UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to      

Merck & Co., Inc.

One Merck Drive

Whitehouse Station, N.J. 08889-0100

(908) 423-1000

Incorporated in New Jersey		I.R.S. Employer Identification
		No. 22-1109110

The number of shares of common stock outstanding as of the close of business on March 31, 2009:

Class		Number of Shares Outstanding
Common Stock		2,108,669,357

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

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

 

 

Part I — Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)

		Three Months Ended
		March 31,
		2009				2008
Sales		$	5,385.2			$	5,822.1
Costs, Expenses and Other
Materials and production			1,333.8				1,238.1
Marketing and administrative			1,632.9				1,854.4
Research and development			1,224.2				1,078.3
Restructuring costs			64.3				69.7
Equity income from affiliates			(585.8	)			(652.1	)
Other (income) expense, net			(67.2	)			(2,209.2	)
			3,602.2				1,379.2
Income Before Taxes			1,783.0				4,442.9
Taxes on Income			327.2				1,108.4
Net Income		$	1,455.8			$	3,334.5
Less: Net Income Attributable to Noncontrolling Interest			30.8				31.9
Net Income Attributable to Merck & Co. Inc.		$	1,425.0			$	3,302.6
Basic Earnings per Common Share Attributable to Merck & Co. Inc. Common Shareholders		$	0.67			$	1.52
Earnings per Common Share Assuming Dilution Attributable to Merck & Co. Inc. Common Shareholders		$	0.67			$	1.52
Dividends Declared per Common Share		$	0.38			$	0.38

The accompanying notes are an integral part of this consolidated financial statement.

MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions)

		March 31,				December 31,
		2009				2008
Assets
Current Assets
Cash and cash equivalents		$	6,017.1			$	4,368.3
Short-term investments			6,564.5				1,118.1
Accounts receivable (including non-trade receivables of $770.9 in 2009 and $871.2 in 2008)			3,569.7				3,778.9
Inventories (excludes inventories of $674.3 in 2009 and $587.3 in 2008 classified in Other assets - see Note 8)			2,127.8				2,091.0
Deferred income taxes and other current assets			7,905.5				7,756.3
Total current assets			26,184.6				19,112.6
Investments			78.7				6,491.3
Property, Plant and Equipment, at cost, net of allowance for depreciation of $12,452.5 in 2009 and $12,128.6 in 2008			11,826.1				11,999.6
Goodwill			1,439.0				1,438.7
Other Intangibles, Net			614.2				525.4
Other Assets			6,400.5				7,628.1
		$	46,543.1			$	47,195.7
Liabilities and Stockholders’ Equity
Current Liabilities
Loans payable and current portion of long-term debt		$	2,798.9			$	2,297.1
Trade accounts payable			622.5				617.6
Accrued and other current liabilities			8,710.7				9,174.1
Income taxes payable			480.2				1,426.4
Dividends payable			803.6				803.5
Total current liabilities			13,415.9				14,318.7
Long-Term Debt			3,939.1				3,943.3
Deferred Income Taxes and Noncurrent Liabilities			7,186.6				7,766.6
Merck & Co., Inc. Stockholders’ Equity
Common stock, one cent par value
Authorized - 5,400,000,000 shares							.
Issued - 2,983,508,675 shares			29.8				29.8
Other paid-in capital			8,386.8				8,319.1
Retained earnings			44,320.4				43,698.8
Accumulated other comprehensive loss			(2,472.8	)			(2,553.9	)
			50,264.2				49,493.8
Less treasury stock, at cost
874,839,318 shares at March 31, 2009
875,818,333 shares at December 31, 2008			30,701.2				30,735.5
Total Merck & Co., Inc. stockholders’ equity			19,563.0				18,758.3
Noncontrolling Interest			2,438.5				2,408.8
Total Equity			22,001.5				21,167.1
		$	46,543.1			$	47,195.7

The accompanying notes are an integral part of this consolidated financial statement.

MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)

		Three Months Ended
		March 31,
		2009				2008
Cash Flows from Operating Activities
Net income		$	1,455.8			$	3,334.5
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on distribution from AstraZeneca LP			—				(2,222.7	)
Equity income from affiliates			(585.8	)			(652.1	)
Dividends and distributions from equity affiliates			456.6				2,669.8
Depreciation and amortization			443.3				391.1
Deferred income taxes			153.6				(227.4	)
Share-based compensation			113.3				91.0
Other			90.5				(113.9	)
Net changes in assets and liabilities			(1,414.7	)			(742.0	)
Net Cash Provided by Operating Activities			712.6				2,528.3
Cash Flows from Investing Activities
Capital expenditures			(235.1	)			(341.4	)
Purchases of securities and other investments			(2,045.0	)			(3,088.4	)
Proceeds from sales of securities and other investments			3,119.1				3,269.4
Acquisitions of subsidiaries, net of cash acquired			(130.0	)			—
Distribution from AstraZeneca LP			—				1,899.3
Decrease in restricted assets			684.5				167.9
Other			(3.4	)			(4.0	)
Net Cash Provided by Investing Activities			1,390.1				1,902.8
Cash Flows from Financing Activities
Net change in short-term borrowings			511.7				(22.6	)
Payments on debt			(7.5	)			(1,382.6	)
Purchases of treasury stock			—				(1,377.8	)
Dividends paid to stockholders			(803.5	)			(830.8	)
Proceeds from exercise of stock options			0.4				79.7
Other			(93.0	)			(49.5	)
Net Cash Used by Financing Activities			(391.9	)			(3,583.6	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(62.0	)			105.8
Net Increase in Cash and Cash Equivalents			1,648.8				953.3
Cash and Cash Equivalents at Beginning of Year			4,368.3				5,336.1
Cash and Cash Equivalents at End of Period		$	6,017.1			$	6,289.4

The accompanying notes are an integral part of this consolidated financial statement.

Notes to Consolidated Financial Statements (unaudited)

1.		Basis of Presentation
		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 Merck & Co., Inc.’s (“Merck” or the “Company”) latest Annual Report on Form 10-K.
		The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.
		Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
		Recently Adopted Accounting Standards — On January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 141R, Business Combinations (“FAS 141R”), Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“FAS 160”), Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”), Emerging Issues Task Force (“EITF”) Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements, EITF Issue No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”), EITF Issue No. 08-7, Accounting for Defensive Intangible Assets (“EITF 08-7”) and FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”).
		FAS 141R expands the scope of acquisition accounting to all transactions under which control of a business is obtained. This standard requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date fair values with limited exceptions. Additionally, FAS 141R requires that contingent consideration as well as contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired in-process research and development be capitalized and recorded as intangible assets at the acquisition date, and also requires transaction costs and costs to restructure the acquired company be expensed. Transactions are now being accounted for under this standard. On April 1, 2009, the FASB issued Staff Position FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which is effective January 1, 2009, and amends the guidance in FAS 141R to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability would be recognized in accordance with FASB Statement No. 5, Accounting for Contingencies (“FAS 5”), and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. If the fair value is not determinable and the FAS 5 criteria are not met, no asset or liability would be recognized.
		FAS 160 provides guidance for the accounting, reporting and disclosure of noncontrolling interests and requires, among other things, that noncontrolling interests be recorded as equity in the consolidated financial statements. The adoption of this standard resulted in the reclassification of $2.4 billion of Minority Interests (now referred to as noncontrolling interests) to a separate component of Stockholders’ Equity on the Consolidated Balance Sheet (see Note 12). Additionally, net income attributable to noncontrolling interests is now shown separately from parent net income in the Consolidated Statement of Income. Prior periods have been restated to reflect the presentation and disclosure requirements of FAS 160.
		EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The effect of adoption of EITF 07-1 was not material to the Company’s financial position or results of operations. See Note 5 for the associated disclosures of the Company’s collaborative arrangements.
		FAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, FAS 161 requires disclosure of the fair values of derivative instruments and associated gains and losses in a tabular format (see Note 7). Since FAS 161 requires only additional disclosures about the Company’s derivatives and hedging activities, the adoption of FAS 161 did not affect the Company’s financial position or results of operations.
		FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive nonforfeitable dividends before they vest will be considered participating securities and included in the earnings per share calculation pursuant to the two class method. The effect of adoption of FSP EITF 03-6-1 was not material to the Company’s results of operations (see Note 17).

Notes to Consolidated Financial Statements (unaudited) (continued)

		EITF 08-6, which is effective January 1, 2009, clarifies the accounting for certain transactions and impairment considerations involving equity method investments and is applied on a prospective basis to future transactions.
		EITF 08-7, which is effective January 1, 2009, clarifies that a defensive intangible asset (an intangible asset that the entity does not intend to actively use, but intends to hold to prevent others from obtaining access to the asset) should be accounted for as a separate unit of accounting and should be assigned a useful life that reflects the entity’s consumption of the expected benefits related to the asset. EITF 08-7 is applied on a prospective basis to future transactions.
		Recently Issued Accounting Standards - The FASB recently issued Staff Position FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP FAS 132(R)-1”), Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2/124-2”) and Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1/APB 28-1”).
		FSP FAS 132(R)-1, which is effective December 31, 2009, amends FASB Statement No. 132R, Employers’ Disclosures about Pensions and other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined pension or other postretirement plan. FSP FAS 132(R)-1 requires disclosures about plan assets including how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and significant concentrations of risk within plan assets. Since FSP FAS 132(R)-1 requires only additional disclosures about the Company’s pension and other postretirement plan assets, the adoption of FSP FAS 132(R)-1 will not affect the Company’s financial position or results of operations.
		Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for an asset or liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. The Company will adopt the provisions of FSP FAS 157-4 during the second quarter of 2009 and is currently assessing the impact of adoption on its financial position and results of operations.
		FSP FAS 115-2/124-2 changes existing guidance for determining whether debt securities are other-than-temporarily impaired and replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. FSP FAS 115-2/124-2 requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. The Company will adopt the provisions of FSP FAS 115-2/124-2 during the second quarter of 2009 and is currently assessing the impact of adoption on its financial position and results of operations.
		FSP FAS 107-1/APB 28-1 requires disclosures about fair values of financial instruments in interim and annual financial statements. Prior to the issuance of FSP FAS 107-1/APB 28-1, disclosures about fair values of financial instruments were only required to be disclosed annually. FSP FAS 107-1/APB 28-1 requires disclosures about fair value of financial instruments in interim and annual financial statements. The Company will adopt FSP FAS 107-1/APB 28-1 in the second quarter 2009. Since FSP FAS 107-1/APB 28-1 requires only additional disclosures of fair values of financial instruments in interim financial statements, the adoption will not affect the Company’s financial position or results of operations.

Notes to Consolidated Financial Statements (unaudited) (continued)

2.		Merger Agreement with Schering-Plough Corporation
		In March 2009, Merck and Schering-Plough Corporation (“Schering-Plough”) announced that their Boards of Directors unanimously approved a definitive merger agreement under which Merck and Schering-Plough will combine in a stock and cash transaction. The transaction will be structured as a “reverse merger” in which Schering-Plough, renamed Merck, will continue as the surviving public corporation. Under the terms of the agreement, each issued and outstanding share of Schering-Plough common stock will be converted into the right to receive a combination of $10.50 in cash and 0.5767 of a share of the combined company. Each Merck share will automatically be converted into a share of the combined company. The cash portion of the consideration will be funded with a combination of existing cash, the sale or redemption of short-and long-term investments and the issuance of debt. Upon completion of the merger, each issued and outstanding share of Schering-Plough 6% Mandatory Convertible Preferred Stock not converted in accordance with the preferred stock designations shall remain outstanding as one share of 6% Mandatory Convertible Preferred Stock of the newly combined company having designations, preferences, qualifications, limitations and other rights identical to those of the Schering-Plough 6% Mandatory Convertible Preferred Stock. The transaction remains subject to Merck and Schering-Plough shareholder approvals and the satisfaction of customary closing conditions and regulatory approvals. The transaction is expected to close in the fourth quarter of 2009.
3.		Restructuring
		2008 Global Restructuring Program
		As previously disclosed, in October 2008, the Company announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across all areas of the Company worldwide by the end of 2011. About 40% of the total reductions will occur in the United States. As part of the 2008 Restructuring Program, the Company is streamlining management layers by reducing its total number of senior and mid-level executives globally by approximately 25%. As of March 31, 2009, the Company has eliminated approximately 2,800 positions in connection with this program, comprised of employee separations and the elimination of contractors and vacant positions. Merck is rolling out a new, more customer-centric selling model designed to provide Merck with a meaningful competitive advantage and help physicians, patients and payers improve patient outcomes. The Company is now operating its new commercial selling models in the United States and other markets around the world. The Company also will make greater use of outside technology resources, centralize common sales and marketing activities, and consolidate and streamline its operations. Merck’s manufacturing division will further focus its capabilities on core products and outsource non-core manufacturing. Also, Merck is expanding its access to worldwide external science through a basic research global operating strategy, which is designed to provide a sustainable pipeline and is focused on translating basic research productivity into late-stage clinical success. To increase efficiencies, basic research operations will consolidate work in support of a given therapeutic area into one of four locations. This will provide a more efficient use of research facilities and result in the closure of three basic research sites located in Tsukuba, Japan; Pomezia, Italy; and Seattle by the end of 2009.
		Separation costs are accounted for under FASB Statement No. 112, Employers’ Accounting for Postemployment Benefits — an amendment of FASB Statement No. 5 and 43 (“FAS 112”), and FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”). In connection with the 2008 Restructuring Program, separation costs under the Company’s existing severance programs worldwide were accounted for under FAS 112 and recorded in the third quarter of 2008 to the extent such costs were probable and estimable. The Company commenced accruing costs related to one-time termination benefits offered to employees under the 2008 Restructuring Program in the fourth quarter of 2008 as that is when the necessary criteria under FAS 146 was met. The Company recorded pretax restructuring costs of $174.6 million related to the 2008 Restructuring Program in the first quarter of 2009. The Company anticipates that total costs for 2009 will be in the range of $400 million to $600 million. The 2008 Restructuring Program is expected to be completed by the end of 2011 with the total pretax costs estimated to be $1.6 billion to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs will result in future cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
		The 2008 Restructuring Program was put into place prior to the pending merger with Schering-Plough and does not reflect any potential impacts of the merger.

