 1993 to 1996 and on April 28, 2004, in connection
with its examination, the IRS issued a preliminary notice of deficiency |
13
Notes to Consolidated Financial Statements (continued)
|
|
with respect to a
partnership transaction entered into in 1993. On December 13, 2005, the Company received a
final notice of deficiency with respect to the transaction with regard to the 1993 tax
return. Specifically, the IRS disallowed certain royalty and other expenses claimed as
deductions on the 1993 tax return. The preliminary notice proposed disallowing similar type
expenses on the 1994-1996 tax returns. The Company anticipates receiving a similar notice
of deficiency for 1997-1999. If the IRS ultimately prevails in its positions, the Companys
income tax due for year 1993 would increase by approximately $60 million plus interest of
approximately $70 million and penalties of approximately $12 million. For the years
1994-1999, the tax would increase by approximately $910 million plus interest of
approximately $630 million. The IRS will likely make similar claims for years subsequent to
1999 with respect to this transaction. The potential disallowance for these later years,
computed on a similar basis to the 1993-1999 disallowances, would be approximately $540
million plus interest of approximately $100 million. The IRS has proposed penalties on the
Company with respect to all periods that were the subject of the preliminary notice of
adjustment and the Company anticipates the IRS would seek to impose penalties on all other
periods. |
|
|
|
The Company vigorously disagrees with the proposed adjustments and intends to aggressively
contest this matter through applicable IRS and judicial procedures, as appropriate. Although
the final resolution of the proposed adjustments is uncertain and involves unsettled areas of
the law, based on currently available information, the Company has provided for the best
estimate of the probable tax liability for this matter. While the resolution of the issue may
result in tax liabilities which are significantly higher or lower than the reserves
established for this matter, management currently believes that the resolution will not have a
material effect on the Companys financial position or liquidity. However, an unfavorable
resolution could have a material effect on the Companys results of operations or cash flows
in the quarter in which an adjustment is recorded or the tax is due or paid. |
|
|
|
In January 2006, the IRS issued a summons requesting certain information in connection with a
minority interest equity financing transaction entered into in 1995. Merck has cooperated
with the terms of the summons. In April 2006, certain current executives received summonses in
connection with this matter. |
|
10. |
|
The Company has defined benefit pension plans covering eligible employees in the United
States and in certain of its international subsidiaries. The net cost of such plans
consisted of the following components: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
90.0 |
|
|
$ |
82.0 |
|
Interest Cost |
|
|
84.8 |
|
|
|
79.0 |
|
Expected return on plan assets |
|
|
(108.0 |
) |
|
|
(101.2 |
) |
Net amortization |
|
|
42.4 |
|
|
|
38.5 |
|
Termination Benefits |
|
|
13.5 |
|
|
|
2.9 |
|
Curtailments |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
122.9 |
|
|
$ |
101.2 |
|
|
|
|
|
|
|
|
14
Notes to Consolidated Financial Statements (continued)
|
|
The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement
benefits plans. The net cost of such plans consisted of the following components: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
21.2 |
|
|
$ |
22.9 |
|
Interest Cost |
|
|
25.4 |
|
|
|
26.6 |
|
Expected return on plan assets |
|
|
(28.2 |
) |
|
|
(25.8 |
) |
Net amortization |
|
|
1.0 |
|
|
|
5.6 |
|
Termination Benefits |
|
|
1.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
$ |
20.8 |
|
|
$ |
29.7 |
|
|
|
|
|
|
|
|
|
|
In connection with restructuring actions (see Note 2), the Company recorded termination
charges for the three months ended March 31, 2006 and 2005 of $13.5 million and $2.9 million,
respectively, on its pension plans and $1.4 million and $0.4 million, respectively, on its
other postretirement benefit plans related to expanded eligibility for certain employees
exiting the Company. |
|
|
|
Also, in connection with these restructuring actions, the Company recorded curtailment losses
of $0.2 million for the three months ended March 31, 2006 on its pension plans. |
|
11. |
|
Other (income) expense, net, consisted of: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Interest income |
|
$ |
(181.7 |
) |
|
$ |
(93.8 |
) |
Interest expense |
|
|
98.2 |
|
|
|
84.5 |
|
Exchange gains |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
Minority interests |
|
|
29.9 |
|
|
|
30.4 |
|
Other, net |
|
|
(46.6 |
) |
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
$ |
(100.6 |
) |
|
$ |
26.5 |
|
|
|
|
|
|
|
|
|
|
The increase in interest income reflects interest income generated from the short-term
investment portfolio derived from higher short-term interest rates. |
|
|
|
Interest paid for the three months ended March 31, 2006 and 2005 was $147.1 million and $93.1
million, respectively. |
15
Notes to Consolidated Financial Statements (continued)
12. |
|
The weighted average common shares used in the computations of basic earnings per common
share and earnings per common share assuming dilution (shares in millions) are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Average common shares outstanding |
|
|
2,184.3 |
|
|
|
2,207.2 |
|
Common shares issuable(1) |
|
|
6.2 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
Average common shares outstanding
assuming dilution |
|
|
2,190.5 |
|
|
|
2,210.4 |
|
|
|
|
|
|
|
|
(1) |
|
Issuable primarily under share-based compensation plans. |
|
|
|
For the three months ended March 31, 2006 and 2005, 230.5 million and 253.2 million,
respectively, common shares issuable under the Companys share-based compensation plans were
excluded from the computation of earnings per common share assuming dilution because the
effect would have been antidilutive. |
|
13. |
|
Comprehensive income for the three months ended March 31, 2006 and 2005, representing all
changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $1,515.4 million and $1,343.1 million, respectively. |
|
14. |
|
The Companys operations are principally managed on a products basis. The Merck
Pharmaceutical segment includes products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Other segment revenues include non-reportable human and
animal health segments. |
|
|
|
Revenues and profits for these segments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Segment revenues: |
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
5,071.2 |
|
|
$ |
5,072.3 |
|
Other segment revenues |
|
|
264.6 |
|
|
|
232.9 |
|
|
|
|
|
|
|
|
|
|
$ |
5,335.8 |
|
|
$ |
5,305.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits: |
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
3,497.7 |
|
|
$ |
3,162.5 |
|
Other segment profits |
|
|
248.9 |
|
|
|
240.4 |
|
|
|
|
|
|
|
|
|
|
$ |
3,746.6 |
|
|
$ |
3,402.9 |
|
|
|
|
|
|
|
|
|
|
A reconciliation of total segment revenues to consolidated sales is as follows: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Segment revenues |
|
$ |
5,335.8 |
|
|
$ |
5,305.2 |
|
Other revenues |
|
|
74.0 |
|
|
|
57.0 |
|
|
|
|
|
|
|
|
|
|
$ |
5,409.8 |
|
|
$ |
5,362.2 |
|
|
|
|
|
|
|
|
16
Notes to Consolidated Financial Statements (continued)
|
|
Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales. |
|
|
Sales (1) of the Companys products were as follows: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Zocor |
|
$ |
1,063.5 |
|
|
$ |
1,106.0 |
|
Singulair |
|
|
801.4 |
|
|
|
735.0 |
|
Fosamax |
|
|
753.6 |
|
|
|
771.8 |
|
Cozaar/Hyzaar |
|
|
701.1 |
|
|
|
719.1 |
|
Proscar |
|
|
188.2 |
|
|
|
175.1 |
|
Primaxin |
|
|
169.6 |
|
|
|
184.8 |
|
Cosopt/Trusopt |
|
|
151.6 |
|
|
|
140.2 |
|
Cancidas |
|
|
146.3 |
|
|
|
130.3 |
|
Vasotec/Vaseretic |
|
|
136.1 |
|
|
|
158.2 |
|
Maxalt |
|
|
92.9 |
|
|
|
77.7 |
|
Propecia |
|
|
75.3 |
|
|
|
70.1 |
|
Vaccines/Biologicals |
|
|
271.5 |
|
|
|
223.8 |
|
Other |
|
|
858.7 |
|
|
|
870.1 |
|
|
|
|
|
|
|
|
|
|
$ |
5,409.8 |
|
|
$ |
5,362.2 |
|
|
|
|
|
|
|
|
(1) Presented net of discounts and returns. |
|
|
|
