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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1996
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____ to _____
COMMISSION FILE NO. 1-3305
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MERCK & CO., INC.
P.O. Box 100
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
Incorporated in New Jersey I.R.S. Employer
Identification No. 22-1109110
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
Common Stock New York and Philadelphia Stock Exchanges
(no par value)
Number of shares of Common Stock (no par value) outstanding as of February
29, 1996: 1,227,590,397.
Aggregate market value of Common Stock (no par value) held by non-
affiliates on December 31, 1995 based on closing price on February 29, 1996:
$81,379,000,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of Form 10-K
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Annual Report to stockholders for the fiscal year Parts I and II
ended December 31, 1995
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 23, 1996
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PART I
ITEM 1. BUSINESS.
Merck & Co., Inc. is a leading research-driven pharmaceutical company
that discovers, develops, manufactures and markets a broad range of human and
animal health products and services. The Company's industry segment is the
Human and Animal Health Products and Services segment, which includes Merck-
Medco Managed Care, Inc. (formerly Medco Containment Services, Inc.) ("Medco"),
acquired in November 1993.
The following table shows the sales of various classes of the
Company's products and services:
<TABLE>
<CAPTION>
($ IN MILLIONS) 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C>
Cardiovasculars $ 6,232.4 $ 5,351.6 $ 4,820.8
Anti-ulcerants 1,019.8 1,565.7 1,324.0
Antibiotics 848.3 827.4 868.7
Ophthalmologicals 570.6 482.3 454.6
Vaccines/biologicals 529.9 485.3 522.9
Benign prostate hypertrophy 405.8 322.7 187.4
Other Merck human health 266.5 381.3 596.2
Other human health 5,726.7 4,103.9 296.6
Animal health/crop protection 1,041.9 1,027.4 916.7
Specialty chemical 39.2 422.2 510.3
--------- --------- ---------
Total $16,681.1 $14,969.8 $10,498.2
========= ========= =========
</TABLE>
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
cardiovascular products, of which Vasotec (enalapril maleate), Zocor
(simvastatin), Mevacor (lovastatin), Prinivil (lisinopril) and Vaseretic
(enalapril maleate-hydrochlorothiazide) are the largest-selling and which
include Cozaar (losartan potassium) and Hyzaar (losartan potassium and
hydrochlorothiazide) launched in 1995; anti-ulcerants, of which Pepcid
(famotidine) is the largest-selling in 1995, succeeding Prilosec (omeprazole),
the largest-selling prior to its 1994 transfer to the Astra Merck joint venture;
antibiotics, of which Primaxin (imipenem-cilastatin sodium) and Noroxin
(norfloxacin) are the largest-selling; ophthalmologicals, of which Timoptic
(timolol maleate), Timoptic XE (timolol maleate ophthalmic gel forming solution)
and Trusopt (dorzolamide hydrochloride) are the largest-selling;
vaccines/biologicals, of which M-M-R II (measles, mumps and rubella virus
vaccine live), Recombivax HB (hepatitis B vaccine (recombinant)) and Varivax
(varicella virus vaccine live (Oka/Merck)), a live virus vaccine for the
prevention of chickenpox launched in 1995, are the largest-selling; benign
prostate hypertrophy which includes Proscar (finasteride), a treatment for
symptomatic benign prostate enlargement; and other Merck human health products
which include Fosamax (alendronate sodium), for treatment of osteoporosis in
postmenopausal women, which was cleared for marketing in the United States by
the U.S. Food and Drug Administration ("FDA") in September 1995 and launched in
October 1995, anti-inflammatories/analgesics, psychotherapeutics and a muscle
relaxant. Also included in this category are rebates and discounts on Company
pharmaceutical products. "Other human health" primarily includes Medco sales of
non-Merck products and Medco human health services, principally managed
prescription drug programs.
Animal health/crop protection products include animal medicinals used for
control and alleviation of disease in livestock, small animals and poultry.
These products are primarily antiparasitics, of which Ivomec (ivermectin), for
the control of internal and external parasites in livestock, and Heartgard-30
(ivermectin), for the prevention of canine heartworm disease, are the largest-
selling; crop protection products; coccidiostats for the treatment of poultry
diseases; and poultry breeding stock.
Specialty chemical products are used in health care, food processing, oil
exploration, paper, textiles and personal care. All specialty chemical
businesses were fully divested by the first quarter of 1995.
In 1994, the FDA cleared Trusopt, the first topical carbonic anhydrase
inhibitor for treatment of elevated intraocular pressure in patients with ocular
hypertension or open-angle glaucoma, for marketing in the United States.
Trusopt was launched in May 1995 in the United States and has been cleared for
marketing in 27 other countries. Fosamax, which was cleared for marketing in
the United States in September 1995, was also cleared for marketing in more than
30 other countries by the end of 1995. Regulatory filings for Fosamax have been
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made in all major markets. Fosamax is licensed to the Company by Istituto
Gentili of Italy. Commencing in 1993, marketing applications were submitted
worldwide for Cozaar and in the United States and France for Hyzaar. In 1994,
Cozaar was cleared for marketing in Denmark, Norway, Sweden, Switzerland and the
United Kingdom for the treatment of hypertension. In 1995, each of Cozaar and
Hyzaar were cleared for the Company to market in the United States for the
treatment of hypertension. Cozaar has now been cleared for marketing in most
major markets worldwide and the registration process for Hyzaar is continuing.
Pursuant to an agreement with E.I. du Pont de Nemours and Company ("DuPont"),
the Company has an exclusive license to market Cozaar and Hyzaar. Cozaar and
Hyzaar are trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE.
In addition, Pepcid AC Acid Controller (famotidine), which is discussed below,
was cleared for marketing in the United States in 1995. In March 1995, the FDA
licensed Varivax for use against chickenpox in healthy children, adolescents and
adults.
Also in 1995, four products received new indications which reinforced the
medical value of the products and expanded their potential use: Zocor reduces
cardiac events and mortality in hypercholesterolemic patients with coronary
heart disease; Mevacor slows progression of atherosclerosis in
hypercholesterolemic patients with coronary heart disease; Prinivil improves
survival when administered in acute myocardial infarction; and Proscar improves
symptoms and urine flow associated with benign prostate enlargement in a
majority of patients and maintains those improvements over an extended period of
time.
During 1994, the Company submitted licensing applications for Vaqta
(hepatitis A vaccine), a highly purified vaccine for the prevention of hepatitis
A, in Canada, China, the United Kingdom and Germany (where it was cleared and
launched in 1995), and the Product License Application for Vaqta was filed in
the United States. On January 31, 1996, an FDA Advisory Committee unanimously
endorsed Vaqta for licensure in the United States. The FDA is not, however,
bound by the recommendations of its Advisory Committee. Also, in January 1996,
the Company submitted a New Drug Application ("NDA") to the FDA for Crixivan
(indinavir sulfate). On March 1, 1996, an FDA Advisory Committee recommended
that the FDA, under the provisions of an accelerated review process, clear
Crixivan for marketing. On March 13, 1996, the FDA cleared Crixivan for
marketing in the United States for treatment of HIV infection in adults when
antiretroviral therapy is warranted.
In June 1993, the Company sold its Calgon Water Management business for
$307.5 million to English China Clays plc. In January 1995, the Company sold
its Calgon Vestal Laboratories business to Bristol-Myers Squibb for $261.5
million. In February 1995, the Company sold its Kelco business to Monsanto
Company for $1.075 billion. The decision to divest these specialty chemicals
businesses, which were not significant to the Company's financial position,
liquidity or results of operations, reflects the Company's intention to focus
its resources more fully on its core human and animal health business.
Following these divestitures, the Company is no longer engaged in the specialty
chemicals business.
In November 1993, the Company acquired all of the outstanding shares of
Medco for approximately $6.6 billion. The purchase price consisted of $2.4
billion in cash, 114.0 million common shares with a market value of $3.8 billion
and 36.1 million options valued at $387.1 million, net of tax. Medco
principally provides services designed to improve patient care and reduce
prescription drug benefit and other medical costs through managed prescription
drug programs.
In a continued effort to focus on its core business, in October 1995, the
Company sold Medco Behavioral Care Corporation ("MBC"), a managed mental health
care service business which was acquired as part of Medco, to MBC management and
Kohlberg Kravis Roberts & Co. for $340.0 million.
Effective April 1992, the Company, through the Merck Vaccine Division, and
Connaught Laboratories, Inc. ("Connaught"), an affiliate of Pasteur Merieux
Serums et Vaccins ("Pasteur Merieux"), which is part of the Rhone-Poulenc group,
agreed to collaborate on the development and marketing of combination pediatric
vaccines and to promote selected vaccines in the United States. The research and
marketing collaboration enables the companies to pool their resources to
expedite the development of vaccines combining several different antigens to
protect children against a variety of diseases, including Haemophilus influenzae
----------- ----------
type b, hepatitis B, diphtheria,
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tetanus, pertussis and poliomyelitis. In addition, the Company and Connaught
have agreed to promote a number of each other's vaccine products.
In May 1993, the Company, through the Merck Vaccine Division, and Pasteur
Merieux agreed to form a joint venture to market human vaccines and to
collaborate in the development of new combination vaccines for distribution in
the European Union ("EU") and the European Free Trade Association. In November
1994, after receiving the approval of the EU, the Company and Pasteur Merieux
contributed, among other things, their European vaccine businesses for equal
shares in the joint venture, known as Pasteur Merieux MSD, S.N.C. The joint
venture is subject to monitoring by the EU, to which the partners agreed to
certain undertakings in return for an exemption from European Competition Law,
effective until December 2006. The joint venture is active through affiliates
in Belgium, Denmark, Italy, Germany, Spain and the United Kingdom, and through
distributors throughout the rest of Europe.
In 1989, the Company and DuPont agreed to form a long-term research and
marketing collaboration to develop a new class of therapeutic agents for high
blood pressure and heart disease, discovered by DuPont, called angiotensin II
receptor antagonists, which includes Cozaar and Hyzaar. In return, the Company
provided DuPont marketing rights in the United States and Canada to its
prescription medicines, Sinemet (carbidopa-levodopa) and Sinemet CR (carbidopa-
levodopa) controlled release formulation.
Effective January 1991, the Company and DuPont entered into a joint venture
to form a worldwide pharmaceutical company for the research, marketing,
manufacturing and sale of pharmaceutical and imaging agent products. DuPont
contributed its entire worldwide pharmaceutical and radiopharmaceutical imaging
agents businesses to the joint venture and is providing administrative services.
The Company is providing research and development expertise, development funds,
certain European marketing rights to several of its prescription medicines,
international industry expertise and cash. In January 1995, the joint venture
began co-promotion of the Company's prescription medicines, Prinivil and
Prinzide (lisinopril and hydrochlorothiazide), in the United States.
In December 1994, the Company agreed to arrangements that, among other
things, eliminated the Company's right to offset the consequences of
disproportionate allocations of the DuPont Merck joint venture income and
expense against the Company's right to receive a disproportionate share of
income arising from its 1989 long-term research and marketing agreement with
DuPont. Accordingly, the Company recorded a $499.6 million provision for an
obligation to the joint venture. This obligation is a function of the favorable
performance of assets contributed by DuPont to the joint venture through
December 31, 1994 and certain Company contractual commitments. This obligation
will be discharged by the end of 1996. The elimination of the offset resulting
from the December 1994 agreement will have no material effect on the Company's
liquidity or future cash flows. The anticipated favorable results from the 1989
agreement are being reported when realized.
In 1989, the Company and Johnson & Johnson entered into a joint venture to
develop, market and manufacture consumer health-care products in the United
States. In January 1993, the Company and Johnson & Johnson finalized an
agreement to extend into Europe the U.S. joint venture. This European extension
currently markets and sells over-the-counter pharmaceutical products in France,
Germany, Spain and the United Kingdom. In January 1994, the Company and Johnson
& Johnson acquired all of the stock of Laboratoires J.P. Martin, a leading self-
medication business in France.
The Company submitted an NDA to the FDA for Pepcid AC Acid Controller
(famotidine), an over-the-counter form of the Company's ulcer medication Pepcid,
in January 1993, to be marketed in the United States by the joint venture. Since
January 1993, marketing approval applications for over-the-counter Pepcid have
been filed in 17 European and 7 other countries. In 1994, marketing licenses
for Pepcid AC were obtained in the United Kingdom, New Zealand and Cyprus. In
April 1995, the joint venture between the Company and Johnson & Johnson obtained
FDA clearance in the United States for marketing Pepcid AC Acid Controller.
Marketing licenses for Pepcid AC were also obtained in Australia, Holland, Hong
Kong, Iceland, Mexico and Sweden in 1995.
In 1982, the Company entered into an agreement with Astra AB ("Astra") to
develop and market Astra products in the United States. Under the first phase
of the agreement, the Company marketed three Astra
4
<PAGE>
products, Prilosec, Plendil (felodipine) and Tonocard (tocainide hydrochloride),
in exchange for a royalty. In July 1993, the Company's total sales of Astra
products reached the level that triggered the first step in the establishment of
a separate entity for operations related to Astra products in the United States.
On November 1, 1994, Astra paid the Company $820.0 million for an interest in a
joint venture that will be carried on in a company called Astra Merck Inc., in
which the Company and Astra each own a 50 percent share. This joint venture
develops and markets most new prescription medicines from Astra's research.
In 1995, Medco entered into a joint venture with Wyeth-Ayerst Laboratories,
a division of American Home Products Corporation, to develop, market and
implement health management programs for certain conditions, including women's
health. The joint venture company will introduce its first health management
programs in 1996.
In 1994, the Company established new subsidiaries in South Korea, Cyprus,
Holland and Germany, and established new branch offices in Chile, the
Philippines and Slovenia. The Company also established new representation
offices in Latvia, Croatia, Estonia and Sri Lanka, and established a new joint
venture company in China for manufacturing, sales and promotion of certain
products of the Company. In 1995, the Company established a representation
office in Lithuania.
Competition -- The markets in which the Company's business is conducted are
highly competitive. Such competition involves an intensive search for
technological innovations and the ability to market these innovations
effectively. With its long-standing emphasis on research and development, the
Company is well prepared to compete in the search for technological innovations.
Additional resources to meet competition include quality control, flexibility to
meet exact customer specifications, an efficient distribution system and a
strong technical information service. The Company is active in acquiring and
marketing products through joint ventures and licenses and has been expanding
its sales and marketing efforts to further address changing industry conditions.