Notes to Consolidated Financial Statements (unaudited) (continued)

		2005 Global Restructuring Program
		In November 2005, the Company announced a global restructuring program (the “2005 Restructuring Program”) designed to reduce the Company’s cost structure, increase efficiency and enhance competitiveness which was substantially complete at the end of 2008.
		For segment reporting, restructuring charges are unallocated expenses.
		The following tables summarize the charges related to restructuring activities by type of cost:

		Three Months Ended March 31, 2009
		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
2008 Restructuring Program
Materials and production		$	—			$	21.4			$	0.8			$	22.2
Research and development			—				86.0				2.1				88.1
Restructuring costs			28.2				—				36.1				64.3
		$	28.2			$	107.4			$	39.0			$	174.6

		Three Months Ended March 31, 2008
		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
2005 Restructuring Program
Materials and production		$	—			$	15.3			$	(0.4	)		$	14.9
Research and development			—				—				—				—
Restructuring costs			101.4				—				(31.7	)			69.7
		$	101.4			$	15.3			$	(32.1	)		$	84.6

		Separation costs are associated with actual headcount reductions, as well as those headcount reductions that were probable and could be reasonably estimated. In the first quarter of 2009, approximately 1,050 positions were eliminated in connection with the 2008 Restructuring Program. In the first quarter of 2008, approximately 900 positions were eliminated, all of which related to the 2005 Restructuring Program. These position eliminations were comprised of actual headcount reductions, and the elimination of contractors and vacant positions.
		Accelerated depreciation costs primarily relate to manufacturing and research facilities to be sold or closed as part of the programs. All of the sites have and will continue to operate up through the respective closure dates, and since future cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than write them off immediately. The site assets include manufacturing and research facilities and equipment.
		Other activity of $39.0 million and $(32.1) million for the first quarter of 2009 and 2008, respectively, reflects costs that include termination charges associated with the Company’s pension and other postretirement benefit plans (see Note 14), asset abandonment, shut-down and other related costs. Other activity for the first quarter of 2008 also reflects pretax gains of $47.8 million resulting from sales of facilities and related assets.

Notes to Consolidated Financial Statements (unaudited) (continued)

The following table summarizes the charges and spending relating to restructuring activities for the three months ended March 31, 2009:

		Separation				Accelerated
($ in millions)		Costs				Depreciation				Other				Total
2008 Program
Restructuring reserves as of January 1, 2009		$	607.7			$	—			$	—			$	607.7
Expense			28.2				107.4				39.0				174.6
(Payments) receipts, net			(66.5	)			—				(34.6	)			(101.1	)
Non-cash activity			—				(107.4	)			(4.4	)			(111.8	)
Restructuring reserves as of March 31, 2009 (1)		$	569.4			$	—			$	—			$	569.4
2005 Program
Restructuring reserves as of January 1, 2009		$	114.8			$	—			$	—			$	114.8
Expense			—				—				—				—
(Payments) receipts, net			(57.2	)			—				—				(57.2	)
Non-cash activity			—				—				—				—
Restructuring reserves as of March 31, 2009 (1)		$	57.6			$	—			$	—			$	57.6

(1)		The cash outlays associated with the remaining restructuring reserve for the 2008 Restructuring Program are expected to be completed by the end of 2011. The cash outlays associated with the remaining restructuring reserve for the 2005 Restructuring Program are expected to be largely completed by the end of 2009.

4.		Research Collaborations, Acquisitions and License Agreements
		In April 2009, Merck, Medarex, Inc. (“Medarex”) and Massachusetts Biologic Laboratories (“MBL”) of the University of Massachusetts Medical School announced an exclusive worldwide license agreement for CDA-1 and CDB-1 (also known as MDX-066/MDX-1388 and MBL-CDA1/MBL-CDB1), an investigational fully human monoclonal antibody combination developed to target and neutralize Clostridium difficile toxins A and B, for the treatment of C. difficile infection. CDA-1 and CDB-1 were co-developed by Medarex and MBL. Under the terms of the agreement, Merck gains worldwide rights to develop and commercialize CDA-1 and CDB-1. Medarex and MBL will receive an aggregate upfront payment of $60 million upon closing, which the Company will record as research and development expense, and are potentially eligible to receive additional cash payments up to $165 million in the aggregate upon achievement of certain milestones associated with the development and approval of a drug candidate covered by this agreement. Upon commercialization, Medarex and MBL will also be eligible to receive double-digit royalties on product sales and milestones if certain sales targets are met. In accordance with the co-development agreement between Medarex and MBL, all payments will be divided equally. The closing of the transaction is subject to clearance under the Hart-Scott-Rodino Antitrust Improvement Act (“HSR Act”), as well as other customary closing conditions. The term of the agreement will commence on the closing date, which will occur upon satisfaction of the closing conditions and, unless terminated earlier, will continue until there are no remaining royalty payment obligations in a country, at which time the agreement will expire in its entirety in such country. Either party may terminate this agreement for uncured material breach by the other party, or bankruptcy or insolvency of the other party. Merck may terminate this agreement at any time upon providing 180 days prior written notice to Medarex and MBL.
		Also, in April 2009, Merck and Santen Pharmaceutical Co., Ltd. (“Santen”) announced a worldwide licensing agreement for tafluprost, a prostaglandin analogue under investigation in the United States. Tafluprost, preserved and preservative-free formulations, has received marketing approval for the reduction of elevated intraocular pressure in open-angle glaucoma and ocular hypertension in several European and Nordic countries as well as Japan and has been filed for approval in additional European and Asia Pacific markets. Under the terms of the agreement, Merck paid a fee, which was capitalized and will be amortized to materials and production costs over the life of the underlying patent, and will pay milestones and royalty payments based on future sales of tafluprost (both preserved and preservative-free formulations) in exchange for exclusive commercial rights to tafluprost in Western Europe (excluding Germany), North America, South America and Africa. Santen will retain commercial rights to tafluprost in most countries in Eastern Europe, Northern Europe and Asia Pacific, including Japan. Merck will provide promotion support to Santen in Germany and Poland. If tafluprost is approved in the United States, Santen has an option to co-promote it there. The agreement between Merck and Santen expires on a country-by-country basis on the last to occur of (a) the expiry of the last to expire valid patent claim; or (b) the expiration of the last to expire royalty. Merck may terminate the agreement at any time upon 90 days prior written notice and also at any time upon 60 days prior written notice if Merck determines that the product presents issues of safety or tolerability. In addition, Merck may terminate the agreement in the event that any of the enumerated agreements between Santen and the co-owner/licensor of certain intellectual property terminate

Notes to Consolidated Financial Statements (unaudited) (continued)

		or expire and this materially adversely affects Merck. If either Merck or Santen materially breaches the agreement and fails to cure after receiving notice, then the non-breaching party may terminate the agreement. The agreement provides for termination by the non-insolvent party due to bankruptcy by the other party. Finally, the agreement will terminate if, during the term, Merck develops or commercializes a competitive product (as that term is defined in the agreement).
		In addition, in April 2009, Merck and Cardiome Pharma Corp. (“Cardiome”) announced a collaboration and license agreement for the development and commercialization of vernakalant, an investigational candidate for the treatment of atrial fibrillation. The agreement provides Merck with exclusive global rights to the oral formulation of vernakalant (“vernakalant (oral)”) for the maintenance of normal heart rhythm in patients with atrial fibrillation, and provides a Merck affiliate, Merck Sharp & Dohme (Switzerland) GmbH, with exclusive rights outside of the United States, Canada and Mexico to the intravenous (“IV”) formulation of vernakalant (“vernakalant (IV)”) for rapid conversion of acute atrial fibrillation to normal heart rhythm. Under the terms of the agreement, Merck will pay Cardiome an initial fee of $60 million upon closing, which the Company will record as research and development expense. In addition, Cardiome is eligible to receive up to $200 million in payments based on achievement of certain milestones associated with the development and approval of vernakalant products (including a total of $35 million for initiation of a planned Phase III program for vernakalant (oral) and submission for regulatory approval in Europe of vernakalant (IV)), and up to $100 million for milestones associated with approvals in other subsequent indications of both the intravenous and oral formulations. Also, Cardiome will receive tiered royalty payments on sales of any approved products and has the potential to receive up to $340 million in milestone payments based on achievement of significant sales thresholds. Cardiome has retained an option to co-promote vernakalant (oral) with Merck through a hospital-based sales force in the United States. Merck will be responsible for all future costs associated with the development, manufacturing and commercialization of these candidates. Merck has granted Cardiome a secured, interest-bearing credit facility of up to $100 million that Cardiome may access in tranches over several years commencing in 2010. Cardiome’s co-development partner in North America, Astellas Pharma U.S., Inc., submitted a New Drug Application with the U.S. Food and Drug Administration (“FDA”) for Kynapid (vernakalant hydrochloride) Injection in December 2006 that included results from two pivotal Phase III clinical trials. In December 2007, the Cardiovascular and Renal Drugs Advisory Committee recommended that the FDA approve vernakalant (IV) for rapid conversion of atrial fibrillation. In August 2008, the FDA issued an Approvable action letter requesting additional information. A Phase IIb double-blind, placebo-controlled, randomized, dose-ranging clinical trial in patients at risk of recurrent atrial fibrillation showed that, at the 500 mg dose, vernakalant (oral) significantly reduced the rate of atrial fibrillation relapse as compared to placebo. The effectiveness of the collaboration agreement is subject to the expiration or earlier termination of the waiting period under the HSR Act, if applicable, as well as other customary closing conditions. This agreement continues in effect until the expiration of Cardiome’s co-promotion rights and all royalty and milestone payment obligations. This agreement may be terminated in the event of insolvency or a material uncured breach by either party. Additionally, the collaboration may be terminated by Merck in the event that Merck determines (in good faith) that it is not advisable to continue the development or commercialization of a vernakalant product as a result of a serious safety issue. In addition, Merck may terminate the agreement at any time upon 12 months prior written notice. Cardiome may terminate the agreement in the event that Merck challenges any Cardiome patent covering vernakalant. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of vernakalant and in some cases continuing royalty obligations.
		In March 2009, Merck acquired Insmed Inc.’s (“Insmed”) portfolio of follow-on biologic therapeutic candidates and its commercial manufacturing facilities located in Boulder, Colorado. Under the terms of the agreement, Merck paid Insmed an aggregate of $130 million in cash to acquire all rights to the Boulder facilities and Insmed’s pipeline of follow-on biologic candidates. Insmed’s follow-on biologics portfolio includes two clinical candidates: INS-19, an investigational recombinant granulocyte-colony stimulating factor (“G-CSF”) that will be evaluated for its ability to prevent infections in patients with cancer receiving chemotherapy, and INS-20, a pegylated recombinant G-CSF designed to allow for less frequent dosing. The transaction is being accounted for as a business combination pursuant to FAS 141R, which requires assets acquired and liabilities assumed be recorded at their respective fair values as of the acquisition date in the Company’s financial statements. The determination of fair value requires management to make significant estimates and assumptions. In connection with the acquisition, the Company allocated substantially all of the purchase price to Insmed’s follow-on biologics portfolio (INS-19 and INS-20) and recorded an indefinite-lived intangible asset. The fair value was determined based upon the present value of expected future cash flows of new product candidates resulting from Insmed’s follow-on biologics portfolio adjusted for the probability of their technical and marketing success utilizing an income approach reflecting appropriate risk-adjusted discount rates. The Company will assess the indefinite-lived intangible assets for recoverability at least on an annual basis or as events and circumstances warrant a review. The ongoing activity related to INS-19 and INS-20 is not expected to be material to the Company’s research and development expense. The remaining net assets acquired were not material and there were no other milestone or royalty obligations associated with the acquisition. This transaction closed on March 31, 2009, and accordingly, the results of operations of the acquired business will be included in the Company’s results of operations beginning April 1, 2009.