Other primarily includes sales of other human pharmaceuticals, pharmaceutical and animal
health supply sales to the Companys joint ventures and revenue from the Companys
relationship with AstraZeneca LP primarily relating to sales of Nexium and Prilosec. |
|
|
|
Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including components of equity income from affiliates
and depreciation and amortization expenses. For internal management reporting presented to
the chief operating decision maker, the Company does not allocate the vast majority of
indirect production costs, research and development expenses and general and administrative
expenses, as well as the cost of financing these activities. Separate divisions maintain
responsibility for monitoring and managing these costs, including depreciation related to
fixed assets utilized by these divisions and, therefore, they are not included in segment
profits. |
|
|
|
A reconciliation of segment profits to Income Before Taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Segment profits |
|
$ |
3,746.6 |
|
|
$ |
3,402.9 |
|
Other profits |
|
|
58.2 |
|
|
|
65.5 |
|
Adjustments |
|
|
156.0 |
|
|
|
120.3 |
|
Unallocated: |
|
|
|
|
|
|
|
|
Interest income |
|
|
181.7 |
|
|
|
93.8 |
|
Interest expense |
|
|
(98.2 |
) |
|
|
(84.5 |
) |
Equity income from affiliates |
|
|
69.5 |
|
|
|
62.8 |
|
Depreciation and amortization |
|
|
(582.8 |
) |
|
|
(340.2 |
) |
Research and development |
|
|
(942.0 |
) |
|
|
(846.6 |
) |
Other expenses, net |
|
|
(618.6 |
) |
|
|
(553.3 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,970.4 |
|
|
$ |
1,920.7 |
|
|
|
|
|
|
|
|
17
Notes to Consolidated Financial Statements (continued)
|
|
Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting certain items of income and
expense. Equity income from affiliates includes taxes paid at the joint venture level and a
portion of equity income that is not reported in segment profits. Other expenses, net,
include expenses from corporate and manufacturing cost centers and other miscellaneous income
(expense), net. |
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Management
On April 3, 2006, Merck announced the appointment of Peter Loescher to the newly created position
of President, Global Human Health, effective May 1, 2006. He will have direct responsibility for
Mercks four marketing and sales divisions: U.S. Human Health, Human Health Asia Pacific, Human
Health Intercontinental (Europe, Middle East, Africa, Canada and Latin America), and Merck
Vaccines. Mr. Loescher was previously President and Chief Executive Officer, GE Healthcare
Bio-Sciences.
Operating Results
Global Restructuring Program
In November 2005, the Company commenced the initial phase of its global restructuring program
designed to reduce the Companys cost structure, increase efficiency, and enhance
competitiveness. As part of this program, Merck plans to sell or close five manufacturing sites
and two preclinical sites by the end of 2008, and eliminate approximately 7,000 positions
company-wide. In the first quarter of 2006, approximately 1,800 positions throughout the Company
were eliminated. Through the end of 2008, when the initial phase of the global restructuring
program is expected to be substantially complete, the cumulative pre-tax costs are expected to
range from $1.8 billion to $2.2 billion. The Company expects to record charges of approximately
$800 million to $1 billion during 2006, based on estimated time of completion, as the
sales/closures of the facilities occur. Cumulative pre-tax savings are expected to be $4.5 to
$5.0 billion from 2006 through 2010. During the first quarter of 2006, the Company recorded
pre-tax restructuring costs of $304.1 million ($194.9 after tax or $0.09 per share) related
primarily to the global restructuring program which was comprised primarily of accelerated
depreciation and separation costs (See Note 2).
Share-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards No. 123R,
Share-Based Payments (FAS 123R). Employee stock option expense was previously recognized using
the intrinsic value method which measures share-based compensation expense as the amount at which
the market price of the stock at the date of grant exceeds the exercise price. FAS 123R requires
the recognition of the fair value of share-based compensation in net income, which the Company
will recognize on a straight-line basis over the requisite service period. Additionally, the
Company elected the modified prospective transition method for adopting FAS 123R, and therefore,
prior periods were not restated. Under this method, the provisions for FAS 123R apply to all
awards granted or modified after January 1, 2006. In addition, the unrecognized expense of awards
that have not yet vested at the date of adoption shall be recognized in net income in the period
after the date of adoption. The Company recorded share-based compensation cost in the amount of
$121.3 million in the first quarter of 2006 (see Note 3). Of this amount, $98.6 million was
incremental due to the adoption of FAS 123R. Incremental share-based compensation expense for
full year 2006 is expected to be approximately $220 million.
At March 31, 2006, there was $357.4 million of total pre-tax unrecognized compensation expense
related to nonvested awards which will be recognized over a weighted average period of 2.2 years.
For segment reporting, share-based compensation expense is recorded in unallocated expense.
Summary
Earnings per share assuming dilution (EPS) for the first quarter of 2006 were $0.69, including
the impact of the global restructuring program of $0.09 per share and the impact of adopting FAS
123R. Net income was $1.52 billion, compared to $1.37 billion in the first quarter of last year.
Worldwide sales were $5.41 billion for the quarter, compared to $5.36 billion for the first
quarter of 2005. Total sales increased 1% for the quarter. Global sales performance includes a
2% favorable effect from price changes, a 1% volume increase, and a 2% unfavorable effect from
foreign exchange for the quarter.
Materials and production costs were $1.34 billion for the first quarter of 2006, which represents
a 6% increase compared to the first quarter of 2005. This increase reflects $205.0 million of
costs associated with the global restructuring program recorded in the first quarter, primarily
related to accelerated depreciation. The increase also reflects $10.6 million related to the
expensing of stock options.
The Companys gross margin was 75.2% in the first quarter of 2006 compared to 76.3% in the first
quarter of 2005. The 2006 gross margin reflects a 3.8 percentage point unfavorable impact
relating to the $205.0 million of costs recorded in Materials and production costs relating to
the global restructuring program as noted above. Changes in the product mix had a favorable
impact on the current quarter gross margin compared with the prior year quarter.
Marketing and administrative expenses were $1.72 billion, an increase of 7% in the first quarter
of 2006. Marketing and administration includes the impact of $62.6 million in the quarter
related to the expensing of stock options as well as
19
activities required to prepare for the
launch of three investigational vaccines and maintaining activities in support of Mercks in-line
products.
Research and development expenses were $942.0 million for the quarter, representing an increase
of 11%, including $55.4 million recorded in the first quarter for accelerated depreciation costs
associated with the global restructuring program, as well as $24.4 million related to the
expensing of stock options. Research and development also includes the impact of licensing
expense for initial payments for research collaborations with Neuromed Pharmaceuticals, Paratek
Pharmaceuticals, and NicOx S.A. (see Note 4).
Restructuring costs were $43.7 million for the quarter representing separation costs associated
with the Companys global restructuring program, as well as remaining costs associated with
earlier programs (see Note 2).
The change in Other (income) expense, net reflects an increase in interest income generated from
the short-term investment portfolio derived from higher short-term interest rates.
The effective tax rate of 22.9% in the first quarter of 2006 reflects the impact of costs
associated with the global restructuring program and the mix of domestic and foreign income.