However, the introduction of new products and processes by competitors may
result in price reductions and product replacements, even for products protected
by patents. For example, the number of compounds available to treat diseases
typically increases over time and has resulted in slowing the growth in sales of
certain of the Company's products.
In addition, particularly in the area of human pharmaceutical products,
legislation enacted in all states allows, encourages or, in a few instances, in
the absence of specific instructions from the prescribing physician, mandates
the use of "generic" products (those containing the same active chemical as an
innovator's product) rather than "brand-name" products. Governmental and other
pressures toward the dispensing of generic products have significantly reduced
the sales of certain of the Company's products no longer protected by patents,
such as Clinoril (sulindac) and Aldomet (methyldopa), and slowed the growth of
certain other products. In 1992, the Company formed a new division, West Point
Pharma, to market the generic form of its product Dolobid (diflunisal). In 1993,
West Point Pharma began marketing an additional 11 off-patent Company drugs in
more than 20 different packages. In December 1994, the Company entered into a
distribution agreement with Endo Laboratories, L.L.C. ("Endo"), a wholly-owned
subsidiary of The DuPont Merck Pharmaceutical Company, effectively transferring
most of its generics business to Endo.
Medco's pharmacy benefit management business is highly competitive. Medco
competes with other pharmacy benefit managers, insurance companies and other
providers of health care and/or administrators of health-care programs. Medco
competes primarily on the basis of its ability to design and administer
innovative programs which contain a plan sponsor's overall prescription drug
costs, its flexibility in handling integrated prescription drug programs
resulting from its ability to dispense drugs through mail service and act as
retail prescription drug manager, and the sophistication and quality of its
systems, procedures and services.
See also the description of the effect upon competition of the Drug Price
Competition and Patent Term Restoration Act of 1984 ("PTRA") on page 8.
It is generally the Company's position to limit individual product price
increases of its pharmaceutical products in the United States to the Consumer
Price Index ("CPI") plus 1 percent on an annual basis and to limit the net
weighted average price increase for the full human health pharmaceutical product
line to the general rate of inflation as measured by the CPI.
5
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Distribution -- Promotion of the Company's human and animal health products
is generally made by professional representatives. Customers for human health
products include drug wholesalers and retailers, hospitals, clinics,
governmental agencies, managed health-care providers such as health maintenance
organizations and other institutions. Customers for human health services
include corporations, labor unions, insurance companies, Blue Cross and Blue
Shield organizations, federal and state employee plans, health maintenance and
similar organizations. Customers for animal health/crop protection products
include veterinarians, distributors, wholesalers, retailers, feed manufacturers,
veterinary suppliers and laboratories.
Raw Materials -- Raw materials and supplies are normally available in
quantities adequate to meet the needs of the Company's business.
Government Regulation and Investigation -- The pharmaceutical industry is
subject to global regulation by country, state and local agencies. Of particular
importance is the FDA in the United States, which administers requirements
covering the testing, approval, safety, effectiveness, manufacturing, labeling
and marketing of prescription pharmaceuticals. In many cases, the FDA
requirements have increased the amount of time and money necessary to develop
new products and bring them to market in the United States, although revised
regulations are designed to reduce somewhat the time for approval of new
products. In 1992, the Prescription Drug User Fee Act was passed, under which
the FDA collects revenues through user fees. The FDA has pledged to devote these
revenues to its process for reviewing and approving applications for new drugs,
antibiotics and biological products.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health-care system, either nationally or at the
state level. Although a federal reform bill has not been enacted by Congress,
some states have passed reform legislation and further federal and state
developments are expected. In 1995, Congress did pass certain measures, which
were vetoed by President Clinton, restructuring the existing Medicaid program
and substituting block grants to the states for many federal entitlements,
including the Vaccines for Children program. The debate to reform the health-
care system is expected to be protracted and intense. Although the Company is
positioned to respond to evolving market forces, it cannot predict the outcome
or effect of legislation resulting from the reform process.
For some years the pharmaceutical industry has been under federal and state
oversight with the new drug approval system, drug safety, advertising and
promotion, drug purchasing and reimbursement programs and formularies variously
under review. The Company believes that it will continue to be able to bring new
drugs to market in this regulatory environment. One federal initiative to
contain costs is the prospective payment system, established under the Social
Security Amendments of 1983 to hold down the growth of Medicare payments to
hospitals, which provides a flat rate for reimbursement to hospitals in advance
of the care for patients. The system establishes a number of patient
classifications -- Diagnosis Related Group(s) ("DRG"). A hospital receives the
flat rate as full payment for each Medicare patient treated within a given DRG
regardless of whether the hospital's actual costs are higher or lower than the
flat rate. This system and other cost-cutting programs have caused hospitals,
health maintenance organizations and other customers of the Company to be more
cost conscious in their treatment programs and to implement cost-containment
measures, including cost containment for the drugs they administer.
Additionally, Congress and the regulatory agencies have sought to reduce
the cost of drugs paid for with federal funds. In 1990, the Company initiated
its Equal Access to Medicines Program ("EAMP") on its single source products,
under which it generally offered its "best price" discount to state Medicaid
programs that grant open access to the Company's products. The Omnibus Budget
Reconciliation Act of 1990 ("OBRA") largely reflects the Company's best price
approach. As a result of a national agreement, effective January 1, 1991,
signed by the Company with the Secretary of Health and Human Services and
administered by the Health Care Financing Administration ("HCFA") pursuant to
OBRA, Medicaid received a minimum rebate of 12.5 percent off average
manufacturer's price ("AMP") through September 30, 1992, and has received a
minimum rebate of 15.1 percent off AMP since January 1, 1996, on the Company's
outpatient drugs reimbursed under Medicaid. In conjunction with implementation
of the federal program under OBRA, the Company's separate EAMP agreements
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with individual states have been permitted to lapse or have been terminated.
Effective in 1992, the terms of the federal HCFA rebate agreement were generally
substituted for the EAMP agreements.
In January 1992, the Company announced that it would provide discounts
on its single-source prescription medicines to non-profit health centers for the
poor that are federally funded under sections 329-330 of the Public Health
Service Act that qualify for the Company's program and agree to assure access to
the Company's drugs. The discounts were largely based on those that the Company
provided Medicaid under the federal "best price" legislation. The discounts were
ultimately provided to such centers for single-source, outpatient prescription
drugs (not reimbursed by Medicaid) purchased directly from the Company by the
centers for their patients.
The Federal Veterans Health Care Act of 1992 was enacted on November
4, 1992, superseding the Company's Public Health Service initiative and
mandating Medicaid rebate-equivalent discounts on covered outpatient drugs
purchased by certain Public Health Service entities and "disproportionate share
hospitals" (hospitals meeting certain qualification criteria). The Act further
mandates minimum discounts of 24 percent off non-federal AMP to the Veterans
Administration, Federal Supply Schedule and certain other federal sector
purchasers on their pharmaceutical drug purchases.
The Omnibus Budget Reconciliation Act of 1993 established a new
Federal Vaccines for Children entitlement program, under which the U.S. Centers
for Disease Control and Prevention ("CDC") funds and purchases recommended
pediatric vaccines at a capped public sector price for the immunization of
Medicaid-eligible, uninsured, native American and certain underinsured children.
The Company was awarded four CDC contracts in 1995 for the supply of its
pediatric vaccines for this program.
The Company encounters similar regulatory and legislative issues in
most of the foreign countries where it does business. There, too, the primary
thrust of governmental inquiry and action is toward determining drug safety and
effectiveness, often with mechanisms for controlling the prices of prescription
drugs and the profits of prescription drug companies. The EU has adopted
directives concerning the classification, labeling, advertising and wholesale
distribution of medicinal products for human use. The Company's policies and
procedures are already consistent with the substance of these directives;
consequently, it is believed that they will not have any material effect on the
Company's business.
The Company is subject to the jurisdiction of various regulatory
agencies and is, therefore, subject to potential administrative actions. Such
actions may include product recalls, seizures of products and other civil and
criminal sanctions. Under certain circumstances, the Company may deem it
advisable to initiate product recalls voluntarily. Although it is difficult to
predict the ultimate effect of these activities and legislative, administrative
and regulatory requirements and proposals, the Company believes that its
development of new and improved products should enable it to compete effectively
within this environment.
There are extensive federal and state regulations applicable to the
practice of pharmacy and the administration of managed health-care programs.
Each state in which Medco operates a pharmacy has laws and regulations governing
its operation and the licensing of and standards of professional practice by its
pharmacists. These regulations are issued by an administrative body in each
state (typically, a pharmacy board), which is empowered to impose sanctions for
non-compliance. The policies and procedures of the Company comply with these
regulations.
Patents, Trademarks and Licenses -- Patent protection is considered,
in the aggregate, to be of material importance in the Company's marketing of
human and animal health products in the United States and in most major foreign
markets. Patents may cover products per se, pharmaceutical formulations,
processes for or intermediates useful in the manufacture of products or the uses
of products. Protection for individual products extends for varying periods in
accordance with the date of grant and the legal life of patents in the various
countries. The protection afforded, which may also vary from country to country,
depends upon the type of patent and its scope of coverage.
Patent portfolios developed for products introduced by the Company
normally provide marketing exclusivity. This is the case with the following
major products in the United States: Chibroxin (norfloxacin), Cozaar, Enacard
(enalapril maleate) for use in dogs, ivermectin-containing products, Fosamax,
Hyzaar, Mefoxin
7
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(cefoxitin sodium), Mevacor, Noroxin, PedvaxHIB (haemophilus b conjugate
-----------
vaccine), Pepcid, Primaxin, Proscar, Timoptic, Trusopt, Vaseretic, Vasotec and
Zocor. Prinivil is subject to a license to a third party and is not marketed
exclusively by the Company.
Product patent protection in the United States has expired for the
following human and animal pharmaceutical products: Aldomet, Aldoril (methyldopa
and hydrochlorothiazide), Amprol (amprolium), Blocadren (timolol maleate),
Clinoril, Decadron (dexamethasone), Diuril (chlorothiazide), Dolobid, Flexeril
(cyclobenzaprine hydrochloride), HydroDiuril (hydrochlorothiazide), Indocin
(indomethacin), Moduretic (amiloride HCl and hydrochlorothiazide), Sinemet, and
TBZ and Thibenzole (thiabendazole).
While the expiration of a product patent normally results in the loss
of marketing exclusivity for the covered product, commercial benefits may
continue to be derived from: (i) later-granted patents on processes and
intermediates related to the most economical method of manufacture of the active
ingredient of such product; (ii) patents relating to the use of such product;
(iii) patents relating to special compositions and formulations; and (iv)
marketing exclusivity that may be available under the PTRA. The effect of
product patent expiration also depends upon many other factors such as the
nature of the market and the position of the product in it, the growth of the
market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of new drug provisions of
the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other
countries.
The PTRA in the United States permits restoration of up to five years
of the patent term for new products to compensate for patent term lost during
the regulatory review process. Additionally, under the PTRA new chemical
entities approved after September 24, 1984 receive a period of five years'
exclusivity from the date of NDA approval, during which time an "abbreviated
NDA" or "paper NDA" may not be submitted to the FDA. Similarly, in the case of
non-new chemical entities approved after September 24, 1984, the applications
for which include the new data of clinical investigations conducted or sponsored
by the applicant essential to approval, no abbreviated NDA or paper NDA may
become effective before three years from NDA approval. However, the PTRA has
also resulted in a general increase in the number and use of generic products
marketed in the United States because the regulatory requirements for approval
of generic versions of off-patent pioneer drugs have significantly lessened.
Additionally, the PTRA has increased the incentive for abbreviated NDA
applicants to challenge the validity of U.S. patents claiming pioneer drugs
because such a challenge could result in an earlier effective approval date for
the generic version of the pioneer drug and a six-month period during which
other generic versions of the pioneer drug could not be marketed.
In Japan, a patent term restoration law enacted in 1988 provides,
under specific conditions, up to five years of additional patent life for
pharmaceuticals. In 1992, the Council of the European Communities published a
regulation which created supplementary protection certificates for medicinal
products. Thus, as of January 1993, certain medicinal products sold in the EU
became eligible for up to five years of market exclusivity after patent
expiration. However, this market exclusivity will expire throughout the EU 15
years after the first product approval in the EU. In February 1993, Canada
enacted Bill C91 which significantly modified Canadian patent law by eliminating
compulsory licensing of pharmaceutical products after December 20, 1991. Thus,
patented pharmaceutical products will have market exclusivity for the full 20-
year patent life in Canada.
The North American Free Trade Agreement was passed in November 1993.
Pursuant to the agreement, Mexico improved its patent law to meet international
standards and to provide full patent protection to pharmaceutical products. The
General Agreement on Tariff and Trade ("GATT") negotiations were concluded in
December 1993 and the U.S. implementing legislation was enacted in December
1994. The required changes in U.S. law became effective in June 1995. The GATT
implementing law changed the patent term of new inventions to 20 years from the
date of patent filing. Existing patents were granted a patent term of the
greater of 17 years from issue or 20 years from filing. Patents on several
products of the Company obtained longer life as a result. In a related matter,
the Company and several other research-based pharmaceutical companies received a
favorable ruling from a Federal District Court in a lawsuit which challenged the
U.S. Patent and Trademark Office ("PTO") and the FDA on their interpretation of
the new law. The Court held that the PTO and FDA were in error in interpreting
the GATT implementing legislation to disallow the adding of previously obtained
patent
8
<PAGE>
term restoration (as compensation for regulatory delays) to the new GATT 20-year
term. Patents on several products of the Company are impacted. The case is now
on appeal to the Federal Circuit Court.
The GATT agreement also requires countries to upgrade their
intellectual property laws to meet minimum international standards and to
provide full patent protection for pharmaceutical products not later than the
end of a ten-year transition period. Many countries are in the process of
upgrading their patent laws due to the GATT agreement.
The Generic Animal Drug and Patent Term Restoration Act, enacted in
November 1988, provides for the extension of term of patents claiming new animal
drugs approved after enactment. This legislation also establishes a process by
which generic versions of new animal drugs can be approved via an Abbreviated
New Animal Drug Application procedure. The provisions of this legislation, in
general, are parallel to those found in the PTRA covering human health products.
Worldwide, all of the Company's important products are sold under
trademarks that are considered in the aggregate to be of material importance.