Notes to Consolidated Financial Statements (unaudited) (continued)

5.		Collaborative Arrangements
		Merck continues its strategy of establishing strong external alliances to complement its substantial internal research capabilities, including research collaborations, acquisitions, licensing pre-clinical and clinical compounds and technology platforms to drive both near- and long-term growth. The Company supplements its internal research with an aggressive licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies. The Company executes a number of external arrangements including research and development collaborations, preclinical and clinical compounds, and technology platforms across a broad range of therapeutic categories. These arrangements often require upfront milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the third party.
		The Company reviews its third party arrangements to determine if the arrangement is within the scope of EITF 07-01. For arrangements that are determined to be collaborative arrangements, the Company reviews costs incurred and revenues generated on sales to third parties, reported by the partners in their respective income statements, on a gross or net basis depending on whether the partner is deemed the principal or agent for the given transaction pursuant to EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent. Furthermore, payments between Merck and its partner are each assessed based on the nature and terms of the arrangements and are generally determined to be cost sharing expenses recorded in the applicable expense line items in the Consolidated Statement of Operations. Royalty payments Merck makes to its partners are recorded within Materials and production costs in the Company’s Consolidated Statement of Operations.
		Merck recorded revenues of $3.0 billion and $3.2 billion in the aggregate for its existing collaborative arrangements for the three months ended March 2009 and 2008, respectively. Expenses incurred related to these arrangements, such as materials and production costs, marketing and administrative, and research and development are reflected in the overall results of the Company.
		Each arrangement is unique in nature and the Company’s more significant arrangements are discussed below.
		Gardasil
		Merck has entered into several license agreements with respect to Gardasil, a vaccine for girls and women ages 9 to 26 to help prevent cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions and genital warts caused by human papillomavirus (“HPV”) types 6, 11, 16, and 18. The most significant arrangements are with GlaxoSmithKline (“GSK”) and CSL Ltd. (“CSL”). Gardasil is also the subject of other third-party licensing agreements. As a consequence of these agreements, the Company pays royalties on the worldwide sales of Gardasil. Sales of Gardasil, as recorded by Merck, were $262.0 million and $390.4 million for the three months ended March 2009 and 2008, respectively. Sales of vaccines in most major European markets are sold through Sanofi Pasteur MSD, the Company’s joint venture with Sanofi Pasteur.
		GlaxoSmithKline
		In 2005, the Company entered into a cross-license and settlement agreement with GSK for certain patent rights related to HPV vaccines. Pursuant to the agreement, GSK received an upfront payment and is receiving royalties from the Company based upon sales of Gardasil. The agreement resolved competing intellectual property claims related to the HPV vaccines.
		CSL Limited
		In 1995, the Company entered into a license agreement and collaboration with CSL relating to certain technology used in the development of Gardasil. CSL, a global specialty biopharmaceutical company, provided some early research collaborative support for the development of Gardasil. The Company licensed worldwide patent rights to Gardasil from CSL, which maintains marketing rights in Australia and New Zealand.

Notes to Consolidated Financial Statements (unaudited) (continued)

		Cozaar/Hyzaar In 1989, the Company and E.I. duPont de Nemours and Company (“DuPont”) agreed to form a long-term research and marketing collaboration to develop a class of therapeutic agents for high blood pressure and heart disease, discovered by DuPont, called angiotensin II receptor antagonists, which include Cozaar and Hyzaar. In return, the Company provided DuPont marketing rights in the United States and Canada to its prescription medicines, Sinemet and Sinemet CR. Pursuant to a 1994 agreement with DuPont, the Company has an exclusive licensing agreement to market Cozaar and Hyzaar, which are both registered trademarks of DuPont, in return for royalties and profit share payments. Sales of Cozaar and Hyzaar were $839.2 million and $846.9 million for the three months ended March 31, 2009 and 2008, respectively.
6.		Fair Value Measurements
		On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements (“FAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), that deferred the effective date of FAS 157 for one year for nonfinancial assets and liabilities recorded at fair value on a nonrecurring basis. The effect of adoption on January 1, 2009 of FAS 157 for nonfinancial assets and liabilities recorded at fair value on a nonrecurring basis did not have a material impact on the Company’s financial position and results of operations. FAS 157 describes three levels of inputs that may be used to measure fair value:
		Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.
		Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, corporate notes and bonds, U.S. and foreign government and agency securities, certain mortgage-backed and asset-backed securities, municipal securities, and derivative contracts whose values are determined using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
		Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 assets mainly include mortgage-backed and asset-backed securities, as well as certain corporate notes and bonds with limited market activity. At March 31, 2009, $75.0 million, or approximately 0.8%, of the Company’s investment securities were categorized as Level 3 fair value assets ($48.2 million of which were pledged under certain collateral arrangements (see Note 16)). All of the assets classified as Level 3 at March 31, 2009 were acquired when the Company elected to be redeemed-in-kind from a short-term fixed income fund that restricted cash redemptions as described below.
		If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Notes to Consolidated Financial Statements (unaudited) (continued)

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

		Fair Value Measurements Using																Fair Value Measurements Using
		Quoted Prices				Significant												Quoted Prices				Significant
		In Active				Other				Significant								In Active				Other				Significant
		Markets for				Observable				Unobservable								Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs								Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total				(Level 1)				(Level 2)				(Level 3)				Total
($ in millions)		March 31, 2009																December 31, 2008
Assets
Investments
Corporate notes and bonds		$	—			$	3,394.0			$	26.8			$	3,420.8			$	—			$	3,093.2			$	—			$	3,093.2
U.S. government and agency securities			—				1,589.3				—				1,589.3				—				2,885.7				—				2,885.7
Mortgage-backed securities (1)			—				655.0				—				655.0				—				723.9				—				723.9
Commercial paper			—				361.1				—				361.1				—				133.0				—				133.0
Asset-backed securities (1)			—				284.4				—				284.4				—				306.7				—				306.7
Foreign government bonds			—				213.6				—				213.6				—				319.4				—				319.4
Equity securities			82.8				33.3				—				116.1				71.1				73.6				—				144.7
Other debt securities			—				2.9				—				2.9				—				2.8				—				2.8
Total investments		$	82.8			$	6,533.6			$	26.8			$	6,643.2			$	71.1			$	7,538.3				—			$	7,609.4
Other assets (2)			—				2,396.9				48.2				2,445.1				—				2,877.9				96.6				2,974.5
Derivative assets (3)			—				578.7				—				578.7				—				548.4				—				548.4
Total Assets		$	82.8			$	9,509.2			$	75.0			$	9,667.0			$	71.1			$	10,964.6			$	96.6			$	11,132.3
Liabilities
Derivative liabilities (3)		$	—			$	84.0			$	—			$	84.0			$	—			$	275.0			$	—			$	275.0

(1)		Mortgage-backed securities represent AAA rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies. Substantially all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by credit card, auto loan, and home equity receivables, with weighted-average lives of primarily 5 years or less.
(2)		Other assets represent a portion of the pledged collateral discussed in Notes 10 and 16. At March 31, 2009, Level 2 Other assets are comprised of $770.7 million in municipal securities, $568.1 million in corporate notes and bonds, $510.8 million in commercial paper, $222.9 million in mortgage-backed securities, $168.2 million of U.S. government and agency securities and $156.2 million of asset-backed securities. At December 31, 2008, Level 2 Other assets are comprised of $987.4 million of corporate notes and bonds, $792.5 million of municipal securities, $357.3 million of commercial paper, $276.0 million of mortgage-backed securities, $240.1 million of U.S. government and agency securities and $224.6 million of asset-backed securities.
(3)		The fair value determination of derivatives includes an assessment of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

		Level 3 Valuation Techniques:
		Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. The Company’s Level 3 investment securities at March 31, 2009, primarily include mortgage-backed and asset-backed securities, as well as certain corporate notes and bonds for which there was a decrease in the observability of market pricing for these investments. These securities were valued primarily using pricing models for which management understands the methodologies. These models incorporate transaction details such as contractual terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at March 31, 2009.

Notes to Consolidated Financial Statements (unaudited) (continued)

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		Three Months Ended March 31, 2009
														Total Realized and													Losses
														Unrealized Gains/													Recorded in
						Net				Purchases,				(Losses) Included in:													Earnings for
		Beginning				Transfers				Sales,								Compre-				Ending					Level 3 Assets
		Balance				In to (Out of)				Settlements,								hensive				Balance					Still Held at
($ in millions)		January 1				Level 3 (1)				Net				Earnings (2)				Income				March 31					March 31
Available-for-sale investments		$	—			$	26.6			$	—			$	—			$	0.2			$	26.8				$	—
Other assets			96.6				(23.8	)			(26.3	)			(1.7	)			3.4				48.2					(1.8	)
Total		$	96.6			$	2.8			$	(26.3	)		$	(1.7	)		$	3.6			$	75.0				$	(1.8	)

		Three Months Ended March 31, 2008
														Total Realized and													Losses
														Unrealized Losses													Recorded in
						Net				Purchases,				Included in:													Earnings for
		Beginning				Transfers				Sales,								Compre-				Ending					Level 3 Assets
		Balance				(Out of)				Settlements,								hensive				Balance					Still Held at
($ in millions)		January 1				Level 3 (1)				Net				Earnings (2)				Income				March 31					March 31
Other assets		$	958.6			$	(785.2	)		$	(8.8	)		$	(2.3	)		$	(1.1	)		$	161.2				$	(2.3	)
Other debt securities			314.5				(314.5	)			—				—				—				—					—
Total		$	1,273.1			$	(1,099.7	)		$	(8.8	)		$	(2.3	)		$	(1.1	)		$	161.2				$	(2.3	)

(1)		Transfers in and out of Level 3 are deemed to occur at the beginning of the quarter in which the transaction takes place.
(2)		Amounts are recorded in Other (income) expense, net, in the Consolidated Statement of Income.

		On January 1, 2008, the Company had investments in a short-term fixed income fund (the “Fund”). Due to market liquidity conditions, cash redemptions from the Fund were restricted. As a result of this restriction on cash redemptions, the Company did not consider the Fund to be traded in an active market with observable pricing on January 1, 2008 and these amounts were categorized as Level 3. On January 7, 2008, the Company elected to be redeemed-in-kind from the Fund and received its share of the underlying securities of the Fund. As a result, the majority of the underlying securities were transferred out of Level 3 as it was determined these securities had observable markets. On March 31, 2009, $75.0 million of the investment securities associated with the redemption-in-kind were classified in Level 3 as the securities contained at least one significant input which was unobservable. These securities account for the entire balance of the Company’s Level 3 assets at March 31, 2009. During the first quarter of 2009, investments in the aggregate amount of $26.6 million, which were no longer pledged as collateral, were reclassified from Other assets to available-for-sale investments.
		The Company has cost method investments associated with certain research and licensing agreements which are measured at fair value on a nonrecurring basis. During the first quarter of 2009, two cost method investments with an aggregate carrying value of $24.7 million were other-than-temporarily impaired and written down to their respective fair values, resulting in an aggregate impairment charge of $8.2 million which was recorded within Other income, expense, net. These investments are traded on a public stock exchange in active markets, therefore, the observable quoted prices were utilized as the fair value amount (Level 1).
		Concentrations of Credit Risk
		On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.