Sales
Sales of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Zocor |
|
$ |
1,063.5 |
|
|
$ |
1,106.0 |
|
Singulair |
|
|
801.4 |
|
|
|
735.0 |
|
Fosamax |
|
|
753.6 |
|
|
|
771.8 |
|
Cozaar/Hyzaar |
|
|
701.1 |
|
|
|
719.1 |
|
Proscar |
|
|
188.2 |
|
|
|
175.1 |
|
Primaxin |
|
|
169.6 |
|
|
|
184.8 |
|
Cosopt/Trusopt |
|
|
151.6 |
|
|
|
140.2 |
|
Cancidas |
|
|
146.3 |
|
|
|
130.3 |
|
Vasotec/Vaseretic |
|
|
136.1 |
|
|
|
158.2 |
|
Maxalt |
|
|
92.9 |
|
|
|
77.7 |
|
Propecia |
|
|
75.3 |
|
|
|
70.1 |
|
Vaccines/Biologicals |
|
|
271.5 |
|
|
|
223.8 |
|
Other |
|
|
858.7 |
|
|
|
870.1 |
|
|
|
|
|
|
|
|
|
|
$ |
5,409.8 |
|
|
$ |
5,362.2 |
|
|
|
|
|
|
|
|
Sales by product are presented net of discounts and returns. The provision for discounts
includes indirect customer discounts that occur when a contracted customer purchases directly
through an intermediary wholesale purchaser, known as chargebacks, as well as indirectly in the
form of rebates owed based upon definitive contractual agreements or legal requirements with
private sector and public sector (Medicaid) benefit providers, after the final dispensing of the
product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced
revenues by $1,179.6 million and $984.0 million for the three month period ended March 31, 2006
and 2005, respectively. Other primarily includes sales of other human pharmaceuticals,
pharmaceutical and animal health supply sales to the Companys joint ventures and revenue from
the Companys relationship with AstraZeneca LP (AZLP). Inventory levels at key wholesalers for
each of the Companys major products are generally less than a month.
Worldwide sales of Singulair, a once-a-day oral medicine indicated for the chronic treatment of
asthma and the relief of symptoms of allergic rhinitis, reached $801.4 million for the first
quarter, representing growth of 9% over the first quarter of 2005. U.S. sales for the quarter
were strong, exceeding the prior year by 17%. Singulair continues to be the most-prescribed
product in the U.S. respiratory market. Sales of Singulair outside of the United States declined
for the quarter.
20
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar*, were $701.1 million for
the first quarter, representing a decrease of 2% from the first quarter of 2005. Cozaar/Hyzaar
remained the number one branded angiotensin II antagonist (AIIA) in Europe and number two branded
AIIA in the United States in the first quarter.
Fosamax and Fosamax Plus D (launching under the name Fosavance throughout the European Union)
together remain the most-prescribed medicine worldwide for the treatment of postmenopausal, male
and glucocorticoid-induced osteoporosis. Global sales for the franchise were $753.6 million for
the first quarter, representing a decrease of 2% compared to the first quarter of 2005. U.S.
sales for the quarter remained strong, growing at 11%. Sales outside of the United States were
adversely affected by the availability of generic alendronate sodium products in several markets.
On March 14, 2006 the Board of Appeal of the European Patent Office issued a decision upholding
its 2004 decision to revoke Mercks patent in Europe that covers once-weekly versions of
alendronate. The decision is final. Mercks alendronate products are protected in many major
markets in Europe until at least 2007.
Zocor, Mercks statin for modifying cholesterol, achieved worldwide sales of $1.06 billion in the
first quarter, representing a decrease of 4% over the first quarter of 2005. U.S. sales for the
quarter remained strong, exceeding the prior year by 13%. Sales outside of the United States
were adversely affected by the availability of generic simvastatin. Mercks U.S. marketing
exclusivity for Zocor expires on June 23, 2006 and the Company expects a significant decline in
U.S. Zocor sales after that time.
Sales of Mercks other promoted medicines and vaccines were $1.48 billion for the first quarter,
representing growth of 6% as compared with the first quarter of 2005. These products treat or
prevent a broad range of medical conditions, including infectious diseases, glaucoma, migraine,
arthritis and pain.
On February 3, 2006 the U. S. Food and Drug Administration (FDA) approved RotaTeq, Mercks
vaccine to help protect children against rotavirus gastroenteritis. On February 21, the Centers
for Disease Control and Preventions (CDC) Advisory Committee on Immunization Practices (ACIP)
unanimously voted to recommend that all infants, starting at 6 to 12 weeks of age, be vaccinated
with RotaTeq, now the only rotavirus vaccine available in the United States. The ACIP
recommended that the oral, ready-to-use vaccine be given during the current routine well-baby
visits at 2, 4, and 6 months of age. The ACIP also voted to recommend that RotaTeq be included
in the CDC Vaccines for Children (VFC) program, which provides vaccines to children who are
Medicaid-eligible, uninsured, underinsured or Native American. Eligible children receive the
recommended vaccines through the government-funded VFC once the CDC contracts for the purchase of
the vaccines. Vaccines sold in most major European markets are sold through the Companys joint
venture, Sanofi Pasteur MSD.
Arcoxia, Mercks medicine for the treatment of arthritis and pain, remains under review by the
FDA in the United States. The MEDAL Program, which began in 2002, was designed to precisely
compare the cardiovascular safety of Arcoxia to the most widely prescribed traditional NSAID in
the world, diclofenac, and will include data in more than 34,000 arthritis patients with a median
treatment time of approximately 20 months. Results of the MEDAL Program are expected later in
the year. One component of the MEDAL Program, the MEDAL study, the largest arthritis study ever
conducted, with 23,500 patients, began to conclude as of March 2006, and will continue to do so
across the global investigation sites over the next few months. Arcoxia is sold throughout
Europe, the Middle East, Africa, Latin America and Asia.
Merck earns ongoing revenue based on sales of products that are associated with alliances, the
most significant of which is AZLP. Revenue from AZLP recorded by Merck was $380.1 million in the
first quarter.
Global
sales of Zetia and Vytorin, as reported by the
Merck/Schering-Plough partnership, in the aggregate were
$793.2 million for the first quarter and combined new prescriptions reached approximately 15% of
the U.S. lipid-lowering market, according to the March 2006 monthly IMS Health data.
* COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours & Company, Wilmington,
Delaware.
21
Global sales by the Merck/Schering-Plough partnership of Zetia, the cholesterol-absorption
inhibitor also marketed as Ezetrol outside the United States, reached $414.8 million in the first
quarter, an increase of 25% compared with the first quarter of 2005.
Global sales of Vytorin, also developed and marketed by the Merck/Schering-Plough partnership,
reached $378.4 million in the first quarter. Vytorin, marketed outside the United States as
Inegy, is the first single cholesterol treatment to provide LDL cholesterol lowering through dual
inhibition of cholesterol production and absorption.
The Company records the results from its interest in the Merck/Schering-Plough partnership in
Equity income from affiliates.
Research and Development
Mercks late-stage development portfolio includes three anticipated filings for 2006 in addition
to the two filings made in 2005 that are currently under FDA review. As of the end of the first
quarter 2006, Merck had five drugs in Phase III development for
diabetes, insomnia, atherosclerosis, and HIV/AIDS.
In the first quarter of 2006, Merck received notification from the FDA that the agency is
extending the review period for the Biologics License Application (BLA) for Mercks
investigational shingles vaccine, Zostavax. The FDA informed Merck that its new goal date for
completing the review of the BLA for Zostavax is May 25, 2006.