Trademark protection continues in some countries as long as used; in other
countries, as long as registered. Registration is for fixed terms and can be
renewed indefinitely.
Royalties received during 1995 on patent and know-how licenses and
other rights amounted to $89.7 million. The Company also paid royalties
amounting to $146.3 million in 1995 under patent and know-how licenses it holds.
RESEARCH AND DEVELOPMENT
The Company's business is characterized by the introduction of new
products or new uses for existing products through a strong research and
development program. Approximately 6,300 people are employed in the Company's
research activities. Expenditures for the Company's research and development
programs were $1331.4 million in 1995, $1,230.6 million in 1994 and $1,172.8
million in 1993 and will be approximately $1.5 billion in 1996. The Company
maintains its ongoing commitment to research over a broad range of therapeutic
areas and clinical development in support of new products. Total expenditures
for the period 1986 through 1995 exceeded $9 billion with a compound annual
growth rate of 12 percent. Research and development costs incurred by the joint
ventures in which the Company participates, totaling $376.9 million in 1995, are
not included in the Company's consolidated research and development expenses.
The Company maintains a number of long-term exploratory and
fundamental research programs in biology and chemistry as well as research
programs directed toward product development. Projects related to human and
animal health are being carried on in various fields such as bacterial and viral
infections, cardiovascular functions, cancer, diabetes, inflammation, ulcer
therapy, kidney function, mental health, the nervous system, ophthalmic
research, prostate therapy, the respiratory system, bone diseases, animal
nutrition and production improvement, endoparasitic and ectoparasitic diseases
and poultry genetics.
In the development of human and animal health products, industry
practice and government regulations in the United States and most foreign
countries provide for the determination of effectiveness and safety of new
chemical compounds through pre-clinical tests and controlled clinical
evaluation. Before a new drug may be marketed in the United States, recorded
data on the experience so gained are included in the NDA, the biological Product
License Application or the New Animal Drug Application to the FDA for the
approval required. The development of certain other products, such as
insecticides, is also subject to government regulations covering safety and
efficacy in the United States and many foreign countries. There can be no
assurance that a compound that is the result of any particular program will
obtain the regulatory approvals necessary for it to be marketed.
New product candidates resulting from this research and development
program include Crixivan, an HIV protease inhibitor that blocks reproduction of
the AIDS virus for which an NDA was filed in January 1996 (see page 3);
Singulair (montelukast sodium), an oral leukotriene D4 receptor antagonist
for the treatment of asthma; and Aggrastat (tirofiban hydrochloride), an
intravenous platelet blocker for the treatment of cardiovascular
9
<PAGE>
disorders. Other products in development include a treatment for male pattern
baldness, a migraine treatment, an oral growth hormone secretagogue and certain
new vaccines.
EMPLOYEES
At the end of 1995, the Company had 45,200 employees worldwide, with
27,900 employed in the United States, including Puerto Rico. Approximately 23
percent of the Company's worldwide employees are represented by various
collective bargaining groups.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations. The Company has maintained a
leadership role in supporting environmental initiatives and fostering pollution
prevention by actions including the elimination of, or application of best
available technology to, air emissions of carcinogens or suspect carcinogens by
the Company, which was accomplished in 1993. At the end of 1995, projects were
in place that are expected to reduce by 90 percent from 1987 levels all
environmental releases and transfers of toxic chemicals from the Company's
facilities worldwide. In 1995, the Company incurred capital expenditures of
approximately $87.0 million for environmental control facilities. Capital
expenditures for this purpose are forecasted to exceed $300.0 million for the
years 1996 through 2000. In addition, the Company's operating and maintenance
expenditures for pollution control were approximately $68.5 million in 1995.
Expenditures for this purpose for the years 1996 through 2000 are forecasted to
exceed $420.0 million. The Company is also remediating environmental
contamination resulting from past industrial activity at certain of its sites.
Remediation expenditures were $17.7 million in 1995 and are estimated at $145.0
million for the years 1996 through 2000. The Company has been accruing for these
costs. Management does not believe that these expenditures should ultimately
result in a material adverse effect on the Company's financial position, results
of operations, liquidity or capital resources.
GEOGRAPHIC AREA INFORMATION
The Company's operations outside the United States are conducted
primarily through subsidiaries. Sales by subsidiaries outside the United States
were 32 percent of sales in 1995 and 1994 and 44 percent of sales in 1993. The
decline in the percentage of sales outside the United States since 1993 is due
to higher domestic sales resulting from the Medco acquisition.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its operations abroad. However, the Company closely reviews its methods of
operations, particularly in less developed countries, and adopts strategies
responsive to changing economic and political conditions.
Over the years, the Company has divested and restructured to reduce
its operational exposure in countries where economic conditions or government
policies make it difficult to earn fair returns. At the same time, the Company
is actively pursuing opportunities in Latin America, Eastern Europe, Asia
Pacific and other regions where changes in government, fiscal and regulatory
policies are making it possible for the Company to earn fair economic returns.
While none of these actions individually has significantly affected operations,
the overall impact has been favorable.
Financial information about geographic areas of the Company's business
is incorporated by reference to page 49 of the Company's 1995 Annual Report to
stockholders.
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located in Whitehouse Station,
New Jersey. The human and animal health business is conducted through divisional
or subsidiary headquarters located in Montvale,
10
<PAGE>
New Jersey; Rahway, New Jersey; Walpole, New Hampshire; West Point,
Pennsylvania; and Woodbridge, New Jersey. Principal research facilities for
human and animal health products are located in Rahway and West Point. The
Company also has production facilities for human and animal health products at
12 locations in the United States. Branch warehouses are conveniently located to
serve markets throughout the country. Medco operates its primary businesses
through owned or leased facilities in various locations throughout the United
States. Outside the United States, through subsidiaries, the Company owns or has
an interest in manufacturing plants or other properties in Australia, Canada and
many countries in Western Europe.
Capital expenditures for 1995 were $1,005.5 million compared with
$1,009.3 million for 1994. In the United States, these amounted to $793.5
million for 1995 and $772.1 million for 1994. Abroad, such expenditures amounted
to $212.0 million for 1995 and $237.2 million for 1994.
The Company and its subsidiaries own their principal facilities and
manufacturing plants under titles which they consider to be satisfactory. The
Company considers that its properties are in good operating condition and that
its machinery and equipment have been well maintained. Plants for the
manufacture of products are suitable for their intended purposes and have
capacities adequate for current and projected needs for existing Company
products. Some capacity of the plants is being converted, with any needed
modification, to the requirements of newly introduced and future products.
ITEM 3. LEGAL PROCEEDINGS.
The Company, including Medco, is party to a number of antitrust suits,
four of which have been certified as class actions (one at the federal level and
three at the state level), instituted by most of the nation's retail pharmacies
and consumers in several states, alleging conspiracies in restraint of trade and
challenging the pricing and/or purchasing practices of the Company and Medco,
respectively. A significant number of other pharmaceutical companies and
wholesalers have also been sued in the same or similar litigation. These
actions, except for several actions pending in state courts, have been
consolidated for pre-trial purposes in the United States District Court for the
Northern District of Illinois. The Company and several other defendants have
entered into an agreement, subject to court approval, to settle the federal
class action alleging conspiracy, which represents the single largest group of
retail pharmacy claims, pursuant to which the Company would pay $51.8 million,
payable in four equal annual installments. The Company has not engaged in any
conspiracy and no admission of wrongdoing has been made or is included in the
agreement, which was entered into in order to avoid the cost of litigation and
the risk of an inaccurate adverse verdict by a jury presented by a case of this
size and complexity. While it is not feasible to predict the final outcome of
these proceedings, in the opinion of the Company, such proceedings should
not ultimately result in any liability which would have a material adverse
effect on the financial position, liquidity or results of operations of the
Company. In addition, prior to the Company's merger with Medco, the Company and
Medco were named in an action by a retail pharmacy seeking to enjoin such
merger. This proceeding was settled by the Company in March 1995. The settlement
includes a consent order that imposes certain restrictions on the exchange of
information between the Company and Medco and requires that Medco offer an open
formulary. In the opinion of the Company, compliance with the consent order will
not have a material adverse effect on the financial position, liquidity or
results of operations of the Company.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. These proceedings seek to require the operators of hazardous
waste disposal facilities, transporters of waste to the sites and generators of
hazardous waste disposed of at the sites to clean up the sites or to reimburse
the government for cleanup costs. The Company has been made a party to these
proceedings as an alleged generator of waste disposed of at the sites. In each
case, the government alleges that the defendants are jointly and severally
liable for the cleanup costs. Although joint and several liability is alleged,
these proceedings are frequently resolved so that the allocation of cleanup
costs among the parties more nearly reflects the relative contributions of the
parties to the site situation. The Company's potential liability varies greatly
from site to site. For some sites the potential liability is de minimis and for
others the costs of cleanup have not yet been determined. While it is not
feasible to predict the outcome of many of these proceedings brought by state
agencies or private litigants, in the opinion of the Company, such proceedings
should
11
<PAGE>
not ultimately result in any liability which would have a material adverse
effect on the financial position, results of operations, liquidity or capital
resources of the Company. The Company has accrued for these costs and such
accruals do not include any reduction for anticipated recoveries of cleanup
costs from insurers, former site owners or operators or other recalcitrant
potentially responsible parties.
In May 1994, Kelco received a Notice of Violation from Environmental
Protection Agency ("EPA") Region 9 alleging that Kelco failed to obtain agency
pre-construction approvals required by the Clean Air Act for physical and/or
process modifications made at its San Diego facility. A tentative settlement of
this matter with the EPA includes (i) a $1.85 million civil penalty and (ii)
capital improvements to be made at the facility in the amount of approximately
$5 million to establish satisfactory environmental controls. Under the terms of
the Kelco Sale Agreement, the Company retained responsibility for the cost of
the settlement and has been actively involved in the negotiations with the EPA.
In November 1994, the Company, along with other pharmaceutical
manufacturers and pharmaceutical benefits managers ("PBMs"), received a notice
from the Federal Trade Commission ("FTC") that the FTC intended to investigate
agreements, alliances, activities and acquisitions involving pharmaceutical
manufacturers and PBMs. The Company has cooperated fully with the FTC
investigation, and believes that it is currently operating in all material
respects in accordance with applicable standards. Accordingly, although the
Company cannot predict the outcome of the investigation, it does not believe
that the result of the investigation will have a material adverse effect on the
financial position, liquidity or results of operations of the Company.
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 these proceedings,
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 which would have a material adverse effect on the financial position,
liquidity or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
_________________
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1996)
RAYMOND V. GILMARTIN -- Age 54
November, 1994 -- Chairman of the Board, President and Chief Executive
Officer
June, 1994 -- President and Chief Executive Officer
Prior to June, 1994, Mr. Gilmartin was President and Chief Executive Officer
(1989 to 1992) and Chairman, President and Chief Executive Officer (1992 to
1994) of Becton Dickinson and Company (medical supplies and devices and
diagnostic systems).
DAVID W. ANSTICE -- Age 47
September, 1994 -- President, Human Health-U.S./Canada -- responsible for
the Company's prescription drug business in the United States and Canada,
worldwide coordination of marketing policies and medical and scientific
affairs
January, 1994 -- President, Human Health-Europe
January, 1993 -- Senior Vice President, Merck Human Health Division (MHHD)-
Europe
April, 1991 -- Senior Vice President, MHHD and President, U.S. Human Health
July, 1989 -- Vice President, Marketing, Merck Sharp & Dohme Division
CELIA A. COLBERT -- Age 39
November, 1993 -- Secretary and Assistant General Counsel
September, 1993 -- Secretary
February, 1993 -- Secretary, New Products Committee
October, 1992 -- Counsel, Corporate Staff
May, 1991 -- Associate Counsel, Corporate Staff
November, 1988 -- Senior Attorney, Corporate Staff
CLIFFORD S. CRAMER -- Age 44
July, 1993 -- Vice President, Planning and Development -- responsible for
strategic planning and external growth activities
April, 1990 -- Executive Director, Corporate Development
STEVEN M. DARIEN -- Age 53
April, 1990 -- Vice President, Human Resources
13
<PAGE>
CAROLINE DORSA -- Age 36
January, 1994 -- Treasurer
July, 1993 -- Executive Director, Customer Marketing, U. S. Human Health
(USHH)
June, 1992 -- Executive Director, Pricing and Strategic Planning, USHH
April, 1990 -- Executive Director, Financial Evaluation and Analysis
R. GORDON DOUGLAS JR. -- Age 61
January, 1994 -- President, Merck Vaccines -- responsible for all functional
areas, including development, manufacture and marketing, of the vaccines
business
April, 1991 -- President, Merck Vaccine Division
October, 1989 -- Senior Vice President, Medical & Scientific Affairs
KENNETH C. FRAZIER -- Age 41
April, 1994 -- Vice President, Public Affairs
May, 1992 -- Vice President, General Counsel and Secretary, Astra/Merck
Group
Prior to May, 1992, Mr. Frazier was a partner at the law firm Drinker,
Biddle & Reath for more than five years.
BERNARD J. KELLEY -- Age 54
December, 1993 -- President, Merck Manufacturing Division (MMD)
August, 1993 -- Senior Vice President, Operations, MMD
September, 1991 -- Senior Vice President, Administration, Planning and
Quality, MMD
September, 1989 -- Vice President, Business Affairs, Merck AgVet Division
JUDY C. LEWENT -- Age 47
September, 1994 -- Senior Vice President and Chief Financial Officer --
responsible for financial and public affairs functions, The Merck Company
Foundation, internal auditing and the Company's joint venture relationships
December, 1993 -- Senior Vice President and Chief Financial Officer --
responsible for financial and public affairs functions and The Merck
Company Foundation
June, 1993 -- Senior Vice President, Chief Financial Officer and Controller
January, 1993 -- Senior Vice President and Chief Financial Officer
April, 1990 -- Vice President, Finance and Chief Financial Officer
14
<PAGE>
HENRI LIPMANOWICZ -- Age 57
January, 1995 -- President, Human Health-Intercontinental Region and Japan
-- responsible for the Company's prescription drug operations in the Near
East, the Far East, Eastern Europe, Africa, Latin America, Australia, New
Zealand and Japan
January, 1994 -- President, Human Health-Merck Intercontinental Region
(MIR)/Japan
June, 1991 -- Senior Vice President, MIR, Merck Human Health Division
April, 1989 -- Vice President, Mid-Europe, Merck Sharp & Dohme International
Division
PER G. H. LOFBERG -- Age 48
December, 1995 -- President, Merck-Medco Managed Care, Inc., a wholly-owned
subsidiary of the Company
January, 1994 -- President, Merck-Medco Managed Care Division
April, 1991 -- Senior Executive Vice President, Strategic Planning and
Marketing, Medco Containment Services, Inc. (Medco)
Prior to April, 1991, Mr. Lofberg was an executive officer of Medco for more
than five years.