Notes to Consolidated Financial Statements (unaudited) (continued)

7.		Derivative Instruments and Hedging Activities
		On January 1, 2009, the Company adopted FAS 161 which requires expanded disclosures on (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect the Company’s financial statements.
		The Company uses derivative instruments to manage certain risks relating to its ongoing business operations, including risks relating to foreign currencies as well as interest rate changes. The Company has established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates. The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk. The objectives and accounting related to the Company’s foreign currency risk management and interest rate risk management programs are discussed below.
		Foreign Currency Risk Management
		The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will partially hedge anticipated third-party sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of sales hedged as it gets closer to the expected date of the transaction, such that it is probable that the hedged transaction will occur. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged risk in the same manner. Merck manages its anticipated transaction exposure with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options’ cash flows offset the decline in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reduces to zero, but the Company benefits from the increase in the value of the anticipated foreign currency cash flows. The Company also utilizes forward contracts in its revenue hedging program. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the increase in the fair value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows.
		These derivative instruments are designated as cash flow hedges under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), and the fair value of these contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Accordingly, the effective portion of these unrealized gains or losses on these contracts are recorded in Accumulated Other Comprehensive Income (“AOCI”) and reclassified into Sales when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de minimis. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
		The primary objective of the balance sheet risk management program is to protect the U.S. dollar value of foreign currency denominated net monetary assets from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. Merck principally utilizes forward exchange contracts, which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and economically offset the consequences of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets. Merck routinely enters into contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The Company will also minimize the effect of exchange on monetary assets and liabilities by managing operating activities and net asset positions at the local level.
		Foreign currency denominated monetary assets and liabilities are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.

Notes to Consolidated Financial Statements (unaudited) (continued)

		The Company uses forward contracts to hedge the changes in fair value of certain foreign currency denominated available-for-sale securities attributable to fluctuations in foreign currency exchange rates. These derivative contracts are designated and qualify as fair value hedges under FAS 133. Accordingly, changes in the fair value of the hedged securities due to fluctuations in spot rates are offset in Other (income) expense, net, by the fair value changes in the forward contracts attributable to spot rate fluctuations. Changes in the contracts’ fair value due to spot-forward differences are excluded from the designated hedge relationship and recognized in Other (income) expense, net. These amounts as well as hedge ineffectiveness were not significant. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
		Interest Rate Risk Management
		At March 31, 2009, the Company was a party to two pay-floating, receive-fixed interest rate swap contracts maturing in 2011 with notional amounts of $125 million each designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. The swaps are designated and qualify as fair value hedges under FAS 133 and effectively convert the fixed-rate obligations to floating-rate instruments. The fair value changes in the notes are offset in interest expense by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
		Presented in the table below is the fair value of derivatives segregated between those derivatives that are designated as hedging instruments under FAS 133 and those that are not designated as hedging instruments under FAS 133 as of March 31, 2009.

				Fair Value of Derivative								U.S. Dollar
($ in millions)		Balance Sheet Caption		Asset				Liability				Notional
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts (current)		Accounts Receivable		$	159.0			$	—			$	2,397.8
Foreign Exchange Contracts (non-current)		Other assets			346.5				—				3,191.1
Foreign Exchange Contracts (current)		Accrued and Other current liabilities			—				43.2				895.0
Foreign Exchange Contracts (non-current)		Noncurrent liabilities			—				1.1				15.0
Interest Rate Swaps (non-current)		Other assets			26.6				—				250.0
				$	532.1			$	44.3
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts (current)		Accounts Receivable		$	46.6			$	—			$	1,934.4
Foreign Exchange Contracts (current)		Accrued and Other current liabilities			—				39.7				1,668.9
				$	46.6			$	39.7
				$	578.7			$	84.0

The table below provides information on the location and pretax (gain) or loss amounts for derivatives that are: (i) designated in a FAS 133 cash flow hedging relationship, (ii) designated in a FAS 133 fair value hedging relationship, and (iii) not designated in a FAS 133 hedging relationship for the quarter ended March 31, 2009.

Notes to Consolidated Financial Statements (unaudited) (continued)

($ in Millions)

Pretax

(Gain)/Loss

Derivatives Designated in a FAS

Recognized in

133 Cash Flow Hedging

Location and Pretax Amount of

Location and Pretax Amount of (Gain)/Loss

OCI on

Relationship

(Gain)/Loss Reclassified from AOCI into Income

Recognized in Income on Derivatives

Derivatives

Foreign Exchange Contracts

Sales

$

0.9

Other (income) expense, net

$

—

$

(71.2

)

Derivatives Designated in a FAS
133 Fair Value Hedging		Location and Amount of Pretax (Gain)/Loss						Location and Amount of Pretax (Gain)/Loss
Relationship		Recognized in Income on Derivatives						Recognized in Income on Hedged Item
Interest Rate Swap contracts		Other (income) expense, net		$	(2.7	)		Other (income) expense, net		$	2.7
Foreign Exchange Contracts		Other (income) expense, net			(55.6	)		Other (income) expense, net			58.7
				$	(58.3	)				$	61.4

Derivatives not Designated in a		Location and Amount of Pretax (Gain)/Loss
FAS 133 Hedging Relationship		Recognized in Income on Derivatives (1)
Foreign Exchange Contracts		Other (income) expense, net $(165.7)

(1)		These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

		At March 31, 2009, the Company estimates $72.2 million of the pretax net unrealized gain on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales.
8.		Inventories
		Inventories consisted of:

		March 31,				December 31,
($ in millions)		2009				2008
Finished goods		$	492.2			$	432.6
Raw materials and work in process			2,241.5				2,147.1
Supplies			93.7				98.6
Total (approximates current cost)			2,827.4				2,678.3
Reduction to LIFO cost for domestic inventories			(25.3	)			—
		$	2,802.1			$	2,678.3
Recognized as:
Inventories		$	2,127.8			$	2,091.0
Other assets		$	674.3			$	587.3

		Amounts recognized as Other assets are comprised entirely of raw materials and work in process inventories, the majority of which are noncurrent vaccine inventories.
9.		Joint Ventures and Other Equity Method Affiliates
		Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates and was comprised of the following:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Merck/Schering-Plough		$	290.9			$	392.8
AstraZeneca LP			168.3				131.1
Other (1)			126.6				128.2
		$	585.8			$	652.1

(1)		Primarily reflects results from Merial Limited, Sanofi Pasteur MSD and Johnson & Johnson°Merck Consumer Pharmaceuticals Company.

Notes to Consolidated Financial Statements (unaudited) (continued)

		Merck/Schering-Plough
		In 2000, the Company and Schering-Plough Corporation (“Schering-Plough”) (collectively the “Partners”) entered into agreements to create an equally-owned partnership to develop and market in the United States new prescription medicines in the cholesterol-management therapeutic area. These agreements generally provide for equal sharing of development costs and for co-promotion of approved products by each company. In 2001, the cholesterol-management partnership agreements were expanded to include all the countries of the world, excluding Japan. In 2002, ezetimibe, the first in a new class of cholesterol-lowering agents, was launched in the United States as Zetia (marketed as Ezetrol outside the United States). In 2004, a combination product containing the active ingredients of both Zetia and Zocor was approved in the United States as Vytorin (marketed as Inegy outside of the United States).
		The cholesterol agreements provide for the sharing of operating income generated by the Merck/Schering-Plough cholesterol partnership (the “MSP Partnership”) based upon percentages that vary by product, sales level and country. In the U.S. market, the Partners share profits on Zetia and Vytorin sales equally, with the exception of the first $300 million of annual Zetia sales on which Schering-Plough receives a greater share of profits. Operating income includes expenses that the Partners have contractually agreed to share, such as a portion of manufacturing costs, specifically identified promotion costs (including direct- to-consumer advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for specific services such as on-going clinical research, market support, market research, market expansion, as well as a specialty sales force and physician education programs. Expenses incurred in support of the MSP Partnership but not shared between the Partners, such as marketing and administrative expenses (including certain sales force costs), as well as certain manufacturing costs, are not included in Equity income from affiliates. However, these costs are reflected in the overall results of the Company. Certain research and development expenses are generally shared equally by the Partners, after adjusting for earned milestones.
		See Note 11 for information with respect to litigation involving the MSP Partnership and the Partners related to the sale and promotion of Zetia and Vytorin.
		Summarized financial information for the MSP Partnership is as follows:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Sales		$	945.3			$	1,232.9
Vytorin			466.0				651.2
Zetia			479.3				581.7
Materials and production costs			42.0				52.4
Other expense, net			242.2				326.8
Income before taxes		$	661.1			$	853.7
Merck’s share of income before taxes (1)		$	293.8			$	394.6

(1)		Merck’s share of the MSP Partnership’s income before taxes differs from the equity income recognized from the MSP Partnership primarily due to the timing of recognition of certain transactions between the Company and the MSP Partnership, including milestone payments.

		AstraZeneca LP
		As previously disclosed, the 1999 AstraZeneca merger triggered a partial redemption in March 2008 of Merck’s interest in certain AstraZeneca LP (“AZLP”) product rights. Upon this redemption, Merck received $4.3 billion from AZLP. This amount was based primarily on a multiple of Merck’s average annual variable returns derived from sales of the former Astra USA, Inc. products for the three years prior to the redemption (the “Limited Partner Share of Agreed Value”). Merck recorded a $1.5 billion pretax gain on the partial redemption in the first quarter of 2008. The partial redemption of Merck’s interest in the product rights did not result in a change in Merck’s 1% limited partnership interest.
		Also, as a result of the 1999 AstraZeneca merger, in exchange for Merck’s relinquishment of rights to future Astra products with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million (the “Advance Payment”). The Advance Payment was deferred as it remained subject to a true-up calculation (the “True-Up Amount”) that was directly dependent on the fair market value in March 2008 of the Astra product rights retained by the Company. The calculated True-Up Amount of $243.7 million was returned to AZLP in March 2008 and Merck recognized a pretax gain of $723.7 million related to the residual Advance Payment balance.

Notes to Consolidated Financial Statements (unaudited) (continued)

		In 1998, Astra purchased an option (the “Asset Option”) for a payment of $443.0 million, which was recorded as deferred revenue, to buy Merck’s interest in the KBI Inc. (“KBI”) products, excluding the gastrointestinal medicines Nexium and Prilosec (the “Non-PPI Products”). The Asset Option is exercisable in the first half of 2010 at an exercise price equal to the net present value as of March 31, 2008 of projected future pretax revenue to be received by the Company from the Non-PPI Products (the “Appraised Value”). Merck also had the right to require Astra to purchase such interest in 2008 at the Appraised Value. In February 2008, the Company advised AZLP that it would not exercise the Asset Option, thus the $443.0 million remains deferred.
		The sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up Amount was guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner Share of Agreed Value less payment of the True-Up Amount resulted in cash receipts to Merck of $4.0 billion and an aggregate pretax gain of $2.2 billion which is included in Other (income) expense, net. AstraZeneca’s purchase of Merck’s interest in the Non-PPI Products is contingent upon the exercise of the Asset Option by AstraZeneca in 2010 and, therefore, payment of the Appraised Value may or may not occur.
		Summarized financial information for AZLP is as follows:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Sales		$	1,315.7			$	1,326.8
Materials and production costs			620.6				696.3
Other expense, net			348.1				384.7
Income before taxes (1)		$	347.0			$	245.8

(1)

Merck’s partnership returns from AZLP are generally contractually determined and are not based on a percentage of income from AZLP.

10.		Debt and Financial Instruments
		In connection with the planned merger with Schering-Plough (see Note 2), on March 8, 2009, Merck entered into a financing commitment letter with JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Inc. (collectively “JPMorgan”), under which JPMorgan committed to provide $7 billion of financing under the following new credit facilities:

	•		a $3 billion 364-day senior unsecured interim term loan facility (the “bridge loan facility”);
	•		a $3 billion 364-day asset sale revolving credit facility (the “asset sale facility”); and
	•		a $1 billion 364-day corporate revolving credit facility (the “incremental facility”).