On March 23, 2006 in the European Union, the Committee for Medicinal Products for Human Use
(CHMP), a scientific committee of the European Medicines Agency, adopted a positive opinion
on the marketing authorization for Zostavax for prevention of herpes zoster (zoster or shingles)
and herpes zoster-related post-herpetic neuralgia for individuals
60 years of age or older. On April 27, 2006, the CHMP also
adopted a positive opinion on the marketing authorization
for RotaTeq for immunization against gastroenteritis due to rotavirus
infection in infants age 6 weeks and older. The
CHMP evaluates the quality, safety and efficacy of medicinal products in the European Union. The
positive CHMP opinions are key milestones toward the granting of
European Union marketing authorizations for Zostavax and
RotaTeq, respectively.
In February 2006, Gardasil, Mercks investigational cervical cancer vaccine, was given priority
review status by the FDA, and the FDA has informed Merck that the review goal date is June 8,
2006. Merck has submitted license applications to additional regulatory agencies including those
in the European Union, Australia, Canada, New Zealand, Mexico, Brazil, Argentina, Taiwan and
Singapore. Agencies in Australia, Canada and New Zealand have also given priority review to
Gardasil. Gardasil is designed to protect against four types of human papillomavirus (HPV)
types 16 and 18, which account for an estimated 70% of cervical cancer cases, and HPV types 6 and
11, which account for an estimated 90% of genital wart cases.
Also in February 2006, Merck announced that the New Drug Application (NDA) for Januvia had been
accepted for standard review by the FDA. Merck expects FDA action on the NDA by mid-October
2006. The Company is moving forward as planned with filings in countries outside the United
States. Phase III data for Januvia will be presented for the first time at the American Diabetes
Association meeting in June 2006.
Januvia is an investigational once-daily medicine with a novel mechanism of action for the
treatment of type 2 diabetes. If approved, Januvia would potentially be the first in a new class
of oral medications (DPP-4 inhibitors) that enhances the bodys own ability to lower blood sugar
(glucose) when it is elevated.
Merck is on track for filing with the FDA in 2006 the NDA for vorinostat, an investigational
histone deacetylase inhibitor for the treatment of cutaneous T-cell lymphoma (CTCL). CTCL is a
type of non-Hodgkins lymphoma in which some of the bodys white blood cells, known as
T-lymphocytes or T-cells, become malignant. Pivotal clinical data with respect to CTCL have been
submitted for presentation at the American Society of Clinical Oncology Annual Meeting in June
2006.
In addition, the Company remains on track for filing with the FDA in 2006 the NDA for MK-0517, a
new intravenous medicine to treat chemotherapy-induced nausea and vomiting.
Merck has entered into Phase III clinical trials for both MK-0524A and MK-0524B, investigational
therapies for lipid/cholesterol management, and plans to file NDAs with the FDA in 2007.
MK-0524A represents a novel approach to lowering LDL-C, raising HDL-C and lowering triglycerides.
MK-0524B combines MK-0524A with the proven benefits of simvastatin to potentially reduce the
risk of coronary heart disease beyond what statins provide alone. Phase II data will be
submitted to the American Heart Association meeting in the fall of 2006.
Additional interim results from a dose-ranging Phase II trial of MK-0518, Mercks investigational
oral integrase inhibitor for the treatment of HIV, were presented at the
13th Annual Conference on Retroviruses and Opportunistic Infections (CROI) in
February. The results showed that the oral investigational medication at all three doses studied
in
22
combination with optimized background therapy (OBT) had greater antiretroviral activity than
OBT alone. Study results also showed that MK-0518 in combination with OBT was generally well
tolerated in these patients with advanced HIV infection who were failing antiretroviral therapy
(ART), who had viruses resistant to at least one drug of each of the three available classes of
oral ARTs and who had limited active ARTs as options for treatment. Enrollment of patients in
Phase III studies for MK-0518 continues and the Company expects to file an NDA with the FDA in
2007.
Merck continues its strategy of establishing strong external alliances to complement our
substantial internal research capabilities, including research collaborations, licensing
pre-clinical and clinical compounds and technology transfers to drive both near- and long-term
growth.
During the quarter, Merck and NicOx S.A. (NicOx) entered into a new agreement to collaborate on
the development of new antihypertensive drugs using NicOxs proprietary nitric oxide-donating
technology. The agreement covers nitric oxide-donating derivatives of several major classes of
antihypertensive agents for the treatment of high blood pressure, complications of hypertension,
and other cardiovascular and related disorders. Merck has the exclusive right to develop and
commercialize antihypertensives that use NicOxs nitric oxide-donating technology for the
treatment of systemic hypertension.
In March 2006, Neuromed Pharmaceuticals Ltd. (Neuromed) and Merck signed a research collaboration
and license agreement to research, develop and commercialize novel compounds for the treatment of
pain and other neurological disorders, including Neuromeds lead compound, NMED-160, which is
currently in Phase II development for the treatment of pain. Under the terms of the agreement,
Neuromed granted Merck an exclusive worldwide license to research, develop and commercialize
NMED-160 and other compounds that selectively target the N-type calcium channel.
Also in March 2006, Merck and Paratek Pharmaceuticals, Inc. announced that they entered into an
exclusive, worldwide collaborative development and license agreement for PTK 0796, a novel,
broad-spectrum aminomethylcycline antibiotic with oral and intravenous formulations currently in
Phase I clinical testing.
On May 9,
2006, Merck announced that it had entered into a definitive agreement
under which the Company will acquire GlycoFi, Inc.
(GlycoFi), a privately-held biotechnology company that is
a leader in the field of yeast glycoengineering and optimization of
biologic drug molecules. Under the terms of the merger agreement, the
Company will acquire 100 percent of the equity of GlycoFi, which will
become a wholly-owned subsidiary of Merck. The all-cash transaction
is valued at approximately $400 million and is expected to close in
the second quarter of 2006, subject to customary closing conditions
and clearance under the Hart-Scott-Rodino Anti-Trust Improvements Act
of 1976, as amended.
Also on May 9, 2006, Merck announced that it had
entered into a definitive agreement under which the Company will acquire Abmaxis, Inc. ("Abmaxis"),
a privately-held biopharmaceutical company dedicated to the discovery
and optimization of monoclonal
antibody (MAb) products for human therapeutics and diagnostics. Under the terms of the acquisition
agreement, the Company will acquire 100 percent of the equity of Abmaxis for
$80 million in cash, making Abmaxis a wholly-owned subsidiary of Merck. The agreement is expected to close in the second quarter of 2006.
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources |
|
|
|
|
|
|
|
($ in millions) |
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
Cash and Investments |
|
$ |
15,503.9 |
|
|
$ |
16,745.5 |
|
Working Capital |
|
$ |
6,712.9 |
|
|
$ |
7,806.9 |
|
Total debt to total liabilities and equity |
|
|
15.5 |
% |
|
|
18.1 |
% |
The decrease in working capital primarily reflects a change in the mix of the Companys
investments from short-term to long-term. The decrease in the ratio of total debt to total
liabilities and equity primarily reflects the repayment of commercial paper in the first quarter
of 2006.
Cash provided by operations continues to be the Companys primary source of funds to finance
operating needs and capital expenditures. Net cash provided by operating activities totaled $1.3
billion for both three month periods ended March 31, 2006 and 2005, respectively. In 2005, the
Company repatriated $15.9 billion in connection with the American Jobs Creation Act of 2004 and
recorded an income tax charge of $766.5 million in the third and fourth quarters of 2005 related
to this repatriation, $185.0 million of which was paid in the fourth quarter of 2005 and the
remainder was paid in the first quarter of 2006 (see Note 8).
Capital expenditures totaled $197.6 million and $343.2 million for the first three months of 2006
and 2005, respectively. Capital expenditures for the full year 2006 are expected to approximate
$1.3 billion.