MARY M. MCDONALD -- Age 51
January, 1993 -- Senior Vice President and General Counsel
April, 1991 -- Vice President and General Counsel
May, 1990 -- Assistant General Counsel and Counsel, Merck Sharp & Dohme
International Division
PETER E. NUGENT -- Age 53
September, 1993 -- Vice President, Controller
July, 1989 -- Vice President, Corporate Taxes
JOHN M. PRESTON -- Age 49
April, 1993 -- President, Merck AgVet Division
July, 1992 -- Executive Vice President, Merck AgVet Division
September, 1991 -- Vice President, Business Affairs, MSD AGVET Division
February, 1991 -- Executive Director, Technical Services, MSD AGVET Division
15
<PAGE>
EDWARD M. SCOLNICK -- Age 55
September, 1994 -- Executive Vice President, Science and Technology and
President, Merck Research Laboratories (MRL) -- responsible for worldwide
research function and activities of Merck Manufacturing Division, computer
resources and corporate licensing
December, 1993 -- Executive Vice President, Science and Technology and
President, MRL -- responsible for worldwide research function and
activities of Merck Manufacturing Division and computer resources
January, 1993 -- Executive Vice President and President, MRL -- responsible
for worldwide research function and activities of Merck AgVet Division and
computer resources
April, 1991 -- Senior Vice President and President, MRL -- responsible for
worldwide research function and activities of Merck Frosst Canada, Inc.
May, 1985 -- President, Merck Sharp & Dohme Research Laboratories Division
BENNETT M. SHAPIRO -- Age 56
September, 1990 -- Executive Vice President, Worldwide Basic Research, Merck
Research Laboratories
PER WOLD-OLSEN -- Age 48
September, 1994 -- President, Human Health-Europe -- responsible for the
Company's European prescription drug business
January, 1994 -- Senior Vice President, Worldwide Human Health Marketing
September, 1991 -- Senior Vice President, Human Health Marketing, Merck
Human Health Division (MHHD)
June, 1991 -- Vice President, Human Health Marketing, MHHD
January, 1990 -- Regional Director-Scandinavia and Vice President, MSD
Europe
All officers listed above serve at the pleasure of the Board of Directors.
None of these officers was elected pursuant to any arrangement or understanding
between the officer and the Board. There are no family relationships among the
officers listed above.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required for this item is incorporated by reference to
pages 37 and 51 of the Company's 1995 Annual Report to stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The information required for this item is incorporated by reference to the
data for the last five fiscal years of the Company included under Results for
Year and Year-End Position in the Selected Financial Data included on page 51 of
the Company's 1995 Annual Report to stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required for this item is incorporated by reference to
pages 28 through 37 of the Company's 1995 Annual Report to stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(A) FINANCIAL STATEMENTS
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1995 and the report dated January 23, 1996 of Arthur Andersen LLP,
independent public accountants, are incorporated by reference to pages 38
through 49 and page 50 of the Company's 1995 Annual Report to stockholders.
(B) SUPPLEMENTARY DATA
Selected quarterly financial data for 1995 and 1994 are incorporated by
reference to page 37 of the Company's 1995 Annual Report to stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The required information on directors and nominees is incorporated by
reference to pages 2 (beginning with the caption "Election of Directors")
through 5 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 23, 1996. Information on executive officers is set
forth in Part I of this document on pages 13 through 16 .
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference to
pages 7 and 8 (beginning with the caption "Compensation and Benefits Committee
Report on Executive Compensation") to 19 of the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held April 23, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item is incorporated by reference to page
8 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held April 23, 1996.
17
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated by reference to page
7 (under the caption "Relationships with Outside Firms") of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held April 23, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS FORM 10-K
Financial Statements:
Consolidated statement of income for the years ended December 31, 1995,
1994 and 1993
Consolidated statement of retained earnings for the years ended
December 31, 1995, 1994 and 1993
Consolidated balance sheet, December 31, 1995 and 1994
Consolidated statement of cash flows for the years ended December 31,
1995, 1994 and 1993
Notes to financial statements
Report of independent public accountants
This information is incorporated by reference to the Company's 1995 Annual
Report to stockholders, as noted on page 17 of this document.
The registrant is primarily an operating company and all of the
subsidiaries included in the consolidated financial statements filed are wholly
owned except for minority interests in six consolidated subsidiaries.
Schedules are omitted because they are either not required or not
applicable.
18
<PAGE>
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <C>
3(a) -- Restated Certificate of Incorporation of *
Merck & Co., Inc. (May 6, 1992)
3(b) -- By-Laws of Merck & Co., Inc. (as amended **
effective June 9, 1994)
10(a) -- Executive Incentive Plan (as amended Filed with this document
effective February 27, 1996)
10(b) -- 1981 Incentive Stock Option Plan *
(as amended effective May 6, 1992)
10(c) -- 1981 Nonqualified Stock Option Plan (as *
amended effective May 6, 1992)
10(d) -- 1987 Incentive Stock Plan (as amended *
effective May 6, 1992)
10(e) -- 1991 Incentive Stock Plan (as amended **
effective February 23, 1994)
10(f) -- 1996 Incentive Stock Plan (as amended Filed with this document
on October 24, 1995, effective
January 1, 1996)
10(g) -- Non-Employee Directors Stock Option Plan *
(as adopted on April 28, 1992 and
restated May 6, 1992)
10(h) -- Supplemental Retirement Plan (as amended **
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of *
Merck & Co., Inc. (as adopted on
September 22, 1987, effective
April 29, 1987)
10(j) -- Plan for Deferred Payment of Directors' **
Compensation (as amended effective
April 1, 1994)
10(k) -- Medco Class A 1983 Non-Qualified Stock ***
Option Plan
10(l) -- Medco Class A Non-Qualified Stock Option Filed with this document
Agreement dated July 1, 1991 between
Medco and Per G.H. Lofberg (together with
a list showing the number of options held)
10(m) -- Form of Stock Option Agreement ***
dated October 14, 1992 between Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(n) -- Employment Agreement between Per G.H. ****
Lofberg and Medco dated April 1, 1993
10(o) -- Amendment dated July 27, 1993 to . Filed with this document
Employment Agreement between Per G.H.
Lofberg and Medco dated April 1, 1993
10(p) -- Employment Agreement between Raymond V. Incorporated by reference to Form
Gilmartin and the Company dated 10-Q Quarterly Report for the
June 9, 1994 period ended June 30, 1994
11 -- Computation of Earnings per Common Share Filed with this document
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <C>
13 -- 1995 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
27 -- Financial Data Schedule Filed with this document
</TABLE>
* Incorporated by reference to Form 10-K Annual Report for the fiscal year
ended December 31, 1992
** Incorporated by reference to Form 10-K Annual Report for the fiscal year
ended December 31, 1994
*** Incorporated by reference to Post Effective Amendment No. 1 to
Registration Statement on Form S-8 to Form S-4 Registration Statement
(No. 33-50667)
**** Incorporated by reference to Form 10-K Annual Report of Medco Containment
Services, Inc. for the fiscal year ended June 30, 1993
None of the instruments defining the rights of holders of long-term debt
of the Company and its subsidiaries (Exhibit Number 4) are being filed since the
total amount of securities authorized under any of such instruments taken
individually does not exceed 10 percent of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company agrees to furnish a copy
of such instruments to the Commission upon request.
Copies of the exhibits may be obtained by stockholders upon written request
directed to the Stockholder Services Department, Merck & Co., Inc., P.O. Box
100--WS 3AB-40, Whitehouse Station, New Jersey 08889-0100 accompanied by check
in the amount of $5.00 payable to Merck & Co., Inc. to cover processing and
mailing costs.
(C) REPORTS ON FORM 8-K
During the three-month period ended December 31, 1995, the Company filed
two Current Reports on Form 8-K:
(i) In a report dated October 2, 1995 and filed October 4, 1995, the
Company announced that the FDA cleared for marketing Fosamax to treat
osteoporosis in women after menopause.
(ii) In a report dated November 28, 1995 and filed December 4, 1995,
the Company announced the approval by its Board of Directors of a new $3
billion treasury stock purchase program.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
MERCK & CO., INC.
Dated: March 18, 1996
By RAYMOND V. GILMARTIN
(Chairman of the Board,
President and Chief
Executive Officer)
By /s/ CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
RAYMOND V. GILMARTIN Chairman of the Board, March 18, 1996
President and Chief Executive
Officer; Principal Executive
Officer; Director
JUDY C. LEWENT Senior Vice President and Chief March 18, 1996
Financial Officer; Principal
Financial Officer
PETER E. NUGENT Vice President, Controller; March 18, 1996
Principal Accounting Officer
DEREK BIRKIN Director March 18, 1996
LAWRENCE A. BOSSIDY Director March 18, 1996
WILLIAM G. BOWEN Director March 18, 1996
JOHNNETTA B. COLE Director March 18, 1996
CAROLYNE K. DAVIS Director March 18, 1996
LLOYD C. ELAM Director March 18, 1996
CHARLES E. EXLEY, JR. Director March 18, 1996
WILLIAM N. KELLEY Director March 18, 1996
SAMUEL O. THIER Director March 18, 1996
DENNIS WEATHERSTONE Director March 18, 1996
CELIA A. COLBERT, BY SIGNING HER NAME HERETO, DOES HEREBY SIGN THIS DOCUMENT
PURSUANT TO POWERS OF ATTORNEY DULY EXECUTED BY THE PERSONS NAMED, FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AS AN EXHIBIT TO THIS DOCUMENT, ON BEHALF
OF SUCH PERSONS, ALL IN THE CAPACITIES AND ON THE DATE STATED, SUCH PERSONS
INCLUDING A MAJORITY OF THE DIRECTORS OF THE COMPANY.
By /s/ CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
21
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (Nos. 33-21087, 33-21088,
33-36101, 33-40177, 33-51235, 33-53463, 33-64273 and 33-64665), on Form S-4 (No.
33-50667) and on Form S-3 (Nos. 33-39349, 33-60322, 33-51785 and 33-57421). It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1995 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
New York, New York
March 18, 1996
22
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C>
3(a) -- Restated Certificate of Incorporation of *
Merck & Co., Inc. (May 6, 1992)
3(b) -- By-Laws of Merck & Co., Inc. (as amended **
effective June 9, 1994)
10(a) -- Executive Incentive Plan (as amended Filed with this document
effective February 27, 1996)
10(b) -- 1981 Incentive Stock Option Plan *
(as amended effective May 6, 1992)
10(c) -- 1981 Nonqualified Stock Option Plan (as *
amended effective May 6, 1992)
10(d) -- 1987 Incentive Stock Plan (as amended *
effective May 6, 1992)
10(e) -- 1991 Incentive Stock Plan (as amended **
effective February 23, 1994)
10(f) -- 1996 Incentive Stock Plan (as amended Filed with this document
on October 24, 1995, effective
January 1, 1996)
10(g) -- Non-Employee Directors Stock Option Plan *
(as adopted on April 28, 1992 and
restated May 6, 1992)
10(h) -- Supplemental Retirement Plan (as amended **
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of *
Merck & Co., Inc. (as adopted on
September 22, 1987, effective
April 29, 1987)
10(j) -- Plan for Deferred Payment of Directors' **
Compensation (as amended effective
April 1, 1994)
10(k) -- Medco Class A 1983 Non-Qualified Stock ***
Option Plan
10(l) -- Medco Class A Non-Qualified Stock Option Filed with this document
Agreement dated July 1, 1991 between
Medco and Per G.H. Lofberg (together with
a list showing the number of options held)
10(m) -- Form of Stock Option Agreement ***
dated October 14, 1992 between Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(n) -- Employment Agreement between Per G.H. ****
Lofberg and Medco dated April 1, 1993
10(o) -- Amendment dated July 27, 1993 to. Filed with this document
Employment Agreement between Per G.H.
Lofberg and Medco dated April 1, 1993
10(p) -- Employment Agreement between Raymond V. Incorporated by reference to Form
Gilmartin and the Company dated 10-Q Quarterly Report for the
June 9, 1994 period ended June 30, 1994
11 -- Computation of Earnings per Common Share Filed with this document
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C>
13 -- 1995 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
27 -- Financial Data Schedule Filed with this document
</TABLE>
* Incorporated by reference to Form 10-K Annual Report for the fiscal year
ended December 31, 1992
** Incorporated by reference to Form 10-K Annual Report for the fiscal year
ended December 31, 1994
*** Incorporated by reference to Post Effective Amendment No. 1 to
Registration Statement on Form S-8 to Form S-4 Registration Statement
(No. 33-50667)
**** Incorporated by reference to Form 10-K Annual Report of Medco Containment
Services, Inc. for the fiscal year ended June 30, 1993
<PAGE>
EXHIBIT 10(a)
MERCK & CO., INC.
EXECUTIVE INCENTIVE PLAN
(As Amended Effective February 27, 1996)
<PAGE>
TABLE OF CONTENTS
Page
----
I. PURPOSE 1
II. DEFINITIONS 1
III. ADMINISTRATION 2
IV. ELIGIBILITY 2
V. AWARD FUND 2
VI. AWARDS 2
VII. DEFERRAL OF AWARDS 3
VIII. LIMITATIONS 3
IX. LIMITATION OF ACTIONS 3
X. CLAIMS PROCEDURES 4
XI. PLAN AMENDMENT, SUSPENSION OR TERMINATION 4
<PAGE>
I. PURPOSE
This Plan is designed to provide for awards to selected salaried employees
in managerial or other important positions, who, individually or as members of a
group, contribute in a substantial degree to the success of the Company, and who
are in a position to have a direct and significant impact on the growth and
success of the Company, thus affording to them a means of participating in that
success and an incentive to contribute further to that success.