		On March 23, 2009, Merck and JPMorgan completed a preliminary syndication pursuant to which eight co-arrangers committed to provide a total of $6.125 billion of financing under the bridge loan facility, the asset sale facility and the incremental facility. As a result of this syndication, under the terms of the commitment letter, JPMorgan was released from $6.125 billion of its $7 billion commitment to provide financing under the bridge loan facility, the asset sale facility and the incremental facility. In addition, in April 2009, Merck amended its existing $1.5 billion five-year revolving credit facility maturing in 2013 which will allow this existing facility to remain in place after the merger. Merck, JPMorgan and the co-arrangers are working together toward completion of a general syndication of the new credit facilities. The new credit facilities and the amended $1.5 billion five-year revolving credit facility will be used to fund, or backstop commercial paper used to fund, the merger and for other general corporate purposes. However, the Company may replace or refinance certain of the facilities with a combination of short- and long-term permanent debt financing. Merck has incurred commitment fees of approximately $100 million associated with these facilities which are being amortized over the commitment period. The Company may incur up to an additional $100 million in commitment fees. The Company has not yet drawn funding from any of these facilities.
		In August 2008, the Company executed a $4.1 billion letter of credit agreement with a financial institution which satisfied certain conditions set forth in the U.S. Vioxx Settlement Agreement (see Note 11). The Company pledged collateral to the financial institution of approximately $5.1 billion pursuant to the terms of the letter of credit agreement. Although the amount of assets pledged as collateral is set by the letter of credit agreement and such assets are held in custody by a third party, the assets are managed by the Company. The Company considers the assets pledged under the letter of credit agreement to be restricted. The letter of credit amount and required collateral balances will decline as payments (after the first $750 million) under the Settlement Agreement are made. (See Note 16 for a discussion of other restricted asset activities.) As of March 31, 2009, $4.8 billion was recorded within Deferred income taxes and other current assets and $409 million was classified as Other assets. As of December 31, 2008, $3.8 billion was recorded within Deferred income taxes and other current assets and $1.3 billion was classified in Other assets.

Notes to Consolidated Financial Statements (unaudited) (continued)

11.		Contingencies
		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, individual and putative class actions have been filed against the Company in state and federal courts alleging personal injury and/or economic loss with respect to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the “MDL”) before District Judge Eldon E. Fallon. A number of such actions filed in state court are coordinated in separate coordinated proceedings in state courts in New Jersey, California and Texas, and the counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As of March 31, 2009, the Company had been served or was aware that it had been named as a defendant in approximately 10,625 lawsuits, which include approximately 25,675 plaintiff groups, alleging personal injuries resulting from the use of Vioxx, and in approximately 242 putative class actions alleging personal injuries and/or economic loss. (All of the actions discussed in this paragraph and in “Other Lawsuits” below are collectively referred to as the “Vioxx Product Liability Lawsuits”.) Of these lawsuits, approximately 8,750 lawsuits representing approximately 21,200 plaintiff groups are or are slated to be in the federal MDL and approximately 135 lawsuits representing approximately 135 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before Judge Carol E. Higbee.
		Of the plaintiff groups described above, most are currently in the Vioxx Settlement Program, described below. As of March 31, 2009, approximately 70 plaintiff groups who were otherwise eligible for the Settlement Program have not participated and their claims remained pending against Merck. In addition, the claims of approximately 400 plaintiff groups who are not eligible for the Settlement Program remain pending against Merck. A number of these 400 plaintiff groups are subject to various motions to dismiss for failure to comply with court-ordered deadlines.
		In addition to the Vioxx Product Liability Lawsuits discussed above, the claims of over 28,500 plaintiffs had been dismissed as of March 31, 2009. Of these, there have been over 5,775 plaintiffs whose claims were dismissed with prejudice (i.e., they cannot be brought again) either by plaintiffs themselves or by the courts. Over 22,700 additional plaintiffs have had their claims dismissed without prejudice (i.e., subject to the applicable statute of limitations, they can be brought again). Of these, approximately 13,750 plaintiff groups represent plaintiffs who had lawsuits pending in the New Jersey Superior Court at the time of the Settlement Agreement described below and who enrolled in the program established by the Settlement Agreement (the “Settlement Program”). Judge Higbee has dismissed these cases without prejudice for administrative reasons.
		On November 9, 2007, Merck announced that it had entered into an agreement (the “Settlement Agreement”) with the law firms that comprise the executive committee of the Plaintiffs’ Steering Committee (“PSC”) of the federal Vioxx MDL, as well as representatives of plaintiffs’ counsel in the Texas, New Jersey and California state coordinated proceedings, to resolve state and federal myocardial infarction (“MI”) and ischemic stroke (“IS”) claims filed as of that date in the United States. The Settlement Agreement, which also applies to tolled claims, was signed by the parties after several meetings with three of the four judges overseeing the coordination of more than 95% of the U.S. Vioxx Product Liability Lawsuits. The Settlement Agreement applies only to U.S. legal residents and those who allege that their MI or IS occurred in the United States.
		Under the Settlement Agreement, Merck will pay a fixed aggregate amount of $4.85 billion into two funds ($4.0 billion for MI claims and $850 million for IS claims) for qualifying claims that enter into the Settlement Program. Individual claimants will be examined by administrators of the Settlement Program to determine qualification based on objective, documented facts provided by claimants, including records sufficient for a scientific evaluation of independent risk factors. The conditions in the Settlement Agreement also require claimants to pass three gates: an injury gate, a duration gate, and a proximity gate (each as defined in the Settlement Agreement).
		The Settlement Agreement provides that Merck does not admit causation or fault. The Settlement Agreement also provided that Merck’s payment obligations would be triggered only if, among other conditions, (1) law firms on the federal and state PSCs and firms that have tried cases in the coordinated proceedings elect to recommend enrollment in the program to 100% of their clients who allege either MI or IS, and (2) by June 30, 2008, plaintiffs enroll in the Settlement Program at least 85% of each of all currently pending and tolled (i) MI claims, (ii) IS claims, (iii) eligible MI and IS claims together which involve death, and (iv) eligible MI and IS claims together which allege more than 12 months of use. Under the terms of the Settlement Agreement, Merck could exercise a right to walk away from the Settlement Agreement if the thresholds and other requirements were not met. The Company waived that right as of August 4, 2008. The waiver of that right triggered Merck’s obligation to pay a fixed total of $4.85 billion. Payments will be made in installments into the settlement funds. The first payment of $500 million was made into the MI Settlement Fund in August 2008 and an additional payment of $250 million was made in October 2008. Interim payments have been made to certain plaintiffs who alleged that they suffered an MI. Payments of $12 million and $3 million were made in

Notes to Consolidated Financial Statements (unaudited) (continued)

		February and March 2009, respectively, into the IS Settlement Fund. In addition, in April 2009, payments of $110 million and $12 million were made into the MI and IS Settlement Funds, respectively. Interim payments to IS claimants began on February 27, 2009. Additional payments will be made on a periodic basis going forward, when and as needed to fund payments of claims and administrative expenses. During 2009, the Company anticipates that it will make total payments of $3.4 billion into the Vioxx settlement funds pursuant to the Settlement Agreement. However, if the pending merger with Schering-Plough is completed in 2009, as expected, the Company expects it will also pay the remaining approximately $700 million into the IS Settlement Fund.
		Merck’s total payment for both funds of $4.85 billion is a fixed amount to be allocated among qualifying claimants based on their individual evaluation. The distribution of interim payments to qualified claimants began in August 2008 and will continue on a rolling basis until all claimants who qualify for an interim payment are paid. Final payments will be made after the examination of all of the eligible claims has been completed.
		After the Settlement Agreement was announced on November 9, 2007, judges in the Federal MDL, California, Texas and New Jersey State Coordinated Proceedings entered a series of orders. The orders: (1) temporarily stayed their respective litigations; (2) required plaintiffs to register their claims by January 15, 2008; (3) required plaintiffs with cases pending as of November 9, 2007 to preserve and produce records and serve expert reports; and (4) required plaintiffs who file thereafter to make similar productions on an accelerated schedule. The Clark County, Nevada and Washoe County, Nevada coordinated proceedings were also generally stayed.
		As of October 30, 2008, the deadline for enrollment in the Settlement Program, more than 48,100 of the approximately 48,325 individuals who were eligible for the Settlement Program and whose claims were not 1) dismissed, 2) expected to be dismissed in the near future, or 3) tolled claims that appear to have been abandoned had submitted some or all of the materials required for enrollment in the Settlement Program. This represents approximately 99.8% of the eligible MI and IS claims previously registered with the Settlement Program.
		On April 14, 2008 and June 3, 2008, two groups of various private insurance companies and health plans filed suit against BrownGreer, the claims administrator for the Settlement Program (the “Claims Administrator”), and U.S. Bancorp, escrow agent for the Settlement Program (the “AvMed” and “Greater New York Benefit Fund” suits). The private insurance companies and health plans claim to have paid healthcare costs on behalf of some of the enrolling claimants and seek to enjoin the Claims Administrator from paying enrolled claimants until their claims for reimbursement from the enrolled claimants are resolved. Each group sought temporary restraining orders and preliminary injunctions. Judge Fallon denied these requests. In AvMed, the defendants moved to sever the claims of the named plaintiffs and, in Greater New York Benefit Fund, to strike the class allegations. Judge Fallon granted these motions. AvMed appealed both of these decisions. The Fifth Circuit heard argument on AvMed’s appeal on November 4, 2008. On November 17, 2008, the Court of Appeals affirmed the district court’s ruling that denied the two motions for preliminary injunctive relief. Greater New York Benefit Fund has served a notice of appeal. On January 22, 2009, the PSC and counsel for certain private insurers announced that they reached a settlement agreement. The agreement provides a program for resolution of liens asserted by private insurers against payments received by certain claimants who have enrolled in the Settlement Program. The agreement can be terminated by the private insurers if fewer than 90% of eligible claimants participate. The plaintiffs in the AvMed and Greater New York Benefit Fund lawsuits have agreed to participate in the settlement.
		There is one U.S. Vioxx Product Liability Lawsuit currently scheduled for trial in 2009. The Company has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits that were tried prior to 2009.
		Juries have now decided in favor of the Company twelve times and in plaintiffs’ favor five times. One Merck verdict was set aside by the court and has not been retried. Another Merck verdict was set aside and retried, leading to one of the five plaintiffs’ verdicts. There have been two unresolved mistrials. With respect to the five plaintiffs’ verdicts, Merck filed an appeal or sought judicial review in each of those cases. In one of those five, an intermediate appellate court overturned the trial verdict and directed that judgment be entered for Merck, and in another, an intermediate appellate court overturned the trial verdict, entering judgment for Merck on one claim and ordering a new trial on the remaining claims.
		All but the following three cases that went to trial are now resolved: McDarby v. Merck, Ernst v. Merck, and Garza v. Merck.
		The first, McDarby, was originally tried along with a second plaintiff, Cona, in April 2006, in the 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. The jury also concluded that, in each case, Merck violated New Jersey’s 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. On June 8, 2007, Judge Higbee denied Merck’s motion for a new trial. On June 15, 2007, Judge Higbee awarded approximately $4 million in the aggregate in attorneys’ fees and costs. The Company has appealed the judgments in both cases and the Appellate Division held

Notes to Consolidated Financial Statements (unaudited) (continued)