Dividends paid to stockholders were $829.8 million and $841.1 million for the first three months
of 2006 and 2005, respectively. In February 2006, the Board of Directors declared a quarterly
dividend of 38 cents per share on the Companys common stock for the second quarter of 2006.
During the first quarter, the Company purchased $247.2 million of its Common Stock (7.2 million
shares) for its Treasury. The Company has approximately $7.3 billion remaining under the July
2002 treasury stock purchase authorization.
In April 2006, the Company extended the maturity date of its $1.5 billion, 5-year revolving
credit facility from 2010 to 2011. The facility provides backup liquidity for the Companys
commercial paper borrowing facility and is used for general corporate purposes. The Company has
not drawn funding from this facility.
23
In April and May 2006, respectively, the Company entered into pay-floating, receive-fixed
interest rate swap contracts each effectively converting $250 million of its $1.0 billion, 4.75%
fixed- rate notes to floating rate instruments. The interest rate swaps are designated as hedges
of the fair value changes in the notes attributable to changes in the benchmark London Interbank
Offered Rate (LIBOR) swap rate and will mature in 2015. The fair value changes in the notes are
fully offset in interest expense by the fair value changes in the swap contract.
Critical Accounting Policies
The Companys significant accounting policies, which include managements best estimates and
judgments, are included in Note 2 to the consolidated financial statements of the 2005 Annual
Report on Form 10-K for the year ended December 31, 2005. Certain of these accounting policies
are considered critical as disclosed in the Critical Accounting Policies and Other Matters
section of Managements Discussion and Analysis in the Companys 2005 Annual Report on Form 10-K
because of the potential for a significant impact on the financial statements due to the inherent
uncertainty in such estimates. Other than the adoption of FAS 123R, as discussed in Note 3,
there have been no significant changes in the Companys critical accounting policies since
December 31, 2005.
Recently Issued Accounting Standards
In April 2006 the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
No. FIN 46R-6, Determining the Variability to Be Considered in Applying FASB Interpretation No.
46R. The FSP clarifies when an entity should use a by design approach when applying FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities. This approach includes
evaluating whether an interest is variable based on a thorough understanding of the design of the
potential variable interest entity (VIE), including the nature of the risk that the potential VIE
was designed to create and pass along to interest holders in the entity. This FSP also included
guidance to assist companies in analyzing the design of potential VIE to determine whether
variability exists. The effects of this FSP on the Companys financial position or results of
operations is not expected to be material.
Legal Proceedings
The Company is involved in various claims and legal proceedings of a nature considered normal to
its business, including product liability, intellectual property, and commercial litigation, as
well as additional matters such as antitrust actions. The following discussion is limited to
recent developments concerning legal proceedings and should be read in conjunction with Note 7 to
the consolidated financial statement of this report and the Companys 2005 Annual Report on Form
10-K for the year ended December 31, 2005.
Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as putative class actions, have been filed against the Company with respect to
Vioxx. As of March 31, 2006, the Company has been served or is aware that it has been named as a
defendant in approximately 11,500 lawsuits, which include approximately 23,350 plaintiff groups,
alleging personal injuries resulting from the use of Vioxx. Of these lawsuits, approximately
5,175 lawsuits representing approximately 14,850 plaintiff groups are or are slated to be in the
federal MDL (discussed below) and approximately 5,250 lawsuits representing approximately 5,250
plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before
Judge Carol E. Higbee. Certain of these lawsuits include allegations regarding gastrointestinal
bleeding, cardiovascular events, thrombotic events or kidney damage. The Company has also been
named as a defendant in approximately 190 putative class actions alleging personal injuries or
seeking (i) medical monitoring as a result of the putative class members use of Vioxx, (ii)
disgorgement of certain profits under common law unjust enrichment theories, and/or (iii) various
remedies under state consumer fraud and fair business practice statutes, including recovering the
cost of Vioxx purchased by individuals and third-party payors such as union health plans (all of
the actions discussed in this paragraph are collectively referred to as the Vioxx Product
Liability Lawsuits). The actions filed in the state courts of California, Texas, New Jersey,
and Philadelphia, Pennsylvania, respectively, have been transferred to a single judge in each
state for coordinated proceedings.
On February 16, 2005, the Judicial Panel on Multidistrict Litigation (the JPML) transferred all
Vioxx Product Liability Lawsuits pending in federal courts nationwide into one Multidistrict
Litigation (MDL) for coordinated pre-trial proceedings. The MDL has been transferred to the
United States District Court for the Eastern District of Louisiana before District Judge Eldon E.
Fallon.
Judge Fallon has indicated that he intends to try a series of cases during the period November
2005 through 2006, in the following categories: (i) heart attack with short term use; (ii) heart
attack with long term use; (iii) stroke; and (iv) cardiovascular injury involving a prescription
written after April 2002 when the labeling for Vioxx was revised to include the results of the
VIGOR trial.
24
Several Vioxx Product Liability Lawsuits are currently scheduled for trial in 2006. The Company
has provided a list of such trials at its website at www.Merck.com which it will periodically
update as appropriate. The Company has included its website address only as an inactive textual
reference and does not intend it to be an active link to its website nor does it incorporate by
reference the information contained therein.
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of limitations
(tolling) as to certain categories of claims allegedly arising from the use of Vioxx by non-New
Jersey citizens. The Tolling Agreement applies to individuals who have not filed lawsuits and
may or may not eventually file lawsuits and only to those claimants who seek to toll claims
alleging injuries resulting from a thrombotic cardiovascular event that results in a myocardial
infarction or ischemic stroke. The Tolling Agreement provides counsel additional time to
evaluate potential claims. The Tolling Agreement requires any tolled claims to be filed in
federal court. As of March 31, 2006, approximately 4,450 claimants had entered into Tolling
Agreements.
The Company has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits
that were tried prior to March 31, 2006. In April 2006, in
a trial involving two plaintiffs,
Thomas Cona and John McDarby, in Superior Court of New Jersey, Law Division, Atlantic County, the
jury returned a split verdict. The jury determined that Vioxx did not substantially contribute
to the heart attack of Mr. Cona, but did substantially contribute to the heart attack of Mr.
McDarby. In addition, the jury concluded that, in each case, Merck violated New Jerseys
consumer fraud statute, which allows plaintiffs to receive their expenses for purchasing the
drug, trebled, as well as reasonable attorneys fees. The jury awarded $4.5 million in
compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that case, as well
as punitive damages of $9 million. The Company intends to appeal this verdict after the
completion of post-trial proceedings in the trial court.
Also in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas returned a
verdict in favor of the family of decedent Leonel Garza. The jury awarded a total of $7 million
in compensatory damages to Mr. Garzas widow and three sons. The jury also purported to award $25
million in punitive damages. Under Texas law, in this case the punitive damages are capped at
$750,000. The Company intends to appeal this verdict after completion of post-trial proceedings
in the trial court.
Other Lawsuits
As previously disclosed, on July 29, 2005, a New Jersey state trial court certified a nationwide
class of third-party payors (such as unions and health insurance plans) that paid in whole or in
part for the Vioxx used by their plan members or insureds. The named plaintiff in that case
seeks recovery of certain Vioxx purchase costs (plus penalties) based on allegations that the
purported class members paid more for Vioxx than they would have had they known of the products
alleged risks. Merck believes that the class was improperly certified. The trial courts ruling
is procedural only; it does not address the merits of plaintiffs allegations, which the Company
intends to defend vigorously. On March 31, 2006, the New Jersey state Superior Court, Appellate
Division, affirmed the class certification order. Merck intends to seek further appellate
review in the New Jersey Supreme Court.