II. DEFINITIONS
The following words and phrases shall have the meanings set forth below:
(1) "Administrative Regulations" shall mean the procedures and regulations
established by the Committee pursuant to Section III hereof for the purpose of
administering the Plan.
(2) "Award Fund" shall mean the aggregate amount made available in any
given year pursuant to Section V hereof from which awards determined under
Section VI hereof may be made.
(3) "Committee" shall mean the Compensation and Benefits Committee of the
Board of Directors of the Company, the membership of which shall be members of
the Board who are not Employees.
(4) "Company" shall mean Merck & Co., Inc. or any successor thereto.
(5) "Deferred Award" shall mean that portion of a Participant's award the
payment of which he/she has elected to defer in accordance with the provisions
of Section VII hereof.
(6) "Employee" shall mean any salaried employee of the Company, a
Subsidiary or an affiliate, the Merck Institute for Therapeutic Research,
whether full-time or part-time and whether or not an officer or director,
excluding, however, any temporary employee or any person serving the Company
only in the capacity of director.
(7) "Net Income" shall mean the amount reported by the Company as
consolidated income before extraordinary items and the cumulative effect of
accounting changes, adjusted, however, by adding any amount which has been
expensed (after taxes) for awards under the Plan in computing such Net Income.
(8) "Participant" shall mean an Employee who is subject to Section 16 of
the Securities Exchange Act of 1934, as amended, or who has been designated by
the Committee to participate in the Plan pursuant to Section IV hereof.
(9) "Plan" shall mean this Merck & Co., Inc. Executive Incentive Plan as
amended from time to time.
(10) "Subsidiary" shall mean any corporation, domestic or foreign (other
than the Company), 50% or more of the total voting power of which is held by the
Company and/or a Subsidiary or Subsidiaries.
-1-
<PAGE>
III. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee may, by
majority vote, establish Administrative Regulations as it deems necessary for
the proper administration of the Plan and make such determinations and take such
action in connection with or in relation to the Plan as it deems necessary.
Each determination made by the Committee shall be final, binding and conclusive
for all purposes and upon all persons. The Committee may rely conclusively on
the determinations made by the Company's independent public accountants.
IV. ELIGIBILITY
Those employees who are subject to Section 16 of the Securities Exchange Act
of 1934, as amended, and those employees who are key officers or management
employees of the Company, a Subsidiary or affiliate who, in the opinion of the
Committee, are in a position to have a direct and significant impact on
achievement of the Company's long term objectives are eligible to participate in
the Plan.
V. AWARD FUND
An Award Fund shall be established at 2.5% of Net Income. No amounts are
paid under the Plan for any year unless the Company has Net Income. However,
the Committee reserves the right to decrease the amount of the Award Fund.
VI. AWARDS
The chief executive officer of the Company may receive an award not to
exceed 10% of the maximum Award Fund for that year. All other Participants may
receive an award not to exceed that amount which is 90% of the maximum Award
Fund for that year divided by the number of Participants other than the chief
executive officer. The Committee, however, reserves the right to pay to the
chief executive officer less than 10% of the maximum Award Fund, and to the
other Participants, less than that amount which is 90% of the maximum Award Fund
divided by the number of Participants other than the chief executive officer.
All such determinations, except in the case of the award for the chief executive
officer of the Company, shall be made after considering the recommendations of
the chief executive officer and such other matters as the Committee shall deem
relevant. In making such determinations, the Committee may, in addition to
achievement of short-term business objectives, take into account achievement by
key executives of long-term goals of the Company. All awards shall be charged
against the Award Fund and may be paid in cash or stock (as the Committee may
determine).
Awards paid in stock shall be charged against the Award Fund using the
average of the high and low prices of Merck common stock on the New York Stock
Exchange composite tape on the date the Award is paid or deferred. The number
of shares authorized for distribution under this Plan each year is one-tenth of
one-percent of outstanding shares of Merck common stock on the last business day
of the preceding calendar year plus any shares authorized under this Plan in
previous years but not used, minus any shares distributed under the Merck
Deferral Program after April 26, 1994. These shares may be delivered from
authorized but unissued shares or from the treasury. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, rights offering, or any other change in the
corporate structure or shares of the Company, the Committee shall make such
adjustment, if any, as it may deem appropriate in the number and kind of shares
authorized by the EIP.
-2-
<PAGE>
VII. DEFERRAL OF AWARDS
A Participant may elect, subject to the approval of, and within limits
established by, the Committee, to designate all or any portion of an award as a
Deferred Award under the Merck & Co., Inc. Deferral Program, which is
incorporated herein by reference. Such election shall be irrevocable. Any
portion of an award which is not so deferred shall be paid as soon as
practicable after approval of such award by the Committee.
VIII. LIMITATIONS
Although this Plan sets the maximum amount which may be paid to a
participant in any given year, the Committee reserves the right to decrease the
maximum or eliminate any award to any participant. No director, officer,
employee of the Company nor any other person shall have the authority to enter
into any agreement with any person for the making or payment of an award or to
make any representation or warranty with respect thereto.
Neither the action of the Company in establishing the Plan nor any action
taken by it or by the Committee under the provisions hereof, nor any provision
of the Plan, shall be construed as giving to any Employee the right to be
retained in the employ of the Company, its Subsidiaries or affiliates.
The Company may offset against any payments to be made to a Participant or
his/her beneficiary under this Plan any amounts owing to the Company, its
Subsidiaries or affiliates from the Participant for any reason.
IX. LIMITATION OF ACTIONS
Every asserted right of action by or on behalf of the Company or by or on
behalf of any stockholder against any past, present or future member of the
Committee or director, officer or Employee of the Company or any Subsidiary or
affiliate thereof, arising out of or in connection with this Plan, shall,
irrespective of the place where such right of action may arise or be asserted
and irrespective of the place of residence of any such member director, officer
or Employee, cease and be barred upon the expiration of three years (i) from the
date of the alleged act or omission in respect of which such right of action
arises or (ii) from the date upon which the Company's Annual Report to
stockholders setting forth the aggregate amount of the awards to all or any part
of which such action may relate is made generally available to stockholders,
whichever date is later; and every asserted right of action by or on behalf of
any Employee, past, present or future, or any beneficiary, spouse, child or
legal representative thereof, against the Company or any Subsidiary or affiliate
thereof, arising out of or in connection with this Plan, shall, irrespective of
the place where such right of action may arise or be asserted, cease and be
barred by the expiration of three years from the date of the alleged act or
omission in respect of which such right of action arises.
-3-
<PAGE>
X. CLAIMS PROCEDURE
In the case of any Participant (whether active, retired or terminated) or
beneficiary whose claim for an award under this Plan has been denied, the
Company shall provide adequate notice in writing of such adverse determination
setting forth the specific reasons for such denial in a manner calculated to be
understood by the recipient thereof. Such Participant or beneficiary shall be
afforded a reasonable opportunity for a full and fair review of the decision
denying the claim by the Committee.
XI. PLAN AMENDMENT, SUSPENSION OR TERMINATION
The Board of Directors or the stockholders may discontinue the Plan at any
time and may from time to time amend or revise the terms of the Plan as
permitted by applicable statutes; provided, however, that no such
discontinuance, amendment or revision shall materially adversely affect any
right or obligation with respect to any award theretofore made. Any amendment
or revision which increases the cost of the Plan by a substantial proportion may
be made only by the stockholders. The Plan will continue in operation until
discontinued as herein provided.
-4-
<PAGE>
================================================================================
EXHIBIT 10(f)
MERCK & CO., INC.
1996 INCENTIVE STOCK PLAN
ADOPTED 4/25/95
AMENDED 10/24/95
EFFECTIVE 1/1/96
================================================================================
<PAGE>
1996 INCENTIVE STOCK PLAN
The 1996 Incentive Stock Plan ("ISP"), effective January 1, 1996, is
established to encourage employees of Merck & Co., Inc. (the "Company"), its
subsidiaries, its affiliates, its joint ventures and the Merck Institute for
Therapeutic Research to acquire Common Stock in the Company. It is believed that
the ISP will stimulate employees' efforts on the Company's behalf, will tend to
maintain and strengthen their desire to remain with the Company, will be in the
interest of the Company and its Stockholders, and will encourage such employees
to have a greater personal financial investment in the Company through ownership
of its Common Stock.
1. ADMINISTRATION
The ISP shall be administered by the Compensation and Benefits
Committee of the Board of Directors of the Company (the "Committee"). The
Committee is authorized, subject to the provisions of the ISP, to establish such
rules and regulations as it deems necessary for the proper administration of the
ISP, and to make such determinations and to take such action in connection
therewith or in relation to the ISP as it deems necessary or advisable,
consistent with the ISP. The Committee may delegate some or all of its power and
authority hereunder to the Chief Executive Officer or other senior member of
management as the Committee deems appropriate; provided, however, that the
Committee may not delegate its authority with regard to any matter or action
affecting an officer subject to Section 16 of the Securities Exchange Act of
1934.
For the purpose of this section and all subsequent sections, the ISP
shall be deemed to include this plan and any comparable sub-plans established by
subsidiaries which, in the aggregate, shall constitute one plan governed by the
terms set forth herein.
2. ELIGIBILITY
Regular full-time and part-time employees of the Company, its
subsidiaries, its affiliates, its joint ventures and the Merck Institute for
Therapeutic Research, including officers, whether or not directors of the
Company, and employees of a joint venture partner or affiliate of the Company
who provide services to the joint venture with such partner or affiliate and who
are not directors or officers of the Company for purposes of Section 16 of the
Securities Exchange Act of 1934, shall be eligible to participate in the ISP
("Eligible Employees") if designated by the Committee or its delegate. Those
directors who are not regular employees are not eligible.
3. INCENTIVES
Incentives under the ISP may be granted in any one or a combination of
(a) Incentive Stock Options (or other statutory stock option); (b) Nonqualified
Stock Options; (c) Stock Appreciation Rights; (d) Restricted Stock Grants and
(e) Performance Shares (together "Incentives"). All Incentives shall be subject
to the terms and conditions set forth herein and to such other terms and
conditions as may be established by the Committee. Determinations by the
Committee under the ISP including without limitation, determinations of the
Eligible Employees, the form, amount and timing of Incentives, the terms and
provisions of Incentives, and the agreements evidencing Incentives, need not be
uniform and may be made selectively among Eligible Employees who receive, or are
eligible to receive, Incentives hereunder, whether or not such Eligible
Employees are similarly situated.
<PAGE>
4. SHARES AVAILABLE FOR INCENTIVES
(a) SHARES SUBJECT TO ISSUANCE OR TRANSFER. Subject to adjustment as
provided in Section 4(c) hereof, there is hereby reserved for issuance under the
ISP 65 million shares of the Company's Common Stock ("Common Stock"). The shares
available for granting awards shall be increased by the number of shares as to
which options or other benefits granted under the Plan have lapsed, expired,
terminated or been canceled. In addition, any shares reserved for issuance under
the Company's 1991 Incentive Stock Plan and 1987 Incentive Stock Plan ("Prior
Plans") in excess of the number of shares as to which options or other benefits
have been awarded thereunder, plus any such shares as to which options or other
benefits granted under the Prior Plans may lapse, expire, terminate or be
canceled, shall also be reserved and available for issuance or reissuance under
the ISP. Shares under this Plan may be delivered by the Company from its
authorized but unissued shares of Common Stock or from Common Stock held in the
Treasury.
(b) LIMIT ON AN INDIVIDUAL'S INCENTIVES. In any given year, no
Eligible Employee may receive Incentives covering more than three million shares
of the Company's Common Stock (such number of shares may be adjusted in
accordance with Section 4(c)).
(c) RECAPITALIZATION ADJUSTMENT. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the corporate structure
or shares of the Company, the Committee shall make such adjustment, if any, as
it may deem appropriate in the number and kind of shares authorized by the ISP,
in the number and kind of shares covered by Incentives granted, in the case of
Stock Options, in the option price, and in the case of stock appreciation
rights, in the fair market value.
5. STOCK OPTIONS
The Committee may grant options qualifying as Incentive Stock Options
under the Internal Revenue Code of 1986, as amended, or any successor code
thereto (the "Code"), other statutory options under the Code, and Nonqualified
Options (collectively "Stock Options"). Such Stock Options shall be subject to
the following terms and conditions and such other terms and conditions as the
Committee may prescribe:
(a) OPTION PRICE. The option price per share with respect to each
Stock Option shall be determined by the Committee, but shall not be less than
100% of the fair market value of the Common Stock on the date the Stock Option
is granted, as determined by the Committee.
(b) PERIOD OF OPTION. The period of each Stock Option shall be fixed
by the Committee but shall not exceed ten (10) years.
(c) PAYMENT. The option price shall be payable in cash at the time the
Stock Option is exercised. No shares shall be issued until full payment therefor
has been made. A grantee of a Stock Option shall have none of the rights of a
stockholder until the shares are issued.
(d) EXERCISE OF OPTION. The shares covered by a Stock Option may be
purchased in such installments and on such exercise dates as the Committee or
its delegate may determine. Any shares not purchased on the applicable exercise
date may be purchased thereafter at any time prior to the final expiration of
the Stock Option. In no event (including those specified in paragraphs (e), (f)
and (g) of this section) shall any Stock Option be exercisable after its
specified expiration period.
(e) TERMINATION OF EMPLOYMENT. Upon the termination of a Stock Option
grantee's employment (for any reason other than retirement, death or termination
for deliberate, willful or gross misconduct), Stock Option privileges shall be
limited to the shares which were immediately exercisable at the date of such
termination. The Committee, however, in its discretion, may provide that any
Stock Options
<PAGE>
outstanding but not yet exercisable upon the termination of a Stock Option
grantee's employment may become exercisable in accordance with a schedule to be
determined by the Committee. Such Stock Option privileges shall expire unless
exercised or surrendered under a Stock Appreciation Right within such period of
time after the date of termination of employment as may be established by the
Committee, but in no event later than the expiration date of the Stock Option.
If a Stock Option grantee's employment is terminated for deliberate, willful or
gross misconduct, as determined by the Company, all rights under the Stock
Option shall expire upon receipt of the notice of such termination.
(f) RETIREMENT. Upon retirement of a Stock Option grantee, Stock
Option privileges shall apply to those shares immediately exercisable at the
date of retirement. The Committee, however, in its discretion, may provide that
any Stock Options outstanding but not yet exercisable upon the retirement of a
Stock Option grantee may become exercisable in accordance with a schedule to be
determined by the Committee. Stock Option privileges shall expire unless
exercised within such period of time as may be established by the Committee, but
in no event later than the expiration date of the Stock Option.