		oral argument on both cases on January 16, 2008. On May 29, 2008, the New Jersey Appellate Division vacated the consumer fraud awards in both cases on the grounds that the Product Liability Act provides the sole remedy for personal injury claims. The Appellate Division also vacated the McDarby punitive damage award on the grounds of federal preemption and vacated the attorneys’ fees and costs awarded under the Consumer Fraud Act in both cases. The Court upheld the McDarby compensatory award. The Company has filed with the Supreme Court of New Jersey a petition to appeal those parts of the trial court’s rulings that the Appellate Division affirmed. Plaintiffs filed a cross-petition to appeal those parts of the trial court’s rulings that the Appellate Division reversed. On October 8, 2008, the Supreme Court of New Jersey granted Merck’s petition for certification of appeal, limited solely to the issue of whether the Federal Food, Drug and Cosmetic Act preempts state law tort claims predicated on the alleged inadequacy of warnings contained in Vioxx labeling that was approved by the FDA. The court denied the plaintiff’s cross-petition. On December 4, 2008, the New Jersey Supreme Court granted Merck’s motion to stay the appeal pending the issuance of a decision from the United States Supreme Court in Wyeth v. Levine. On March 4, 2009, the U.S. Supreme Court issued its opinion in Wyeth v. Levine. On April 6, 2009, Merck filed a supplemental brief.
		As previously reported, in September 2006, Merck filed a notice of appeal of the August 2005 jury verdict in favor of the plaintiff in the Texas state court case, Ernst v. Merck. On May 29, 2008, the Texas Court of Appeals reversed the trial court’s judgment and issued a judgment in favor of Merck. The Court of Appeals found the evidence to be legally insufficient on the issue of causation. Plaintiffs have filed a motion for rehearing en banc in the Court of Appeals. Merck filed a response in October 2008. In January 2009, plaintiffs filed a reply in support of their rehearing motion. On February 11, 2009, Merck filed a reply.
		As previously reported, in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a total of $7 million in compensatory damages to Mr. Garza’s widow and three sons. The jury also purported to award $25 million in punitive damages even though under Texas law, in this case, potential punitive damages were capped at $750,000. On May 14, 2008, the San Antonio Court of Appeals reversed the judgment and rendered a judgment in favor of Merck. On December 10, 2008, the Court of Appeals, on rehearing, vacated its prior ruling and issued a replacement. In the new ruling, the Court ordered a take-nothing judgment for Merck on the design defect claim, but reversed and remanded for a new trial as to the strict liability claim because of juror misconduct. On January 26, 2009, Merck filed a petition for review with the Texas Supreme Court. Plaintiffs filed their response on February 25, 2009.
		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 sought 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 product’s alleged risks. On March 31, 2006, the New Jersey Superior Court, Appellate Division, affirmed the class certification order. On September 6, 2007, the New Jersey Supreme Court reversed the certification of a nationwide class action of third-party payors, finding that the suit did not meet the requirements for a class action. Claims of certain individual third-party payors remain pending in the New Jersey court. Judge Higbee lifted the stay in these cases and the cases are currently in the discovery phase. A status conference with the court took place in January 2009 to discuss scheduling issues in these cases, including the selection of early trial pool cases.
		The New Jersey Superior Court heard argument on plaintiffs’ motion for class certification in Martin-Kleinman v. Merck, which is a putative consumer class action, on December 5, 2008. On March 17, 2009, the Court denied the motion for class certification.
		There are also pending in various U.S. courts putative class actions purportedly brought on behalf of individual purchasers or users of Vioxx asserting claims for reimbursement of alleged economic loss. The majority of these cases are at early procedural stages. On June 12, 2008, a Missouri state court certified a class of Missouri plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. The plaintiffs do not allege any personal injuries from taking Vioxx. The Missouri Court of Appeals heard oral argument in the case on March 31, 2009. During the pendency of the appeal, discovery is proceeding in the lower court. On February 3, 2009, Judge Fallon dismissed the master personal injury/wrongful death class action master complaint and the medical monitoring class action master complaint in the MDL.
		Plaintiffs also have filed a class action in California state court seeking certification of a class of California third-party payors and end-users. The court heard oral argument on plaintiffs’ motion for class certification on February 19, 2009.
		The Company has also been named as a defendant in eighteen separate lawsuits brought by government entities, including the Attorneys General of ten states, five counties, the City of New York, and private citizens (who have brought qui tam and taxpayer derivative suits). 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

Notes to Consolidated Financial Statements (unaudited) (continued)

		statutes, including civil penalties. One of the lawsuits brought by the counties is a class action filed by Santa Clara County, California on behalf of all similarly situated California counties.
		With the exception of a case filed by the Texas Attorney General (which remains in Texas state court and is currently scheduled for trial in January 2010), a case filed by the Michigan Attorney General (which was remanded to state court in January 2009), and one case that has not been removed to federal court, the rest of the actions described in the above paragraph have been transferred to the federal MDL and are in the discovery phase. Merck filed a motion to dismiss the Michigan Attorney General case which was denied.
		Shareholder Lawsuits
		As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, the Company and various current and former officers and directors are defendants in various putative class actions and individual lawsuits under the federal securities laws and state securities laws (the “Vioxx Securities Lawsuits”). All of the Vioxx Securities Lawsuits pending in federal court have been transferred by the Judicial Panel on Multidistrict Litigation (the “JPML”) to the United States District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL (the “Shareholder MDL”). Judge Chesler has consolidated the Vioxx Securities Lawsuits for all purposes. The putative class action, which requested damages on behalf of purchasers of Company stock between May 21, 1999 and October 29, 2004, alleged that the defendants made false and misleading statements regarding Vioxx in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought unspecified compensatory damages and the costs of suit, including attorneys’ fees. The complaint also asserted claims under Section 20A of the Securities and Exchange Act against certain defendants relating to their sales of Merck stock and under Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on statements in a registration statement and certain prospectuses filed in connection with the Merck Stock Investment Plan, a dividend reinvestment plan. On April 12, 2007, Judge Chesler granted defendants’ motion to dismiss the complaint with prejudice. Plaintiffs appealed Judge Chesler’s decision to the United States Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit issued an opinion reversing Judge Chesler’s order and remanding the case to the District Court. On September 23, 2008, Merck filed a petition seeking rehearing en banc, which was denied. The case was remanded to the District Court in October 2008, and plaintiffs have filed their Consolidated and Fifth Amended Class Action Complaint. Merck filed a petition for a writ of certiorari with the United States Supreme Court on January 15, 2009. On March 23, 2009, plaintiffs filed a response to Merck’s petition and, on April 7, 2009, Merck filed a reply brief. Merck expects to file a motion to dismiss the Fifth Amended Class Action Complaint.
		In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging violations of federal securities laws as well as violations of state law against the Company and certain officers. Pursuant to the Case Management Order governing the Shareholder MDL, the case, which is based on the same allegations as the Vioxx Securities Lawsuits, was consolidated with the Vioxx Securities Lawsuits. Defendants’ motion to dismiss the pension fund’s complaint was filed on August 3, 2007. In September 2007, the Dutch pension fund filed an amended complaint rather than responding to defendants’ motion to dismiss. In addition in 2007, six new complaints were filed in the District of New Jersey on behalf of various foreign institutional investors also alleging violations of federal securities laws as well as violations of state law against the Company and certain officers. Defendants are not required to respond to these complaints until after Judge Chesler resolves any motion to dismiss in the consolidated securities action.
		As previously disclosed, various shareholder derivative actions filed in federal court were transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the “Vioxx Derivative Lawsuits”). On May 5, 2006, Judge Chesler granted defendants’ motion to dismiss and denied plaintiffs’ request for leave to amend their complaint. Plaintiffs appealed, arguing that Judge Chesler erred in denying plaintiffs’ leave to amend their complaint with materials acquired during discovery. On July 18, 2007, the United States Court of Appeals for the Third Circuit reversed the District Court’s decision on the grounds that Judge Chesler should have allowed plaintiffs to make use of the discovery material to try to establish demand futility, and remanded the case for the District Court’s consideration of whether, even with the additional materials, plaintiffs’ request to amend their complaint would still be futile. Plaintiffs filed their brief in support of their request for leave to amend their complaint in November 2007. The Court denied the motion in June 2008 and closed the case. Plaintiffs have appealed Judge Chesler’s decision to the United States Court of Appeals for the Third Circuit. The appeal has now been fully briefed.
		In addition, as previously disclosed, various putative class actions filed in federal court under the Employee Retirement Income Security Act (“ERISA”) against the Company and certain current and former officers and directors (the “Vioxx ERISA Lawsuits” and, together with the Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the “Vioxx Shareholder Lawsuits”) have been transferred to the Shareholder MDL and consolidated for all purposes. The consolidated complaint asserts claims on behalf of certain of the Company’s current and former employees who are participants in certain of the Company’s retirement plans for breach of fiduciary duty. The lawsuits make similar allegations to the allegations contained in the Vioxx Securities Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part defendants’ motion to dismiss the ERISA complaint. In October 2007, plaintiffs moved for certification of a class of individuals who were participants in and beneficiaries of the Company’s retirement savings plans at any time between October 1, 1998 and September 30, 2004 and whose plan accounts included

Notes to Consolidated Financial Statements (unaudited) (continued)

		investments in the Merck Common Stock Fund and/or Merck common stock. On February 9, 2009, the Court denied the motion for certification of a class as to one count and granted the motion as to the remaining counts. The Court also limited the class to those individuals who were participants in and beneficiaries of the Company’s retirement savings plans who suffered a loss due to their investments in Merck stock through the plans and who did not execute a settlement releasing their claims. On October 6, 2008, defendants filed a motion for judgment on the pleadings seeking dismissal of the complaint. Judge Chesler entered an order denying the motion on March 24, 2009. On December 24, 2008, plaintiffs filed a motion for partial summary judgment against certain individual defendants. Plaintiffs’ motion is fully briefed and pending. Discovery is ongoing in this litigation.
		As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the Company’s 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 December 2004, the Special Committee of the Board of Directors retained the Honorable John S. Martin, Jr. of Debevoise & Plimpton LLP to conduct an independent investigation of, among other things, the allegations set forth in the demand. Judge Martin’s report was made public in September 2006. Based on the Special Committee’s recommendation made after careful consideration of the Martin report and the impact that derivative litigation would have on the Company, the Board rejected the demand. On October 11, 2007, the shareholders filed a lawsuit in state court in Atlantic County, New Jersey against current and former executives and directors of the Company alleging that the Board’s rejection of their demand was unreasonable and improper, and that the defendants breached various duties to the Company in allowing Vioxx to be marketed. The current and former executive and director defendants filed motions to dismiss the complaint in June 2008. On October 30, 2008, proceedings in the case were stayed through March 1, 2009. On November 21, 2008, the pending motions to dismiss were denied without prejudice in light of the stay. Defendants have informed the Court that they will renew their motions to dismiss and the Court has scheduled a conference for June 2, 2009.
		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, Argentina, Australia, Turkey, and Israel, as well as in The Philippines and Singapore.
		On May 30, 2008, the provincial court of Queen’s Bench in Saskatchewan, Canada entered an order certifying a class of Vioxx users in Canada, except those in Quebec. The class includes individual purchasers who allege inducement to purchase by unfair marketing practices; individuals who allege Vioxx was not of acceptable quality, defective or not fit for the purpose of managing pain associated with approved indications; or ingestors who claim Vioxx caused or exacerbated a cardiovascular or gastrointestinal condition. On June 17, 2008, the Court of Appeal for Saskatchewan granted the Company leave to appeal the certification order and the appeal was argued before that court in September and November 2008. On March 30, 2009, the Court of Appeal released its decision granting the Company’s appeal and quashing the certification order. On July 28, 2008, the Superior Court in Ontario denied the Company’s motion to stay class proceedings in Ontario, which had been based on the earlier certification order entered in Saskatchewan, and decided to certify an overlapping class of Vioxx users in Canada, except those in Quebec and Saskatchewan, who allege negligence and an entitlement to elect to waive the tort. On November 24, 2008, the Ontario Divisional Court granted the Company’s motion for leave to appeal the Superior Court’s decision denying the stay of the Ontario class proceedings and denied the Company’s motion to appeal the certification order. The Company’s appeal was heard by the Ontario Divisional Court in February 2009. On February 13, 2009, the Divisional Court declined to set aside the order denying the stay. The Company has filed a motion for leave to appeal to the Ontario Court of Appeal, which is pending before that court. Earlier, in November 2006, the Superior Court in Quebec authorized the institution of a class action on behalf of all individuals who, in Quebec, consumed Vioxx and suffered damages arising out of its ingestion. The plaintiffs have not instituted an action based upon that authorization.
		A trial in a representative action in Australia commenced on March 30, 2009, in the Federal Court of Australia. The named plaintiff, who alleges he suffered an MI, seeks to represent others in Australia who ingested Vioxx and suffered an MI, thrombotic stroke, unstable angina, transient ischemic attack or peripheral vascular disease. On November 24, 2008, the Company filed a motion for an order that the proceeding no longer continue as a representative proceeding. During a hearing on December 5, 2008, the court dismissed that motion and, on January 9, 2009, issued its reasons for that decision. On February 17, 2009, the Company’s motion for leave to appeal that decision to the full Federal Court was denied and the parties were directed to prepare proposed lists of issues to be tried. On March 11, 2009, the full Federal Court allowed the Company’s appeal of that part of the trial judge’s order that had declined to specify the matters to be tried and directed further proceedings on remand on that issue. On March 30, 2009, the trial judge entered an order directing that, in advance of all other issues in the proceeding, the issues to be determined during the trial are those issues of fact and law in the named plaintiff’s individual case, and those issues of fact and law that the trial judge finds, after hearing the evidence, are common to the claims of the group members that the named plaintiff has alleged that he represents.