As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, and Texas. The Attorney
General of Montana has also recently filed a lawsuit. These actions allege that the Company
misrepresented the safety of Vioxx and seek (i) recovery of the cost of Vioxx purchased or
reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by the state and
its agencies for medical services for the treatment of persons injured by Vioxx; (iii) damages
under various common law theories; and/or (iv) remedies under various state statutory theories,
including state consumer fraud and/or fair business practices or Medicaid fraud statutes,
including civil penalties.
Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, the Company, along
with various current and former officers and directors of the Company, are defendants in a number
of putative class actions and individual lawsuits filed in (or removed to) federal court by
shareholders under the federal securities laws (the Vioxx Securities Lawsuits), all of which
have been transferred by the JPML, along with related lawsuits discussed below, to the United
States District Court for the District of New Jersey before District Judge Stanley R. Chesler for
inclusion in a nationwide MDL for coordinated pretrial proceedings (the Shareholder MDL).
Judge Chesler has consolidated the Vioxx Securities Lawsuits for all purposes. On June 9, 2005,
plaintiffs in the Vioxx Securities Lawsuits filed a Fourth Consolidated and Amended Class Action
Complaint superseding prior complaints in the various cases (the Complaint). Plaintiffs
request certification of a class of purchasers of Company stock between May 21, 1999 and October
29, 2004. The Complaint alleges that the defendants made false and misleading statements
regarding Vioxx in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and seeks unspecified compensatory damages and the costs of suit, including attorneys fees. The
Complaint also asserts a claim under Section 20A of the
25
Securities and Exchange Act against
certain defendants relating to their sales of Merck stock. In addition, the Complaint includes
allegations under Sections 11, 12 and 15 of the Securities Act of 1933 that certain defendants
made incomplete and misleading statements in a registration statement and certain prospectuses
filed in connection with the Merck Stock Investment Plan, a dividend reinvestment plan.
Defendants have filed a motion to dismiss the Complaint, which is pending.
As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by the
State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors. The
complaint, which was brought under Oregon securities law, alleges that plaintiff has suffered
damages in connection with its purchases of Merck common stock at artificially inflated prices
due to the Companys alleged violations of law related to disclosures about Vioxx. The Company
has moved to dismiss the complaint, which motion is pending.
As previously disclosed, a number of shareholder derivative actions have been filed in federal
court and in New Jersey Superior Court naming the Company as a nominal defendant and certain
members of the Board (past and present), together with certain executive officers, as defendants.
The complaints arise out of substantially the same factual allegations that are made in the
Vioxx Securities Lawsuits. The derivative suits, which are purportedly brought to assert rights
of the Company, assert claims against the Board members and officers for breach of fiduciary
duty, waste of corporate assets, unjust enrichment, abuse of control and gross mismanagement.
All of the actions discussed in this paragraph are collectively referred to as the Vioxx
Derivative Lawsuits. The JPML has transferred the Vioxx Derivative Lawsuits pending in federal
court to the Shareholder MDL. Judge Chesler consolidated the Vioxx Derivative Lawsuits for
all purposes. On June 20, 2005, the federal derivative plaintiffs filed a Verified Consolidated
Shareholders Derivative Complaint superseding prior complaints in the various cases. Defendants
filed a motion to dismiss this complaint. On May 5, 2006, Judge
Chesler granted defendants motion to dismiss and denied
plaintiffs request for leave to amend their complaint.
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage to the Company with respect
to the allegedly improper marketing of Vioxx. In response to that demand letter, the Board of
Directors determined at its November 23, 2004 meeting that the Board would take the shareholders
request under consideration and it remains under consideration.
In addition, as previously disclosed, a number of putative class actions have been filed against
the Company and certain current and former officers and directors of the Company in federal
court (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities Lawsuits and the Vioxx
Derivative Lawsuits, the Vioxx Shareholder Lawsuits) on behalf of certain of the Companys
current and former employees who are participants in certain of the Companys retirement plans
asserting claims under the Employee Retirement Income Security Act (ERISA). The lawsuits make
similar allegations to the allegations contained in the Vioxx Securities Lawsuits and claim that
the defendants breached their duties as plan fiduciaries. The JPML has transferred all Vioxx
ERISA Lawsuits to the Shareholder MDL. Judge Chesler has consolidated the Vioxx ERISA Lawsuits
for all purposes. A consolidated and amended complaint was filed in the Vioxx ERISA Lawsuits on
August 2, 2005. Defendants have filed a motion to dismiss this complaint, which is pending.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe as well as Canada, Brazil, Australia, Turkey, and Israel.
Additional Lawsuits
Based on media reports and other sources, the Company anticipates that additional Vioxx Product
Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits (collectively, the
Vioxx Lawsuits) will be filed against it and/or certain of its current and former officers and
directors in the future.
Insurance
As previously disclosed, the Company has product liability insurance for claims brought in the
Vioxx Product Liability Lawsuits with stated upper limits of approximately $630 million after
deductibles and co-insurance. This insurance provides coverage for legal defense costs and
potential damage amounts that have been or will be incurred in connection with the Vioxx Product
Liability Lawsuits. The Company believes that this insurance coverage extends to additional
Vioxx Product Liability Lawsuits that may be filed in the future. The Company has Directors and
Officers insurance coverage applicable to the Vioxx Securities Lawsuits and Vioxx Derivative
Lawsuits with stated upper limits of approximately $190 million. The Company has fiduciary and
other insurance for the Vioxx ERISA Lawsuits with stated upper limits of approximately $275
million. Additional insurance coverage for these claims may also be available under upper-level
excess policies that provide coverage for a variety of risks. There are disputes with certain
insurers about
26
the availability of some or all of this insurance coverage and there are likely to
be additional disputes. At this time, the Company believes that its insurance coverage with
respect to the Vioxx Lawsuits will not be adequate to cover its defense costs and any losses.
As previously disclosed, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the Vioxx Lawsuits) have commenced an arbitration
seeking, among other things, to cancel those policies, to void all of their obligations under
those policies and to raise other coverage issues with respect to the Vioxx Lawsuits. A second
arbitration against one of the Companys upper level excess insurers has also been commenced.
Merck intends to contest vigorously the insurers claims and will attempt to enforce its rights
under applicable insurance policies. The amounts actually recovered under the policies discussed
in this section may be less than the amounts specified in the preceding paragraph.
Investigations
As previously disclosed, in November 2004, the Company was advised by the staff of the SEC that
it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under criminal statutes. As previously disclosed,
the Companys U.K. subsidiary has been notified by the Medicines and Healthcare Products
Regulatory Agency in the United Kingdom (the MHRA) of an investigation by the MHRA of
compliance by the Company with EU adverse experience reporting requirements in connection with
Vioxx. Recently, the MHRA advised the Company that its investigation has been completed and no
enforcement action will be taken with respect to the matter. In addition, as previously
disclosed, investigations are being conducted by local authorities in certain cities in Europe in
order to determine whether any criminal charges should be brought concerning Vioxx. The Company
is cooperating with these governmental entities in their respective investigations (the Vioxx
Investigations). The Company cannot predict the outcome of these inquiries; however, they could
result in potential civil and/or criminal dispositions.
As previously disclosed, the Company has received a Civil Investigative Demand (CID) from a
group of Attorneys General from 31 states and the District of Columbia who are investigating
whether the Company violated state consumer protection laws when marketing Vioxx. The Company is
cooperating with the Attorneys General in responding to the initial CID and additional requests
for information.