(g) DEATH. Upon the death of a Stock Option grantee, Stock Option
privileges shall apply to those shares which were immediately exercisable at the
time of death. The Committee, however, in its discretion, may provide that any
Stock Options outstanding but not yet exercisable upon the death of a Stock
Option grantee may become exercisable in accordance with a schedule to be
determined by the Committee. Such privileges shall expire unless exercised by
legal representatives within a period of time as determined by the Committee but
in no event later than the expiration date of the Stock Option.
(h) LIMITS ON INCENTIVE STOCK OPTIONS. Except as may otherwise be
permitted by the Code, the Committee shall not grant to an Eligible Employee
Incentive Stock Options, that, in the aggregate, are first exercisable during
any one calendar year to the extent that the aggregate fair market value of the
Common Stock, at the time the Incentive Stock Options are granted, exceeds
$100,000.
6. STOCK APPRECIATION RIGHTS
The Committee may, in its discretion, grant a right to receive the
appreciation in the fair market value of shares of Common Stock ("Stock
Appreciation Right") either singly or in combination with an underlying Stock
Option granted hereunder or under the Prior Plans. Such Stock Appreciation
Rights shall be subject to the following terms and conditions and such other
terms and conditions as the Committee may prescribe:
(a) TIME AND PERIOD OF GRANT. If a Stock Appreciation Right is granted
with respect to an underlying Stock Option, it may be granted at the time of the
Stock Option Grant or at any time thereafter but prior to the expiration of the
Stock Option Grant. If a Stock Appreciation Right is granted with respect to an
underlying Stock Option, at the time the Stock Appreciation Right is granted the
Committee may limit the exercise period for such Stock Appreciation Right,
before and after which period no Stock Appreciation Right shall attach to the
underlying Stock Option. In no event shall the exercise period for a Stock
Appreciation Right granted with respect to an underlying Stock Option exceed the
exercise period for such Stock Option. If a Stock Appreciation Right is granted
without an underlying Stock Option, the period for exercise of the Stock
Appreciation Right shall be set by the Committee.
(b) VALUE OF STOCK APPRECIATION RIGHT. If a Stock Appreciation Right
is granted with respect to an underlying Stock Option, the grantee will be
entitled to surrender the Stock Option which is then exercisable and receive in
exchange therefor an amount equal to the excess of the fair market value of the
Common Stock on the date the election to surrender is received by the Company
over the Stock Option price multiplied by the number of shares covered by the
Stock Option which are surrendered. If a Stock Appreciation Right is granted
without an underlying Stock Option, the grantee will receive upon exercise of
<PAGE>
the Stock Appreciation Right an amount equal to the excess of the fair market
value of the Common Stock on the date the election to surrender such Stock
Appreciation Right is received by the Company over the fair market value of the
Common Stock on the date of grant multiplied by the number of shares covered by
the grant of the Stock Appreciation Right.
(c) PAYMENT OF STOCK APPRECIATION RIGHT. Payment of a Stock
Appreciation Right shall be in the form of shares of Common Stock, cash, or any
combination of shares and cash. The form of payment upon exercise of such a
right shall be determined by the Committee either at the time of grant of the
Stock Appreciation Right or at the time of exercise of the Stock Appreciation
Right.
7. PERFORMANCE SHARE AWARDS
The Committee may grant awards under which payment may be made in
shares of Common Stock, cash or any combination of shares and cash if the
performance of the Company or any subsidiary, division or affiliate of the
Company selected by the Committee during the Award Period meets certain goals
established by the Committee ("Performance Share Awards"). Such Performance
Share Awards shall be subject to the following terms and conditions and such
other terms and conditions as the Committee may prescribe:
(a) AWARD PERIOD AND PERFORMANCE GOALS. The Committee shall determine
and include in a Performance Share Award grant the period of time for which a
Performance Share Award is made ("Award Period"). The Committee shall also
establish performance objectives ("Performance Goals") to be met by the Company,
subsidiary or division during the Award Period as a condition to payment of the
Performance Share Award. The Performance Goals may include earnings per share,
return on stockholders' equity, return on assets, net income, or any other
financial or other measurement established by the Committee. The Performance
Goals may include minimum and optimum objectives or a single set of objectives.
(b) PAYMENT OF PERFORMANCE SHARE AWARDS. The Committee shall establish
the method of calculating the amount of payment to be made under a Performance
Share Award if the Performance Goals are met, including the fixing of a maximum
payment. The Performance Share Award shall be expressed in terms of shares of
Common Stock and referred to as "Performance Shares." After the completion of an
Award Period, the performance of the Company, subsidiary or division shall be
measured against the Performance Goals, and the Committee shall determine
whether all, none or any portion of a Performance Share Award shall be paid. The
Committee, in its discretion, may elect to make payment in shares of Common
Stock, cash or a combination of shares and cash. Any cash payment shall be based
on the fair market value of Performance Shares on, or as soon as practicable
prior to, the date of payment.
(c) REVISION OF PERFORMANCE GOALS. At any time prior to the end of an
Award Period, the Committee may revise the Performance Goals and the computation
of payment if unforeseen events occur which have a substantial effect on the
performance of the Company, subsidiary or division and which in the judgment of
the Committee make the application of the Performance Goals unfair unless a
revision is made.
(d) REQUIREMENT OF EMPLOYMENT. A grantee of a Performance Share Award
must remain in the employ of the Company until the completion of the Award
Period in order to be entitled to payment under the Performance Share Award;
provided that the Committee may, in its sole discretion, provide for a partial
payment where such an exception is deemed equitable.
(e) DIVIDENDS. The Committee may, in its discretion, at the time of
the granting of a Performance Share Award, provide that any dividends declared
on the Common Stock during the Award Period, and which would have been paid with
respect to Performance Shares had they been owned by a grantee, be (i) paid to
the grantee, or (ii) accumulated for the benefit of the grantee and used to
increase the number of Performance Shares of the grantee.
<PAGE>
(f) LIMIT ON PERFORMANCE SHARE AWARDS. Incentives granted as
Performance Share Awards under this section and Restricted Stock Grants under
Section 8 shall not exceed, in the aggregate, six million shares of Common Stock
(such number of shares may be adjusted in accordance with Section 4(c)).
8. RESTRICTED STOCK GRANTS
The Committee may award shares of Common Stock to a grantee, which
shares shall be subject to the following terms and conditions and such other
terms and conditions as the Committee may prescribe ("Restricted Stock Grant"):
(a) REQUIREMENT OF EMPLOYMENT. A grantee of a Restricted Stock Grant
must remain in the employment of the Company during a period designated by the
Committee ("Restriction Period") in order to retain the shares under the
Restricted Stock Grant. If the grantee leaves the employment of the Company
prior to the end of the Restriction Period, the Restricted Stock Grant shall
terminate and the shares of Common Stock shall be returned immediately to the
Company; provided that the Committee may, at the time of the grant, provide for
the employment restriction to lapse with respect to a portion or portions of the
Restricted Stock Grant at different times during the Restriction Period. The
Committee may, in its discretion, also provide for such complete or partial
exceptions to the employment restriction as it deems equitable.
(b) RESTRICTIONS ON TRANSFER AND LEGEND ON STOCK CERTIFICATES. During
the Restriction Period, the grantee may not sell, assign, transfer, pledge, or
otherwise dispose of the shares of Common Stock except to a successor under
Section 10 hereof. Each certificate for shares of Common Stock issued hereunder
shall contain a legend giving appropriate notice of the restrictions in the
grant.
(c) ESCROW AGREEMENT. The Committee may require the grantee to enter
into an escrow agreement providing that the certificates representing the
Restricted Stock Grant will remain in the physical custody of an escrow holder
until all restrictions are removed or expire.
(d) LAPSE OF RESTRICTIONS. All restrictions imposed under the
Restricted Stock Grant shall lapse upon the expiration of the Restriction Period
if the conditions as to employment set forth above have been met. The grantee
shall then be entitled to have the legend removed from the certificates.
(e) DIVIDENDS. The Committee shall, in its discretion, at the time of
the Restricted Stock Grant, provide that any dividends declared on the Common
Stock during the Restriction Period shall either be (i) paid to the grantee, or
(ii) accumulated for the benefit of the grantee and paid to the grantee only
after the expiration of the Restriction Period.
(f) LIMIT ON RESTRICTED STOCK GRANT. Incentives granted as Restricted
Stock Grants under this section and Performance Share Awards under Section 7
shall not exceed, in the aggregate, six million shares of Common Stock (such
number of shares may be adjusted in accordance with Section 4(c)).
9. DISCONTINUANCE OR AMENDMENT OF THE PLAN
The Board of Directors may discontinue the ISP at any time and may
from time to time amend or revise the terms of the ISP as permitted by
applicable statutes, except that it may not revoke or alter, in a manner
unfavorable to the grantees of any Incentives hereunder, any Incentives then
outstanding, nor may the Board amend the ISP without stockholder approval where
the absence of such approval would cause the Plan to fail to comply with Rule
16b-3 under the Securities Exchange Act of 1934, or any other requirement of
applicable law or regulation. No Incentive shall be granted under the ISP after
December 31, 2000, but Incentives granted theretofore may extend beyond that
date.
<PAGE>
10. NONTRANSFERABILITY
Each Incentive Stock Option granted under the ISP shall not be
transferable other than by will or the laws of descent and distribution; each
other Incentive granted under the ISP may be transferable subject to the terms
and conditions as may be established by the Committee in accordance with
regulations promulgated under the Securities Exchange Act of 1934, or any other
applicable law or regulation.
11. NO RIGHT OF EMPLOYMENT
The ISP and the Incentives granted hereunder shall not confer upon any
Eligible Employee the right to continued employment with the Company, its
subsidiaries, its affiliates, its joint ventures or the Merck Institute for
Therapeutic Research or affect in any way the right of such entities to
terminate the employment of an Eligible Employee at any time and for any reason.
12. TAXES
The Company shall be entitled to withhold the amount of any tax
attributable to any option granted, any amount payable or shares deliverable
under the ISP after giving the person entitled to receive such amount or shares
notice as far in advance as practicable.
<PAGE>
Exhibit 10(l)
MEDCO CONTAINMENT SERVICES, INC.
CLASS A NON-QUALIFIED STOCK OPTION AGREEMENT
NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") made as of July 1,
1991, between MEDCO CONTAINMENT SERVICES, INC., a Delaware corporation with
offices at 100 Summit Avenue, Montvale, New Jersey 07645 (the "Company"), and
PER G. H. LOFBERG ("Optionee").
RECITAL
The Company desires to provide Optionee with an opportunity to acquire
shares of Common Stock of the Company pursuant to the terms of the Company's
Class A 1983 Non-Qualified Stock Option Plan (the "Plan"), a copy of which is
attached as an Exhibit to this Agreement and incorporated herein. All terms
used herein shall have the same meanings as in the Plan, unless otherwise
defined. Optionee is a director of the Company.
AGREEMENTS
In consideration of the Recital (which is incorporated by reference) and
the mutual covenants of this Agreement, the Company and Optionee agree as
follows:
1. Confirmation of Grant of Option. Pursuant to a determination by the
-------------------------------
Board of Directors of the Company (the "Board") or its Stock Option Committee
(the "Committee") effective as of the date first set forth above (the "Date of
Grant"), the Company hereby confirms that Optionee has been granted, subject to
the terms of this Agreement and the Plan, as of the Date of Grant, as a matter
of separate inducement and agreement and not in lieu of salary or other
compensation for services, the right (the "Option") to purchase 60,000 shares of
Common Stock of the Company (the shares subject to purchase hereunder being
hereinafter called "Shares") at a price of $48.25 per Share. The price and
number of Shares subject to the Option may be adjusted as provided in section 8.
2. Exercisability of Option.
------------------------
2.1 Subject to section 7.6 of the Plan and to the terms and
conditions of this Agreement, the Option shall be exercisable:
2.1.1 with respect to 20% of the Shares, on or after the first
anniversary of the Date of Grant;
2.1.2 with respect to an additional 20% of the Shares, on and
after the second anniversary of the Date of Grant;
2.1.3 with respect to an additional 20% of the Shares, on and
after the third anniversary of the Date of Grant;
<PAGE>
2.1.4 with respect to an additional 20% of the Shares, on and
after the fourth anniversary of the Date of Grant; and
2.1.5 with respect to the remainder of the Shares, on and after
the fifth anniversary of the Date of Grant.
The foregoing vesting is on a cumulative basis. For example, assuming
that the Option has not terminated and that Optionee has not exercised any part
of the Option, Optionee shall have the right to purchase by exercise 60% of the
Shares subject to the Option after the third anniversary of the Date of Grant.
If, in that example, Optionee had already exercised the Option for 10% of the
Shares, he would have the right to exercise for 50% of the Shares after the
third anniversary.
2.2 The unexercised portion of the Option (both vested and non-
vested) shall automatically and without notice terminate and become null and
void at the time of the earliest to occur of the following:
2.2.1 the tenth anniversary of the Date of Grant;
2.2.2 subject to the provisions of section 2.3 below, 30 days
following the date of termination of Optionee's status as a director of the
Company; except that, if following such termination Optionee is retained as a
------ ----
consultant by the Company, the Board or the Committee may, in their sole
discretion, continue the Option for the balance of its term with respect to
either (a) all Shares covered by it or (b) the Shares for which the Option has
become exercisable pursuant to section 2.1 (in which case the Option shall be
deemed not to have terminated) or may permit the termination to stand. Any such
continuation shall not be deemed the grant of a new Option.
2.3 If Optionee dies within the 30 day period following termination
(described in section 2.2.2), any unexercised portion of the Option which was
otherwise exercisable on the date of death shall be exercisable by Optionee's
personal representatives, heirs or legatees at any time within the one year
period from the date of death. If Optionee dies while a director of the
Company, any unexercised portion of the Option that was exercisable on the date
of death shall be exercisable by the Optionee's personal representatives, heirs
or legatees at any time within the one year period from the date of death.
2.4 Notwithstanding any other provision of this Agreement, the right
to exercise any unvested portion of the Option may be accelerated by the Board
or the Committee and shall be acceleration pursuant to section 7.6 of the Plan.