Notes to Consolidated Financial Statements (unaudited) (continued)

		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”) may 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 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. As a result of the previously disclosed arbitration, additional insurance coverage for these claims should also be available, if needed, under upper-level excess policies that provide coverage for a variety of risks. There are disputes with the insurers about the availability of some or all of the Company’s insurance coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed in this paragraph may be less than the stated upper limits.
		Investigations
		As previously disclosed, 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 Company’s research, marketing and selling activities with respect to Vioxx in a federal health care investigation under criminal statutes. This investigation includes subpoenas for witnesses to appear before a grand jury. In March 2009, Merck received a letter from the U.S. Attorney’s Office for the District of Massachusetts identifying it as a target of the grand jury investigation regarding Vioxx. Further, as previously disclosed, investigations are being conducted by local authorities in certain cities in Europe in order to determine whether any criminal charges should be brought concerning Vioxx. 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.
		In addition, the Company received a subpoena in September 2006 from the State of California Attorney General seeking documents and information related to the placement of Vioxx on California’s Medi-Cal formulary. The Company is cooperating with the Attorney General in responding to the subpoena.
		Reserves
		As discussed above, on November 9, 2007, Merck entered into the Settlement Agreement with the law firms that comprise the executive committee of the PSC of the federal Vioxx MDL as well as representatives of plaintiffs’ counsel in the Texas, New Jersey and California state coordinated proceedings to resolve state and federal MI and IS claims filed as of that date in the United States. The Settlement Agreement, which also applies to tolled claims, was signed by the parties after several meetings with three of the four judges overseeing the coordination of more than 95% of the current claims in the Vioxx Litigation. The Settlement Agreement applies only to U.S. legal residents and those who allege that their MI or IS occurred in the United States. In 2007, as a result of entering into the Settlement Agreement, the Company recorded a pretax charge of $4.85 billion which represents the fixed aggregate amount to be paid to plaintiffs qualifying for payment under the Settlement Program.
		The Company currently anticipates that one U.S. Vioxx Product Liability Lawsuit will be tried in 2009. The Company cannot predict the timing of any other trials related to the Vioxx Litigation. The Company believes that it has meritorious defenses to the Vioxx 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 not included in the Settlement Program. The Company has not established any reserves for any potential liability relating to the Vioxx Lawsuits not included in the Settlement Program or the Vioxx Investigations. Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.
		Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. As of December 31, 2008, the Company had an aggregate reserve of approximately $4.379 billion (the “Vioxx Reserve”) for the Settlement Program and the Company’s future legal defense costs related to the Vioxx Litigation.
		During the first quarter of 2009, the Company spent approximately $54 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 addition, in the first quarter of 2009, the Company paid an additional $15 million into the settlement funds in connection with the Settlement Program. Consequently, as of March 31, 2009, the aggregate amount of the Vioxx Reserve was approximately $4.310 billion, which is included in Accrued and other current

Notes to Consolidated Financial Statements (unaudited) (continued)

		liabilities on the Consolidated Balance Sheet. Some of the significant factors considered in the review of the Vioxx Reserve were as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of the Vioxx Litigation, including the Settlement Agreement and the expectation that certain lawsuits will continue to be pending; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the Vioxx Litigation. The amount of the Vioxx Reserve as of March 31, 2009 allocated solely to defense costs represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with the remaining aspects of the Vioxx Litigation; however, events such as additional trials in the Vioxx Litigation and other events that could arise in the course of the Vioxx Litigation could affect the ultimate amount of defense costs to be incurred by the Company.
		The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the Vioxx Reserve at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
		Other Product Liability Litigation
		As previously disclosed, the Company is a defendant in product liability lawsuits in the United States involving Fosamax (the “Fosamax Litigation”). As of March 31, 2009, approximately 856 cases, which include approximately 1,237 plaintiff groups, had been filed and were pending against Merck in either federal or state court, including one case which seeks class action certification, as well as damages and/or medical monitoring. In these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw, generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of Fosamax. On August 16, 2006, the JPML ordered that the Fosamax product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (the “Fosamax MDL”) for coordinated pre-trial proceedings. The Fosamax MDL has been transferred to Judge John Keenan in the United States District Court for the Southern District of New York. As a result of the JPML order, approximately 699 of the cases are before Judge Keenan. Judge Keenan has issued a Case Management Order (and various amendments thereto) setting forth a schedule governing the proceedings which focused primarily upon resolving the class action certification motions in 2007 and completing fact discovery in an initial group of 25 cases by October 1, 2008. Briefing and argument on plaintiffs’ motions for certification of medical monitoring classes were completed in 2007 and Judge Keenan issued an order denying the motions on January 3, 2008. On January 28, 2008, Judge Keenan issued a further order dismissing with prejudice all class claims asserted in the first four class action lawsuits filed against Merck that sought personal injury damages and/or medical monitoring relief on a class wide basis. In October 2008, Judge Keenan issued an order requiring that Daubert motions be filed in May 2009 and scheduling trials in the first three cases in the MDL for August 2009, October 2009, and January 2010, respectively. A trial is scheduled in Alabama state court later in 2009.
		In addition, in July 2008, an application was made by the Atlantic County Superior Court of New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass tort designation and centralized management before one judge in New Jersey. On October 6, 2008, the New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries, including osteonecrosis of the jaw, but not solely seeking medical monitoring, be designated as a mass tort for centralized management purposes before Judge Higbee in Atlantic County Superior Court. As a result of the New Jersey Supreme Court’s order, approximately 130 cases were coordinated as of March 31, 2009 before Judge Higbee, who has begun setting various case management deadlines during the second quarter of 2009.
		Discovery is ongoing in both the Fosamax MDL litigation as well as in various state court cases. The Company intends to defend against these lawsuits.
		As of December 31, 2008, the Company had a remaining reserve of approximately $33 million solely for its future legal defense costs for the Fosamax Litigation. During the first quarter of 2009, the Company spent approximately $9 million. Consequently, as of March 31, 2009, the Company had a reserve of approximately $24 million solely for its future legal defense costs for the Fosamax Litigation. Some of the significant factors considered in the establishment of the reserve for the Fosamax Litigation legal defense costs were as follows: the actual costs incurred by the Company thus far; the development of the Company’s legal defense strategy and structure in light of the creation of the Fosamax MDL; the number of cases being brought against the Company; and the anticipated timing, progression, and related costs of pre-trial activities in the Fosamax Litigation. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves. Due to the uncertain nature of litigation, the Company is unable to estimate its costs beyond the completion of the first three federal trials discussed above. The Company has not established any reserves for any potential liability relating to the Fosamax Litigation. Unfavorable outcomes in the Fosamax Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

Notes to Consolidated Financial Statements (unaudited) (continued)

		Vytorin/Zetia Litigation

		As previously disclosed, the Company and its joint venture partner, Schering-Plough, have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations (“O&I”), and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sale and promotion of Vytorin, as well as sales of stock by corporate officers. In addition, since August 2008, the companies have received three additional letters from O&I, including one dated February 19, 2009, seeking certain information and documents related to the SEAS clinical trial. As previously disclosed, the companies have each received subpoenas from the New York and New Jersey State Attorneys General Offices and a letter from the Connecticut Attorney General seeking similar information and documents. In addition, the Company has received six Civil Investigative Demands (“CIDs”) from a multistate group of 34 State Attorneys General who are jointly investigating whether the companies violated state consumer protection laws when marketing Vytorin. Finally, in September 2008, the Company received a letter from the Civil Division of the DOJ informing it that the DOJ is investigating whether the companies’ conduct relating to the promotion of Vytorin caused false claims to be submitted to federal health care programs. The Company is cooperating with these investigations and working with Schering-Plough to respond to the inquiries. In addition, the Company has become aware of or been served with approximately 145 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the MSP Partnership’s sale and promotion of Vytorin and Zetia. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. These actions, which have been filed in or transferred to federal court, are coordinated in a multidistrict litigation in the U.S. District Court for the District Court of New Jersey before District Judge Dennis M. Cavanaugh. One similar lawsuit is pending in Pennsylvania state court. The parties are presently engaged in motions practice and briefing.
		Also, as previously disclosed, on April 3, 2008, a Merck shareholder filed a putative class action lawsuit in federal court in the Eastern District of Pennsylvania alleging that Merck and its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities laws. This suit has since been withdrawn and re-filed in the District of New Jersey and has been consolidated with another federal securities lawsuit under the caption In re Merck & Co., Inc. Vytorin Securities Litigation. An amended consolidated complaint was filed on October 6, 2008 and names as defendants Merck; Merck/Schering-Plough Pharmaceuticals, LLC; and certain of the Company’s officers and directors. Specifically, the complaint alleges that Merck delayed releasing unfavorable results of a clinical study regarding the efficacy of Vytorin and that Merck made false and misleading statements about expected earnings, knowing that once the results of the Vytorin study were released, sales of Vytorin would decline and Merck’s earnings would suffer. On April 22, 2008, a member of a Merck ERISA plan filed a putative class action lawsuit against the Company and certain of its officers and directors alleging they breached their fiduciary duties under ERISA. Since that time, there have been other similar ERISA lawsuits filed against the Company in the District of New Jersey, and all of those lawsuits have been consolidated under the caption In re Merck & Co., Inc. Vytorin ERISA Litigation. An amended consolidated complaint was filed on February 5, 2009, and names as defendants Merck and various members of Merck’s Board of Directors and members of committees of Merck’s Board of Directors. Plaintiffs allege that the ERISA plans’ investment in Company stock was imprudent because the Company’s earnings are dependent on the commercial success of its cholesterol drug Vytorin and that defendants knew or should have known that the results of a scientific study would cause the medical community to turn to less expensive drugs for cholesterol management. The Company intends to defend the lawsuits referred to in this section vigorously. Unfavorable outcomes resulting from the government investigations or the civil litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.
		In November 2008, the individual shareholder who had previously delivered a letter to the Company’s Board of Directors demanding that the Board take legal action against the responsible individuals to recover the amounts paid by the Company in 2007 to resolve certain governmental investigations delivered another letter to the Board demanding that the Board or a subcommittee thereof commence an investigation into the matters raised by various civil suits and governmental investigations relating to Vytorin.
		Patent Litigation
		From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug Applications (“ANDA’s”) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. Generic pharmaceutical manufacturers have submitted ANDA’s to the FDA seeking to market in the United States a generic form of Fosamax, Nexium, Singulair, Primaxin and Emend prior to the expiration of the Company’s (and AstraZeneca’s in the case of Nexium) patents concerning these products. In addition, an ANDA has been submitted to the FDA seeking to market in the United States a generic form of Zetia prior to the expiration of Schering-Plough’s patent concerning that product. The generic companies’ ANDA’s generally include allegations of non-infringement, invalidity and unenforceability of the patents. The Company has filed patent infringement suits in federal court against companies filing ANDA’s for generic alendronate (Fosamax), montelukast (Singulair), imipenem/cilastatin (Primaxin) and AstraZeneca and the Company have filed patent infringement suits in federal court against companies filing ANDA’s for generic esomeprazole (Nexium). Also, the Company and Schering-Plough have filed a patent infringement suit in federal court against companies filing ANDA’s for generic ezetimibe (Zetia). 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

Notes to Consolidated Financial Statements (unaudited) (continued)

		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.
		As previously disclosed, in February 2007, the Company received a notice from Teva Pharmaceuticals, Inc. (“Teva”), a generic company, indicating that it had filed an ANDA for montelukast and that it is challenging the U.S. patent that is listed for Singulair. On April 2, 2007, the Company filed a patent infringement action against Teva. The lawsuit automatically stays FDA approval of Teva’s ANDA until August 2009 or until an adverse court decision, if any, whichever may occur earlier. A trial in this matter was held in February 2009. The Company is awaiting the court’s decision which the Company expects to receive before the stay expires in August 2009.
		As previously disclosed, in September 2004, the Company appealed a decision of the Opposition Division of the European Patent Office (“EPO”) that revoked the Company’s patent in Europe that covers the once-weekly administration of alendronate. On March 14, 2006, the Board of Appeal of the EPO upheld the decision of the Opposition Division revoking the patent. On March 28, 2007, the EPO issued another patent in Europe to the Company that covers the once-weekly administration of alendronate. Under its terms, this new patent is effective until July 2018. The Company has sued multiple parties in European countries asserting its European patent covering once-weekly dosing of Fosamax. Oppositions have been filed in the EPO against this patent. In a hearing held March 17-18, 2009, the Opposition Division of the EPO issued an appealable decision revoking this patent. The Company is currently considering its options.
		In January 2009, the Company received notice that an ANDA was filed with the FDA for aprepitant which contained a Paragraph IV challenge to patents on Emend. The Company is evaluating the information provided with the notice to determine what action should be taken.
		Other Litigation
		There are various other legal proceedings, principally product liability and intellectual property suits involving the Company, which are pending. While it is not feasible to predict the outcome of such proceedings or the proceedings discussed in this Note, in the opinion of the Company, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability that would have a material adverse effect on the financial position, liquidity or results of operations of the Company, other than proceedings for which a separate assessment is provided in this Note.
12.		Stockholders’ Equity