Reserves
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be tried
in 2006. The Company cannot predict the timing of any trials with respect to the Vioxx
Shareholder Lawsuits. The Company believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of the inherent difficulty of
predicting the outcome of litigation, particularly where there are many claimants and the
claimants seek indeterminate damages, 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. The Company has not established any reserves for any potential
liability relating to the Vioxx Lawsuits or the Vioxx Investigations, including for those cases
in which a verdict or judgment has been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company believes it has strong points to
raise on appeal and therefore that unfavorable outcomes in such cases are not probable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2004, the Company had established a
reserve of $675 million solely for its future legal defense costs related to the Vioxx
Litigation.
During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide
related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii)
the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx
Litigation). In the fourth quarter, the Company recorded a charge of $295 million to increase
the reserve solely for its future legal defense costs related to the Vioxx Litigation to $685
million at December 31, 2005. This reserve is based on certain assumptions and is the best
estimate of the amount that the Company believes, at this time, it can reasonably estimate will
be spent through 2007. Some of the significant factors considered in the establishment and
ongoing review of the reserve for the Vioxx legal defense costs were as follows: the actual
costs incurred by the Company up to that time; the development of the Companys legal defense
strategy and structure in light of the scope of the Vioxx Litigation; the number of cases being
brought against the Company; the costs and outcomes of completed trials and the anticipated
timing, progression, and related costs of pre-trial activities and trials in the Vioxx Product
Liability Lawsuits. Events such as scheduled trials, that are expected to occur throughout 2006
and into 2007, and the inherent inability to predict the ultimate outcomes of such trials, limit
the Companys ability to reasonably estimate its legal costs beyond the end of 2007. The
Company will continue to monitor its legal defense
27
costs and review the adequacy of the
associated reserves. Unfavorable outcomes in the Vioxx Litigation could have a material adverse
effect on the Companys financial position, liquidity and results of operations.
Other Product Liability Litigation
The Company is a defendant in product liability lawsuits in the United States involving Fosamax.
Approximately 15 cases have been filed against Merck, including two cases which seek class action
certification, as well as damages and medical monitoring. In these actions, plaintiffs allege,
among other things, that they have suffered osteonecrosis of the jaw, generally with tooth
extraction and/or delayed healing, in association with the use of Fosamax. The Company will
vigorously defend against these lawsuits.
Governmental Proceedings
As previously disclosed, the Company has received a subpoena from the DOJ in connection with its
investigation of the Companys marketing and selling activities, including nominal pricing
programs and samples. The Company has been advised that the activities being investigated by the
DOJ are also the subject of a qui tam complaint. The Company has also reported that it has
received a CID from the Attorney General of Texas regarding the Companys marketing and selling
activities relating to Texas. As previously disclosed, the Company received another CID from the
Attorney General of Texas asking for additional information regarding the Companys marketing and
selling activities related to Texas; the second CID includes requests with respect to nominal
pricing programs and samples. In April 2004, the Company received a subpoena from the office of
the Inspector General for the District of Columbia in connection with an investigation of the
Companys interactions with physicians in the District of Columbia, Maryland, and Virginia. In
November 2004, the Company received a letter request from the DOJ in connection with its
investigation of the Companys pricing of Pepcid. In September 2005, the Company received a
subpoena from the Illinois Attorney General. The subpoena seeks information related to
repackaging of prescription drugs.
As previously disclosed, the Company has received a letter from the DOJ advising it of the
existence of a qui tam complaint alleging that the Company violated certain rules related to its
calculations of best price and other federal pricing benchmark calculations, certain of which may
affect the Companys Medicaid rebate obligation.
The Company is cooperating with all of these investigations. The Company cannot predict the
outcome of these investigations; however, it is possible that unfavorable outcomes could have a
material adverse effect on the Companys financial position, liquidity and results of operations.
In addition, from time to time, other federal, state or foreign regulators or authorities may
seek information about practices in the pharmaceutical industry or the Companys business
practices in inquiries other than the investigations discussed in this section. It is not
feasible to predict the outcome of any such inquiries.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the FDA
seeking to market generic forms of the Companys products prior to the expiration of relevant
patents owned by the Company. Generic pharmaceutical manufacturers have submitted ANDAs to the
FDA seeking to market in the United States a generic form of Fosamax, Prilosec, Nexium, Propecia,
Trusopt and Cosopt prior to the expiration of the Companys (and AstraZenecas in the case of
Prilosec and Nexium) patents concerning these products. The generic companies ANDAs generally
include allegations of non-infringement, invalidity and unenforceability of the patents. Generic
manufacturers have received FDA approval to market a generic form of Prilosec. The Company has
filed patent infringement suits in federal court against companies filing ANDAs for generic
alendronate (Fosamax), finasteride (Propecia), dorzolamide (Trusopt) and dorzolamide/timolol
(Cosopt), and AstraZeneca and the Company have filed patent infringement suits in federal court
against companies filing ANDAs for generic omeprazole (Prilosec) and esomeprazole (Nexium).
Similar patent challenges exist in certain foreign jurisdictions. The Company intends to
vigorously defend its patents, which it believes are valid, against infringement by generic
companies attempting to market products prior to the expiration dates of such patents. As with
any litigation, there can be no assurance of the outcomes, which, if adverse, could result in
significantly shortened periods of exclusivity for these products.
On March 17, 2006, the Company filed an infringement action against Cobalt Pharmaceuticals, Inc.
(Cobalt), a Canadian company, in the U.S. District Court for the Eastern District of Virginia,
alleging that Cobalts filing of an ANDA with a Paragraph IV certification infringes the
Companys basic patent covering the use of alendronate. This patent was upheld by the U.S.
District Court for the District of Delaware in 2002 and the U.S. Court of Appeals for the Federal
Circuit in 2003 following challenges by other generic manufacturers. Accordingly, FDA approval
of Cobalts ANDA is stayed for 30 months until August 2008 or until an adverse court decision, if
any, whichever may occur earlier.
28
As previously disclosed in September 2004 the Company appealed a decision of the Opposition
Division (the Opposition Division) of the European Patent Office (the EPO) that revoked the
Companys patent in Europe that covers the once-weekly administration of alendronate. On March
14, 2006, the Board of Appeal of the EPO upheld the decision of the Opposition Division. Thus,
the Company is not entitled to market exclusivity for Fosamax in most major European markets
after 2007. In addition, Mercks basic patent covering the use of alendronate has been
challenged in several European countries and if the Company is unsuccessful in those countries
the Company could lose exclusivity rights to Fosamax before 2007 in such countries. The Company
is defending the alendronate weekly product in other major European markets based on other
patents.
On January 18, 2006, the Company sued Hi-Tech Pharmacal Co., Inc. (Hi-Tech) of Amityville, New
York for patent infringement in response to Hi-Techs application to the FDA seeking approval of
a generic version of Mercks ophthalmic drugs Trusopt and Cosopt, which are used for treating
elevated intraocular pressure in people with ocular hypertension or glaucoma. In the lawsuit,
Merck sued to enforce a patent covering an active ingredient, dorzolamide, which is present in
both Trusopt and Cosopt. Merck has elected not to enforce two U.S. patents listed with the FDA
which cover the combination of dorzolamide and timolol, the two active ingredients in Cosopt.
This lawsuit will automatically stay FDA approval of Hi-Techs ANDAs for 30 months or until an
adverse court decision, whichever may occur earlier. The patent covering dorzolamide provides
exclusivity for Trusopt and Cosopt until October 2008 (including six months of pediatric
exclusivity). After such time, the Company expects sales of these products to decline.
In the case of omeprazole, the trial court in the United States rendered an opinion in October
2002 upholding the validity of the Companys and AstraZenecas patents covering the stabilized
formulation of omeprazole and ruling that one defendants omeprazole product did not infringe
those patents. The other three defendants products were found to infringe the formulation
patents. In December 2003, the U.S. Court of Appeals for the Federal Circuit affirmed the
decision of the trial court. With respect to the Companys patent infringement claims against
certain other generic manufacturers omeprazole products, trial began on April 3, 2006.