The terms of any such acceleration shall be deemed to be a provision of the
Option and not the grant of a new option.
- 2 -
<PAGE>
3. Method of Exercise of Option. Subject to section 7.7 of the Plan,
----------------------------
the Option may be exercised by Optionee (or by Optionee's personal
representatives, heirs or legatees, as provided in section 2 but no other
person) as to all or (at Optionee's election) part of the Shares as to which
the Option is then exercisable (that is, "vested") under section 2 by giving
written notice of exercise to the Company at its principal business office,
specifying the number of shares for which the Option is exercised, accompanied
by payment in full for such Shares. The failure to exercise the Option, in
whole or in part, as to any vested exercise rights shall not constitute a waiver
of those rights. The Company shall cause certificates for the Shares so
purchased to be delivered to Optionee or Optionee's personal representatives,
heirs or legatees at its principal business office, against payment in full of
the Option Price, on the date specified in the notice of exercise. The Option
Price shall be paid in cash, certified check or bank draft or (if the shares of
Common Stock of the Company are then publicly traded) in fully paid shares of
Common Stock of the Company (valued for this purpose at their then fair market
value determined as provided below) or a combination of the two. Payment in the
form of shares of Common Stock of the Company shall be by delivery of one or
more certificates therefor, accompanied by a blank signed assignment, and the
shares so delivered shall be valued at the average of the closing price of the
Company's Common Stock on the principal exchange on which traded on the 20
trading days during which the Common Stock actually traded preceding the Closing
Date or, if the Company's Common Stock is not traded on an exchange, at the
average last quoted bid price in the over-the-counter market on the 20 trading
days during which the Common Stock actually traded preceding the Closing Date.
4. Non-Transferability of Option. Except as set forth in section 7.7,
-----------------------------
the Option shall not be transferable otherwise than by will or by the laws of
descent and distribution. Without limiting the generality of the foregoing, the
Option may not be assigned, transferred (except as permitted in the preceding
sentence), pledged or hypothecated in any way (whether by operation of law or
otherwise), and shall not be subject to levy, attachment or similar process.
Any attempt to assign, transfer, pledge or hypothecate the Option contrary to
the provisions of this Agreement, and any levy, attachment or similar process
upon the Option, shall be null and void and without effect, and the Board may,
in its discretion, upon the happening of any such event, terminate the Option as
of the date of such event.
5. No Rights Prior to Issuance of Shares. The holder of the Option
-------------------------------------
shall not have any rights to dividends nor any other rights of a shareholder
with respect to the Shares covered by the Option until the Shares have been
issued (as evidenced by the appropriate entry on the books of the transfer agent
of the Company) following exercise of the Option prior to its termination.
6. Restrictions on Exercise and on Common Stock.
--------------------------------------------
6.1 The Shares issued upon exercise of the Option shall be issued
only to Optionee or a person permitted to exercise the Option pursuant to
section 2.3 or pursuant to section 7.7 of the Plan as in effect on the date
hereof. Each share
- 3 -
<PAGE>
certificate representing Shares purchased upon exercise of the Option shall bear
a legend stating that the Shares evidenced thereby may not be sold or
transferred except in compliance with the Securities Act of 1933 (the "1933
Act") and the provisions of the Plan. The certificate(s) may be made subject
to a stop transfer order placed with the Company's transfer agent.
6.2 Notwithstanding any other provision of this Agreement, unless
the issuance of Shares upon exercise of the Option shall then be covered by an
effective registration statement under the 1933 Act (which the Company shall
have no obligation to file), the Company shall have no obligation to issue any
Shares pursuant to an exercise of the Option in the absence of an opinion of
counsel to the Company that said sale may be effected pursuant to an exemption
from the registration requirements of the 1933 Act. If the Company's Common
Stock is not then publicly traded, the Company shall have no obligation to file
a registration statement or take other steps to permit the Shares to be issued
in compliance with the 1933 Act. It shall be a further condition to the
Company's obligation to issue and deliver to Optionee certificates for those
Shares that Optionee deliver to the Company in writing, a representation that
such Optionee is exercising such Option for his or her own account for
investment only and not with a view to distribution and that the Optionee will
not make any sale, transfer or other disposition of any Shares purchased except
(i) pursuant to the registration thereof under the 1933 Act, as amended, (ii)
pursuant to an opinion of counsel satisfactory in form and substance to the
Company that the sale, transfer or other disposition may be made without
registration, or (iii) pursuant to a "no action" letter from the Securities and
Exchange Commission. Optionee has been advised and understands the Shares must
be held indefinitely unless they are registered for resale under the 1933 Act or
an exemption from registration is available and that the Company is under no
obligation to register those shares under the 1933 Act for resale or to take any
action which would make available to the holder any exemption from registration.
7. Right to Terminate Employment. This Agreement does not constitute a
-----------------------------
contract of, or an implied promise to continue, Optionee's employment or status
with the Company or a subsidiary; and nothing contained in this Agreement shall
confer upon Optionee the right to continue such employment or status; nor does
this Agreement affect the right of the Company or any subsidiary to terminate
Optionee's employment at any time. Optionee shall have no rights in the
benefits conferred by the Option or in any Shares except to the extent the
Option is exercised while vested and prior to termination. Termination of the
Option by reason of cessation of employment shall give no rise for any claim for
damages by Optionee under this or any other agreements and shall be without
prejudice to any rights or remedies which the Company or any subsidiary may have
against Optionee.
8. Adjustment. Subject to the provisions of the Plan, the number,
----------
class and Option Price of Shares covered by the Option, and any other rights
under the Option, shall be adjusted by the Board or the Committee, whose good
faith
- 4 -
<PAGE>
determination with respect thereto shall be conclusive, to reflect any stock
dividend, common stock split, share combination, exchange of shares, merger,
consolidation, recapitalization, separation, reorganization, liquidation or
extraordinary dividend or distribution payable in assets for stock of a company
other than the Company.
9. Notice. Each notice relating to this Agreement shall be in writing
------
and delivered in person or by certified mail to the proper address. Each notice
to the Company shall be addressed to it at its principal office, attention of
the President. Each notice to Optionee (or other person or persons then
entitled to exercise the Option) shall be addressed to Optionee (or such other
person or persons) at Optionee's most recent address on the books of the
Company. Anyone to whom a notice may be given under this Agreement may
designate a new address by notice to that effect. Each notice shall be deemed
to have been given on the day it is received.
10. Benefits of Agreement. This Agreement shall inure to the benefit of
---------------------
and be binding upon each successor of the Company. Subject to section 2.3,
rights granted to the Company under this Agreement shall be binding upon
Optionee's heirs, legal representatives and successors.
11. Source of Rights. This Agreement and the Plan as in effect on the
----------------
date hereof (which is incorporated in full herein) shall be the sole and
exclusive source of any and all rights which Optionee, and Optionee's personal
representatives, heirs or legatees may have in respect to the Option as granted
hereunder. In the event of any conflict between the provisions of the Plan and
of this Agreement, the provisions of the Plan shall prevail.
12. Captions. The captions contained in this Agreement are for
--------
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
13. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of New Jersey applicable to agreements and made to be fully performed
therein.
EXECUTION
The parties signed this Agreement as of the day and year first written,
whereupon it became binding in accordance with its terms.
MEDCO CONTAINMENT SERVICES, INC.
By: /s/ James V. Manning
---------------------------------------
JAMES V. MANNING
Senior Executive Vice President-Finance
/s/ Per G. H. Lofberg
---------------------------------------
OPTIONEE
- 5 -
<PAGE>
ANNEX A
-------
Options Held
Vesting Exercise Expiration
Options Date Exercisable Price Date
- ------- ------- ----------- -------- ----------
36,421 7/01/95 36,421 $15.89 7/01/01
36,421 7/01/96 - $15.89 7/01/01
-6-
<PAGE>
Exhibit 10(o)
July 27, 1993
Medco Containment Services, Inc.
100 Summit Avenue
Montvale, New Jersey 07645
Gentlemen:
In connection with the transaction (the "Transaction") contemplated by the
Agreement and Plan of Merger dated as of July 27, 1993 (the "Merger Agreement")
among Merck & Co., Inc. ("Parent"), Acquisition Corp. and Medco Containment
Services, Inc. ("Medco"), I agree that, effective and contingent upon closing of
the Transaction, my current employment agreement is amended as follows:
A. In Section 9.4, the period for which I cannot engage in competitive
activities is changed from the period stated in the employment agreement to
a period expiring 5 years from the termination of my employment (the
"Restricted Period").
B. In Section 9.5, the period for which I cannot solicit customers,
employees, agents or consultants is changed from the period stated in the
employment agreement to the Restricted Period.
C. In Section 4.4, the additional cash compensation that will become
payable to me 18 months after closing of the Transaction will be payable in
cash at such 18 months. Within 60 trading days after my receipt of such
additional cash compensation and within 60 trading days of my sale of
shares of stock of Synetic, Inc. or Medical Marketing Group, Inc. obtained
upon exercise of any options that accelerate as a result of the closing of
the Transaction, I will invest an amount equal to 40% of the amount of such
additional cash compensation and 40% of the proceeds from such sale, as the
case may be, multiplied in each case by 34%, in shares of Parent common
stock to be purchased on the open market (subject to any applicable legal
restrictions under Federal securities laws on making such investment, and
in the event of any such legal restrictions, I will invest as soon
thereafter as possible). I agree that I will not, without Parent's
consent, sell or otherwise transfer such shares for a period of three years
from the closing of the Transaction or until the earlier termination of my
employment without "cause" or my resignation for "cause" (in each case as
defined for purposes of my employment agreement) or death or disability.
In the event that the Internal Revenue Service proposes an adjustment in my
Federal tax liability as a result of the position taken by me on my Federal
tax return with respect to such additional cash compensation, Medco will,
at my request, pursue the defense thereof at its sole expense and on
mutually agreeable terms, provided that Medco (or Parent) is contesting a
similar position taken by the Internal Revenue Service with respect to its
own tax return.
D. With respect to my existing shares of Medco common stock, I agree to
elect to receive Parent common stock for all of such shares in accordance
with Section 2.01 (c)(ii) of the Merger Agreement.
E. In Section 9.4 of my employment agreement, the restrictions on
competitive employment shall have no territorial restrictions.
<PAGE>
F. In Sections 9.4 and 9.5 of my employment agreement, the businesses
to which the restrictions described therein apply shall be only (i) the
pharmaceutical business of Parent and its Affiliates (unless such business
is subsequently disposed of and I did not have material involvement in such
business during the two-year period preceding the termination of my
employment), (ii) the business as of either the closing of the Transaction
or the termination of my employment of Medco and its subsidiaries (unless
such business is subsequently disposed of and I did not have material
involvement in such business during the two-year period preceding the
termination of my employment) and (iii) any other then current business of
Parent and its Affiliates as to which I become materially involved
following the closing of the Transaction.
G. Section 7.3 of my employment agreement (and all references thereto)
are deleted.
I further agree that the provisions of the agreements evidencing any
options held by me to purchase shares of common stock of Medco which provide for
an acceleration of vesting in connection with the Transaction (including,
without limitation, the options granted to me as of October 14, 1992 subject to
stockholder approval to be obtained at the next meeting of Medco's stockholders)
will be waived so that such acceleration of vesting will not occur (in which
case the otherwise applicable vesting schedule will continue to apply). In the
event that I am terminated by Medco without "cause" (as defined for purposes of
my employment agreement), resign for "cause" (as defined below), die or become
disabled, all of such options will become immediately vested and exercisable.
For purposes of this paragraph and for all other purposes of my employment
agreement, resignation for "cause" will mean my resignation due to: (a) Medco's
material breach of any of the material terms of my employment agreement, (b) my
relocation without my consent to an office outside the greater New York City
metropolitan area (it being understood that such area shall be deemed to include
Whitehouse Station, New Jersey so long as I am provided with appropriate
transportation to such location from my residence, if my residence is more than
60 miles away), or (c) any diminution in my title, duties or responsibilities
that (i) results in my no longer having senior executive status with Medco or
(ii) requires me, without my consent, to devote more than a de minimis amount of
-- -------
my time to an area of activity that I am not engaged in on the date hereof.
All other provisions of my employment agreement shall continue in effect
without change.
Very truly yours,
/s/ Per G.H. Lofberg
--------------------
Per G.H. Lofberg
Agreed to:
MEDCO CONTAINMENT SERVICES, INC.
By: /s/ Charles A. Mele
-------------------
Charles A. Mele
<PAGE>
Exhibit 11
MERCK & CO., INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
----------------------------------------
(In millions except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net Income and Adjusted Earnings:
- --------------------------------
Net Income.............................................. $3,335.2 $2,997.0 $2,166.2
Effect on Earnings of Compensation Expense Relating to
Stock Option and Incentive Plans...................... 17.9 5.2 1.6
Effect on Earnings of Interest on Debentures............ - .2 .2
-------- -------- --------
Adjusted Earnings for Fully Diluted Earnings Per Share.. $3,353.1 $3,002.4 $2,168.0
======== ======== ========
Weighted Average Shares and Share Equivalents Outstanding:
- -----------------------------------------------------------
Weighted Average Shares Outstanding (As Reported).......... 1,236.1 1,257.2 1,156.5
Common Share Equivalents Issuable Under Stock Option and
Incentive Plans.......................................... 33.0 18.3 8.9
Common Share Equivalents Issuable on Assumed Conversion
of Debentures............................................ .4 .7 .4
------- ------- -------
Weighted Average Shares and Share Equivalents Outstanding.. 1,269.5 1,276.2 1,165.8
======= ======= =======
Earnings Per Share (As Reported)........................... $2.70 $2.38 $1.87
===== ===== =====
Fully Diluted Earnings Per Share (a)....................... $2.64 $2.35 $1.86
===== ===== =====
</TABLE>
(a) This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No.
15 because it results in dilution of less than 3%.