		Common
		Stock				Common								Treasury				Treasury
		Shares				Stock				Other Paid-In				Stock				Stock
(in millions)		Issued				at Cost				Capital				Shares				at Cost
Balance at January 1, 2008			2,983.5			$	29.8			$	8,014.9				811.0			$	28,174.7
Employee share-based compensation plans			—				—				61.6				(3.1	)			(110.1	)
Purchases of treasury stock			—				—				—				29.1				1,377.8
Balance at March 31, 2008			2,983.5			$	29.8			$	8,076.5				837.0			$	29,442.4
Balance at January 1, 2009			2,983.5			$	29.8			$	8,319.1				875.8			$	30,735.5
Employee share-based compensation plans			—				—				67.7				(1.0	)			(34.3	)
Purchases of treasury stock			—				—				—				—				—
Balance at March 31, 2009			2,983.5			$	29.8			$	8,386.8				874.8			$	30,701.2

Notes to Consolidated Financial Statements (unaudited) (continued)

The accumulated balances related to each component of other comprehensive income (loss), net of taxes, were as follows:

																		Accumulated
										Employee				Cumulative				Other
										Benefit				Translation				Comprehensive
($ in millions)		Derivatives				Investments				Plans				Adjustment				Income (Loss)
Balance at January 1, 2008		$	(39.7	)		$	143.6			$	(992.9	)		$	62.9			$	(826.1	)
Other comprehensive income (loss)			(17.5	)			10.6				50.4				18.2				61.7
Balance at March 31, 2008		$	(57.2	)		$	154.2			$	(942.5	)		$	81.1			$	(764.4	)
Balance at January 1, 2009		$	111.9			$	63.1			$	(2,754.6	)		$	25.7			$	(2,553.9	)
Other comprehensive income (loss)			43.6				20.9				24.8				(8.2	)			81.1
Balance at March 31, 2009		$	155.5			$	84.0			$	(2,729.8	)		$	17.5			$	(2,472.8	)

		Comprehensive income was $1,506.1 million and $3,364.3 million for the three months ended March 31, 2009 and 2008, respectively.
		The reconciliation of noncontrolling interest was as follows:

($ in millions)		2009				2008
-
Balance at January 1		$	2,408.8			$	2,406.7
Net income attributable to noncontrolling interest			30.8				31.9
Distributions			(1.4	)			(1.5	)
Other			0.3				0.3
-
Balance at March 31		$	2,438.5			$	2,437.4

		In connection with the 1998 restructuring of Astra Merck Inc., the Company assumed $2.4 billion par value preferred stock with a dividend rate of 5% per annum, which is carried by KBI and included in Noncontrolling Interests with Stockholders’ Equity on the Consolidated Balance Sheet. The increase in Noncontrolling Interests during the first quarter of 2009 is attributable to the dividends for the quarter, which have been accrued, but not yet paid. While a small portion of the preferred stock carried by KBI is convertible into KBI common shares, none of the preferred securities are convertible into the Company’s common shares and, therefore, are not included as common shares issuable for purposes of computing Earnings per common share assuming dilution (see Note 17).
13.		Share-Based Compensation
		The Company has share-based compensation plans under which employees, non-employee directors and employees of certain of the Company’s 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. The Company recognizes the fair value of share-based compensation in net income on a straight-line basis over the requisite service period.
		The following table provides amounts of share-based compensation cost recorded in the Consolidated Statement of Income:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Pretax share-based compensation expense		$	113.3			$	91.0
Income tax benefits			(36.4	)			(28.7	)
Total share-based compensation expense, net of tax		$	76.9			$	62.3

During the first three months of 2009 and 2008, the Company granted 1.5 million options and 32.4 million options, respectively, related to its annual grant and other grants. The decrease in the current year is due primarily to a change in the annual grant date, in which options will be granted in second quarter of 2009 compared with the prior year when options were granted in the first quarter of 2008. The weighted average fair value of options granted for the first three months of 2009 and 2008 was $5.87 and $10.20 per option, respectively, and was determined using the following assumptions:

Notes to Consolidated Financial Statements (unaudited) (continued)

		Three Months Ended
		March 31,
		2009				2008
Expected dividend yield			5.1	%			3.4	%
Risk-free interest rate			2.1	%			2.7	%
Expected volatility			34.0	%			30.8	%
Expected life (years)			6.0				6.1

		At March 31, 2009, there was $415.9 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 2.0 years. For segment reporting, share-based compensation costs are unallocated expenses.
14.		Pension and Other Postretirement Benefit Plans
		The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net cost of such plans consisted of the following components:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Service cost		$	95.3			$	92.7
Interest cost			101.9				107.3
Expected return on plan assets			(151.1	)			(148.0	)
Net amortization			30.9				22.6
Termination benefits			22.6				5.5
Curtailments			(3.5	)			—
Settlements			3.0				—
		$	99.1			$	80.1

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 benefit plans. The net cost of such plans consisted of the following components:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Service cost		$	18.9			$	22.2
Interest cost			25.7				30.8
Expected return on plan assets			(23.8	)			(34.6	)
Net amortization			5.6				(3.8	)
Termination benefits			6.4				1.2
Curtailments			0.3				(0.6	)
		$	33.1			$	15.2

In connection with restructuring actions (see Note 3), the Company recorded termination charges for the three months ended March 31, 2009 and 2008 on its pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting the Company. Also, in connection with these restructuring actions, the Company recorded curtailments on its pension plans for the three months ended March 31, 2009 and on its other postretirement benefit plans for the three months ended March 31, 2009 and 2008. In addition, the Company recorded settlement losses on its pension plans for the three months ended March 31, 2009.

Notes to Consolidated Financial Statements (unaudited) (continued)

15.		Other (Income) Expense, Net
		Other (income) expense, net, consisted of:

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Interest income		$	(96.3	)		$	(169.5	)
Interest expense			60.7				72.6
Exchange losses (gains)			16.5				12.6
Other, net			(48.1	)			(2,124.9	)
		$	(67.2	)		$	(2,209.2	)

		Other, net in 2008 primarily reflects an aggregate gain from AZLP of $2.2 billion (see Note 9) and a gain of $249 million related to the sale of the Company’s remaining worldwide rights to Aggrastat, partially offset by a $300 million expense for a contribution to the Merck Company Foundation, and a $55 million charge related to the resolution of an investigation into whether the Company violated state consumer protection laws with respect to the sales and marketing of Vioxx. Interest paid for the three months ended March 31, 2009 and 2008 was $59.7 million and $68.9 million, respectively.
16.		Taxes on Income
		The effective tax rate of 18.4% for the first quarter of 2009 reflects a net favorable impact of approximately 5 percentage points resulting from the previously disclosed settlement reached with the Canada Revenue Agency (“CRA”) and restructuring charges. The effective tax rate of 24.9% for the first quarter of 2008 reflects the unfavorable impact of the AZLP gain (see Note 9) being fully taxable in the United States at a combined federal and state tax rate of approximately 36.3%, partially offset by the favorable impact of approximately 4 percentage points relating to the first quarter 2008 realization of foreign tax credits. In the first quarter of 2008, the Company decided to distribute certain prior years’ foreign earnings to the United States which resulted in the utilization of foreign tax credits. These foreign tax credits arose as a result of tax payments made outside of the United States in prior years that became realizable based on a change in the Company’s decision to distribute these foreign earnings.
		As previously disclosed, in October 2006, the CRA issued the Company a notice of reassessment containing adjustments related to certain intercompany pricing matters. In February 2009, Merck and the CRA negotiated a settlement agreement in regard to these matters. In accordance with the settlement, Merck paid an additional tax of approximately $300 million (U.S. dollars) and interest of approximately $360 million (U.S. dollars) with no additional amounts or penalties due on this assessment. In accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (“FIN 48”), the settlement was accounted for in the first quarter of 2009. The Company had previously established reserves for these matters. A significant portion of the taxes paid is expected to be creditable for U.S. tax purposes. The resolution of these matters did not have a material effect on the Company’s financial position or liquidity, other than with respect to the associated collateral as discussed below.
		In addition, in July 2007 and November 2008, the CRA proposed additional adjustments for 1999 and 2000, respectively, relating to other intercompany pricing matters. The adjustments would increase Canadian tax due by approximately $260 million (U.S. dollars) plus $250 million (U.S. dollars) of interest through March 31, 2009. It is possible that the CRA will propose similar adjustments for later years. The Company disagrees with the positions taken by the CRA and believes they are without merit. The Company intends to contest the assessments through the CRA appeals process and the courts if necessary. Management believes that resolution of these matters will not have a material effect on the Company’s financial position or liquidity.

Notes to Consolidated Financial Statements (unaudited) (continued)

		In connection with the appeals process for the matters discussed above, during 2007, the Company pledged collateral to two financial institutions, one of which provided a guarantee to the CRA and the other to the Quebec Ministry of Revenue representing a portion of the tax and interest assessed. As a result of the settlement noted above, guarantees required to appeal the disputes were reduced or eliminated and approximately $800 million of associated collateral was released and reclassified from Other Assets to Cash and cash equivalents and Short-term investments. Approximately $150 million additional cash and securities were released from collateral in April 2009. Certain of the cash and investments continue to be collateralized for guarantees required to appeal other Canadian tax disputes. The collateral is included in Deferred income taxes and other current assets and Other Assets in the Consolidated Balance Sheet and totaled approximately $400 million and $1.2 billion at March 31, 2009 and December 31, 2008, respectively.
17.		Earnings Per Share
		Effective January 1, 2009, the Company adopted FSP EITF 03-6-1, which states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. The provisions of this FSP are retrospective; therefore prior periods have been restated. RSUs granted by the Company to certain management level employees (see Note 13) participate in dividends on the same basis as common shares and are nonforfeitable by the holder. As a result, these RSUs meet the definition of a participating security.
		The calculations of earnings per share under the two-class method are as follows:

		Three Months Ended
		March 31,
		2009				2008
Basic Earnings per Common Share:
Net Income Attributable to Merck & Co., Inc.		$	1,425.0			$	3,302.6
Less: Income allocated to participating securities			4.1				8.4
Net income available to common shareholders			1,420.9				3,294.2
Average common shares outstanding			2,107.9				2,160.3
		$	0.67			$	1.52
Earnings per Common Share Assuming Dilution:
Net Income Attributable to Merck & Co., Inc.		$	1,425.0			$	3,302.6
Less: Income allocated to participating securities			4.1				8.4
Net income available to common shareholders			1,420.9				3,294.2
Average common shares outstanding			2,107.9				2,160.3
Common shares issuable (1)			1.3				12.1
Average common shares outstanding assuming dilution			2,109.2				2,172.4
		$	0.67			$	1.52

(1)		Issuable primarily under share-based compensation plans.

For the three months ended March 31, 2009 and 2008, 229.8 million and 202.8 million, respectively, of common shares issuable under the Company’s share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

Notes to Consolidated Financial Statements (unaudited) (continued)

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

		Three Months Ended
		March 31,
($ in millions)		2009				2008
Pharmaceutical:
Singulair		$	1,057.2			$	1,103.8
Cozaar/Hyzaar			839.2				846.9
Januvia			411.1				272.1
Fosamax			261.3				469.8
Zocor			137.4				179.1
Maxalt			133.2				121.6
Janumet			128.5				58.4
Cosopt/Trusopt			121.1				201.3
Propecia			102.8				105.0
Arcoxia			81.3				93.4
Vasotec/Vaseretic			77.1				95.7
Proscar			72.1				85.0
Emend			69.2				59.6
Other pharmaceutical (2)			469.4				589.9
Vaccine and infectious disease product sales included in the Pharmaceutical segment (3)			524.7				529.8
Pharmaceutical segment revenues			4,485.6				4,811.4
Vaccines(4) and Infectious Diseases:
Gardasil			262.0				390.4
ProQuad/M-M-R II/Varivax			252.0				225.6
RotaTeq			134.4				190.1
Zostavax			75.2				73.5
Hepatitis vaccines			34.5				33.9
Other vaccines			55.5				72.6
Primaxin			164.5				202.6
Isentress			148.1				46.5
Cancidas			138.7				148.9
Invanz			61.7				55.5
Crixivan/Stocrin			49.1				75.3
Other infectious disease			8.7				0.5
Vaccine and infectious disease product sales included in the Pharmaceutical segment (3)			(524.7	)			(529.8	)
Vaccines and Infectious Diseases segment revenues			859.7				985.6
Other segment revenues(5)			11.1				25.0
Total segment revenues			5,356.4				5,822.0
Other (6)			28.8				0.1
		$	5,385.2			$	5,822.1