The Company and AstraZeneca received notice in October 2005 that Ranbaxy Laboratories Limited
(Ranbaxy) had filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV
challenges to patents on Nexium. On November 21, 2005, the Company and AstraZeneca sued Ranbaxy
in the United States District Court in New Jersey. Accordingly, FDA approval of Ranbaxys ANDA
is stayed for 30 months until April 2008 or until an adverse court decision, if any, whichever
may occur earlier. The Company and AstraZeneca received notice in January 2006 that IVAX
Pharmaceuticals, Inc., subsequently acquired by Teva Pharmaceutical Industries Ltd. (Teva), had
filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV challenges to patents
on Nexium. On March 8, 2006, the Company and AstraZeneca sued Teva in the United States District
Court in New Jersey. Accordingly, FDA approval of Tevas ANDA is stayed for 30 months until
September 2008 or until an adverse court decision, if any, whichever may occur earlier.
In the case of finasteride, an ANDA has been filed seeking approval of a generic version of
Propecia and alleging invalidity of the Companys patents. The Company filed a patent
infringement lawsuit in the District Court of Delaware in September 2004. A trial is scheduled
for June 2006.
In Europe, the Company is aware of various companies seeking registration for generic losartan
(the active ingredient for Cozaar). The Company has patent rights to losartan via license from
E.I. du Pont de Nemours and Company (du Pont). The Company and du Pont have filed patent
infringement proceedings against various companies in Portugal.
Other Litigation
As previously disclosed, prior to the spin-off of Medco Health, the Company and Medco Health
agreed to settle, on a class action basis, a series of lawsuits asserting violations of ERISA
(the Gruer Cases). The Company, Medco Health and certain plaintiffs counsel filed the
settlement agreement with the federal district court in New York, where cases commenced by a
number of plaintiffs, including participants in a number of pharmaceutical benefit plans for
which Medco Health is the pharmacy benefit manager, as well as trustees of such plans, have been
consolidated. Medco Health and the Company agreed to the proposed settlement in order to avoid
the significant cost and distraction of prolonged litigation. The proposed class settlement has
been agreed to by plaintiffs in five of the cases filed against Medco Health and the Company.
Under the proposed settlement, the Company and Medco Health have agreed to pay a total of $42.5
million, and Medco Health has agreed to modify certain business practices or to continue certain
specified business practices for a period of five years. The financial compensation is intended
to benefit members of the settlement class, which includes ERISA plans for which Medco Health
administered a pharmacy benefit at any time since December 17, 1994. The district court held
hearings to hear objections to the fairness of the proposed settlement and approved the
settlement in 2004, but has not yet determined the number of class member plans that have
properly elected not to participate in the settlement. The settlement becomes final only if and
when all appeals have been resolved. Certain class member plans have indicated that they will
not participate in the settlement. Cases initiated by
29
three such plans and two individuals
remain pending in the Southern District of New York. Plaintiffs in these cases have asserted
claims based on ERISA as well as other federal and state laws that are the same as or similar to
the claims that had been asserted by settling class members in the Gruer Cases. The Company and
Medco Health are named as defendants in these cases.
Three notices of appeal were filed and the appellate court heard oral argument in May 2005. On
December 8, 2005, the appellate court issued a decision vacating the district courts judgment
and remanding the cases to the district court to allow the district court to resolve certain
jurisdictional issues. A hearing was held to address such issues on February 24, 2006.
After the spin-off of Medco Health, Medco Health assumed substantially all of the liability
exposure for the matters discussed in the foregoing two paragraphs. These cases are being
defended by Medco Health.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures. Based on their evaluation, as of the end of the period covered by this Form 10-Q, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) are effective. There have been no changes in
internal control over financial reporting, for the period covered by this report, that have
materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting, except as indicated below.
During the first quarter of 2006, payroll processing for US employees was transitioned to a new
software system. This change was initiated to streamline existing pay and time reporting
operational processes and to reduce manual work, thereby further improving internal controls.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report and other written reports and oral statements made from time to time by the Company
may contain so-called forward-looking statements, all of which are based on managements
current expectations and are subject to risks and uncertainties which may cause results to differ
materially from those set forth in the statements. One can identify these forward-looking
statements by their use of words such as expects, plans, will, estimates, forecasts,
projects and other words of similar meaning. One can also identify them by the fact that they
do not relate strictly to historical or current facts. These statements are likely to address
the Companys 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 Companys
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. One should
carefully evaluate such statements in light of factors, including risk factors, described in the
Companys filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and
8-K. In Item 1 of the Companys Annual Report on Form
10-K for the year ended December 31, 2005, as filed on March 13, 2006, the Company discusses in
more detail various important factors that could cause actual results to differ from expected or
historic results. The Company notes these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. One should understand that it is not possible to
predict or identify all such factors. Consequently, the reader should not consider any such list
to be a complete statement of all potential risks or uncertainties.
30
PART II Other Information
Item 1. Legal Proceedings
Information with respect to certain legal proceedings is incorporated by reference from
Managements Discussion and Analysis of Financial Condition and Results of Operations contained
in Part I of this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities for the three month period ended March 31, 2006 is as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value |
|
|
|
Total Number |
|
|
Average Price |
|
|
Of Shares That May Yet |
|
|
|
of Shares |
|
|
Paid Per |
|
|
Be Purchased Under the |
|
Period |
|
Purchased(1) |
|
|
Share |
|
|
Plans or Programs(1) |
|
January 1 - January 31, 2006 |
|
|
2,375,000 |
|
|
$ |
33.38 |
|
|
$ |
7,450.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 - February 28, 2006 |
|
|
2,168,500 |
|
|
$ |
34.84 |
|
|
$ |
7,374.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 - March 31, 2006 |
|
|
2,607,700 |
|
|
$ |
35.41 |
|
|
$ |
7,282.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,151,200 |
|
|
$ |
34.56 |
|
|
$ |
7,282.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All shares purchased during the period were made as part of a plan announced in July 2002
to purchase $10 billion in Merck shares. |
Item 6. Exhibits
Exhibits
|
|
|
Number |
|
Description |
|
3.1
|
|
Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
September 30, 2004 |
|
|
|
3.2
|
|
By-Laws of Merck & Co., Inc. (as amended effective May 24, 2005) -
Incorporated by reference to Current Report on Form 8-K dated May 24, 2005 |
|
|
|
10.1
|
|
Offer Letter between Merck & Co., Inc. and Peter Loescher, dated March 15, 2006 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
31
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
MERCK & CO., INC.
|
|
|
|
|
|
|
|
Date: May 9, 2006
|
|
/s/ Kenneth C. Frazier |
|
|
|
|
|
|
|
|
|
KENNETH C. FRAZIER |
|
|
|
|
Senior Vice President and General Counsel |
|
|
|
|
|
|
|
Date: May 9, 2006
|
|
/s/ Richard C. Henriques |
|
|
|
|
|
|
|
|
|
RICHARD C. HENRIQUES |
|
|
|
|
Vice President, Controller |
|
|
32
EXHIBIT INDEX
|
|
|
Number |
|
Description |
|
3.1
|
|
Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
September 30, 2004 |
|
|
|
3.2
|
|
By-Laws of Merck & Co., Inc. (as amended effective May 24, 2005) -
Incorporated by reference to Current Report on Form 8-K dated May 24, 2005 |
|
|
|
10.1
|
|
Offer Letter between Merck & Co., Inc. and Peter Loescher, dated March 15, 2006 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
33