<PAGE>
Exhibit 12
MERCK & CO., INC. AND SUBSIDIARIES
Computation Of Ratios Of Earnings To Fixed Charges
--------------------------------------------------
(In millions except ratio data)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Before Taxes and Cumulative
Effect of Accounting Changes $4,797.2 $4,415.2 $3,102.7 $3,563.6 $3,166.7 $2,698.8
Add:
One-third of rents 28.1 36.0 35.0 34.0 31.1 26.5
Interest expense, net 60.3 96.0 48.0 23.6 26.0 51.9
Preferred stock dividends 2.1 - - - - -
-------- -------- -------- -------- -------- --------
Earnings $4,887.7 $4,547.2 $3,185.7 $3,621.2 $3,223.8 $2,777.2
======== ======== ======== ======== ======== ========
One-third of rents $ 28.1 $ 36.0 $ 35.0 $ 34.0 $ 31.1 $ 26.5
Interest expense 98.7 124.4 84.7 72.7 68.7 69.8
Preferred stock dividends 2.1 - - - - -
-------- -------- -------- -------- -------- --------
Fixed Charges $ 128.9 $ 160.4 $ 119.7 $ 106.7 $ 99.8 $ 96.3
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 38 28 27 34 32 29
======== ======== ======== ======== ======== ========
</TABLE>
For purposes of computing these ratios, "earnings" consist of income before
taxes, cumulative effect of accounting changes, one-third of rents (deemed by
the Company to be representative of the interest factor inherent in rents),
interest expense, net of amounts capitalized, and dividends on preferred stock
of subsidiary companies. "Fixed charges" consist of one-third of rents,
interest expense as reported in the Company's consolidated financial statements
and dividends on preferred stock of subsidiary companies.
<PAGE>
FINANCIAL
REVIEW
DESCRIPTION OF MERCK'S BUSINESS
Merck is a leading research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products and services.
SALES
- ----------------------------------------------------------------
($ in millions) 1995 1994 1993
- ----------------------------------------------------------------
Cardiovasculars.................. $ 6,232.4 $ 5,351.6 $4,820.8
Anti-ulcerants................... 1,019.8 1,565.7 1,324.0
Antibiotics...................... 848.3 827.4 868.7
Ophthalmologicals................ 570.6 482.3 454.6
Vaccines/biologicals............. 529.9 485.3 522.9
Benign prostate hypertrophy...... 405.8 322.7 187.4
Other Merck human health......... 266.5 381.3 596.2
Other human health............... 5,726.7 4,103.9 296.6
Animal health/crop protection.... 1,041.9 1,027.4 916.7
Specialty chemical............... 39.2 422.2 510.3
- ----------------------------------------------------------------
$16,681.1 $14,969.8 $10,498.2
================================================================
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
cardiovascular products, of which Vasotec, Zocor, Mevacor, Prinivil and
Vaseretic are the largest-selling and which include Cozaar and Hyzaar launched
in 1995; anti-ulcerants, of which Pepcid is the largest-selling in 1995,
succeeding Prilosec, the largest-selling prior to its 1994 transfer to the Astra
Merck joint venture; antibiotics, of which Primaxin and Noroxin are the largest-
selling; ophthalmologicals, of which Timoptic, Timoptic-XE and Trusopt are the
largest-selling; vaccines/biologicals, of which M-M-R II, a pediatric vaccine
for measles, mumps and rubella, Recombivax HB (hepatitis B vaccine recombinant)
and Varivax, a live virus vaccine for the prevention of chickenpox launched in
1995, are the largest-selling; benign prostate hypertrophy, which includes
Proscar, a treatment for symptomatic benign prostate enlargement; and other
Merck human health products, which include Fosamax, a treatment for osteoporosis
in postmenopausal women, which was cleared for marketing in the United States by
the U.S. Food and Drug Administration (F.D.A.) in late September 1995, and
launched in mid-October, anti-inflammatory/analgesics, psychotherapeutics and a
muscle relaxant. Also included in this category are rebates and discounts on
Merck pharmaceutical products. Other human health primarily includes Merck-Medco
Managed Care (Medco) sales of non-Merck products and Medco human health
services, principally managed prescription drug programs.
Animal health/crop protection products include animal medicinals used for
control and alleviation of disease in livestock, small animals and poultry.
These products are primarily antiparasitics, of which Ivomec for the control of
internal and external parasites in livestock, and Heartgard-30 for the
prevention of canine heartworm disease, are the largest-selling; crop protection
products; coccidiostats for the treatment of poultry diseases, and poultry
breeding stock.
Specialty chemical products are used in health care, food processing, oil
exploration, paper, textiles and personal care. All specialty chemical
businesses were divested by the first quarter of 1995.
Promotion of the Company's human and animal health products is generally
made by professional representatives. Customers for human health products
include drug wholesalers and retailers, hospitals, clinics, governmental
agencies and managed health-care providers such as health maintenance
organizations and other institutions. Customers for human health services
include corporations, labor unions, insurance companies, Blue Cross and Blue
Shield organizations, Federal and state employee plans, health maintenance and
other similar organizations. Customers for animal health/crop protection
products include veterinarians, distributors, wholesalers, retailers, feed
manufacturers, veterinary suppliers and laboratories.
The markets in which the Company's business is conducted are highly
competitive and, in many cases, highly regulated. The introduction of new,
technologically innovative products and processes by competitors may result in
price reductions and product substitutions, even for products protected by
patents. Global efforts toward health-care cost containment continue to exert
pressure on product pricing. In the United States, government efforts to slow
the increase of health-care costs and the demand for price discounts from
managed-care groups have limited the Company's ability to mitigate the effect of
inflation on costs and expenses through pricing. Outside of the United States,
government mandated cost containment programs have required the Company to
similarly limit selling prices. Additionally, government actions to reduce
patient reimbursement, restrict physician prescribing levels and increase the
use of generic products have significantly reduced the sales growth of certain
products. It is anticipated that the worldwide trend for cost containment and
competitive pricing will continue for the balance of the 1990's and result in
continued pricing pressures.
Merck is responding to this new environment in a number of ways. In
November 1993, the Company acquired Medco Containment Services, Inc. to enhance
its competitive position in the emerging area of managed care. Medco provides
services to managed-care organizations designed to reduce prescription
28
<PAGE>
drug benefit costs through managed prescription drug programs. Managed-care
organizations are expected to deliver a major portion of the nation's future
health-care services. The Company is also developing a series of health
management programs which use patient and physician communication to improve
drug therapy, promote better health outcomes and lower the long-term cost of
care associated with certain chronic diseases. The Company is also responding to
the new environment by developing innovative sales, marketing and education
techniques, by developing health-care alliances with large pharmaceutical buyers
and by continuing efforts to become more productive throughout the entire
organization.
In the United States, legislative bodies are working to expand health-care
access and reduce the costs associated therewith. The debate to reform the
health-care system has been and will continue to be protracted and intense.
Although the Company cannot fully predict the outcome of legislation to
accomplish the goals of reform, it is well positioned to respond to evolving
market forces resulting from legislative changes to the system. The Company
believes that its current policies and strategies will enable it to maintain a
strong position in this changing economic environment.
Since early 1990, the Company has voluntarily committed to a policy of
constraining price increases. The policy limits the net weighted average price
increases for all human health pharmaceutical products to the general rate of
inflation as measured by the U.S. Consumer Price Index (CPI). In early 1993, the
policy was extended to provide further savings to the health-care system by
limiting price increases on individual products to the projected CPI plus 1% on
an annual basis. Since its inception, this policy has yielded a cumulative net
price increase that is significantly below the cumulative increase in the
general rate of U.S. inflation. This policy is supported by our strategy to grow
through volume and not price, given stable market conditions and government
policies that foster innovation.
Also in 1990, Merck introduced its Equal Access to Medicines Program in a
number of states. Under this program, Merck voluntarily granted its best price
discounts to state Medicaid programs in exchange for full patient access to our
products. This innovative program served as a model for national legislation
applicable to all prescription drug manufacturers.
Other principal strategies for remaining competitive in this environment
include investing in research and development (R&D) directed toward the
discovery and development of technologically innovative products and new
indications for existing products, acquisitions, joint ventures, licensing
agreements and other strategic alliances. Continuous improvement in productivity
gains has become a permanent strategy. Productivity gains in 1995 continued to
offset inflation at the manufacturing level, and the Company seeks to achieve
the same goal in 1996. Actions undertaken include plant optimization,
implementing lowest cost processes, improving integration and technology
transfer between research and manufacturing, re-engineering of core and
administrative processes and delayering the organization. The Company put
additional resources into its sales force in 1995, in large part by reallocating
resources from staff positions into the field. This served the dual purpose of
optimizing the organization and driving revenue growth by directing more
resources to product launches.
In 1989, Merck and E. I. du Pont de Nemours and Company (DuPont) agreed to
form a long-term research and marketing collaboration to further develop a new
class of therapeutic agents for high blood pressure and heart disease,
discovered and developed by DuPont, called angiotensin II receptor antagonists.
In return, Merck provided DuPont marketing rights in the United States and
Canada to the Merck prescription medicines, Sinemet and SinemetCR. In 1994,
Cozaar, the first of the angiotensin II receptor antagonists, was cleared for
Merck to market in several European countries. In 1995, Cozaar and Hyzaar, a
combination of Cozaar and the diuretic hydrochlorothiazide, were cleared for
Merck to market in the United States and many international markets.
To further enhance the Company's access to research products, Merck and
DuPont created an independent, research-driven, worldwide pharmaceutical joint
venture, equally owned by each party, which began operations on January 1, 1991.
DuPont contributed its entire pharmaceutical and radiopharmaceutical imaging
agents businesses and is providing administrative services. Merck is providing
research and development expertise, development funds, certain European
marketing rights to several of its prescription medicines, international
industry expertise and cash. The joint venture's R&D effort is not expected to
produce significant commercial results in the near term. In January 1995, the
joint venture began co-promotion of Merck's prescription medicines, Prinivil and
Prinzide, in the United States. Joint venture sales for 1995 were $1.2 billion,
consisting primarily of cardiovascular, radiopharmaceutical and central nervous
system products.
In December 1994, the Company agreed to arrangements that, among other
things, eliminated the Company's right to offset the consequences of
disproportionate allocations of the DuPont Merck joint venture income and
expense against the Company's right to receive a disproportionate share of
income arising from its 1989 long-term research and marketing agreement with
DuPont. Accordingly, the Company recorded a $499.6 million provision for an
obligation to the joint venture. This obligation is a function of the favorable
performance of assets contributed by DuPont to the joint venture through
December 31, 1994, and certain Merck contractual commitments. This obligation
will be discharged by the end of 1996. The elimination of the offset resulting
from the December 1994 agreement will have no material effect on the Company's
liquidity or future cash flows. The anticipated favorable results from the 1989
agreement are being reported when realized.
In 1989, Merck and Johnson & Johnson formed a joint venture to develop and
market a broad range of non-prescription medicines for U.S. consumers. In
January 1990, the joint venture acquired the U.S. self-medication business of
ICI Americas, Inc. (ICI), with ICI obtaining the U.S. rights to Elavil, one of
the Company's products. In January 1993, Merck and Johnson & Johnson extended
their U.S. joint venture agreement to market and sell over-the-counter (OTC)
pharmaceutical products in Europe. Also in January 1993,
29
<PAGE>
Merck contributed its existing OTC medications business in Spain to a new joint
venture company. In September 1993, the European joint venture established a new
company in the United Kingdom to market Merck and Johnson & Johnson OTC
medications. In January 1994, Merck and Johnson & Johnson acquired Laboratoires
J. P. Martin, a leading self-medication business in France. In April 1995, the
joint venture obtained F.D.A. clearance in the United States for marketing
Pepcid AC Acid Controller, a non-prescription formulation of Pepcid, Merck's H2-
receptor antagonist. Sales of product marketed by the joint venture were $403.5
million for 1995, consisting primarily of gastrointestinal products.
In 1991, Merck formed a separate vaccine division to enhance its existing
vaccine business and also to expand its presence through acquisitions, licensing
agreements and outside research collaborations. In 1992, Merck and Connaught
Laboratories, Inc., an affiliate of Pasteur Merieux Serums et Vaccines
(Pasteur), finalized an agreement to collaborate on the development and
marketing of combination pediatric vaccines and to promote selected vaccine
products in the United States. In November 1994, Merck and Pasteur formed a
joint venture to market vaccines and to collaborate in the development of
combination vaccines for distribution in Europe. This joint venture is not
expected to have a significant impact on comparability of net income in the near
term. Joint venture vaccine sales for 1995 were $598.6 million.
In 1982, the Company entered into an agreement with Astra AB (Astra) to
develop and market Astra products in the United States. Under the first phase of
the agreement, Merck marketed three Astra products, Prilosec, Plendil and
Tonocard, in exchange for a royalty. In July 1993, the Company's total sales of
Astra products reached a level that triggered the first step in the
establishment of a separate entity for operations related to Astra products. On
November 1, 1994, Astra paid Merck $820.0 million for an interest in a joint
venture that is carried on in a company called Astra Merck Inc., in which Merck
and Astra each own a 50% share. This joint venture develops and markets in the
United States most new prescription medicines from Astra's research. The
formation of the joint venture has not had a material impact on comparability of
net income. As of November 1, 1994, Astra Merck product sales are no longer
reported in consolidated sales. Sales for 1994 prior to November 1 were $733.2
million. Joint venture sales for 1995 were $1.3 billion, consisting primarily of
Prilosec, for which the joint venture received F.D.A. approval in 1995 to market
in the United States as the first and only acid pump inhibitor to maintain
healing of erosive esophagitis.
During 1995, Medco entered into a joint venture with the Wyeth-Ayerst
Division of American Home Products Corporation to develop, market and implement
health management programs for women's health and certain other important
therapeutic areas. The joint venture company commenced operations during the
year and will introduce its first health management programs in 1996. The
formation of this joint venture is not expected to have a significant impact on
the Company's financial position and will not significantly impact ongoing
results of operations.
The Company completed the sale of its remaining specialty chemical
businesses in 1995. In January, the Company sold its Calgon Vestal Laboratories
business for $261.5 million to Bristol-Myers Squibb. In February, the Company
sold its Kelco business to Monsanto for $1.075 billion. These divestitures
resulted in pretax gains of $682.9 million recorded in the first quarter. These
specialty chemical businesses were not significant to the Company's financial
position or results of operations.
In its continued effort to focus on core businesses, in October 1995, the
Company sold Medco Behavioral Care (MBC), a managed mental health-care service
business, to MBC management and Kohlberg Kravis Roberts & Co. for $340.0
million. The sale of this business did not have a significant impact on the
Company's financial position and will not significantly affect ongoing results
of operations.
FOREIGN OPERATIONS
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales by subsidiaries outside the United States were 32%
of sales in 1995 and 1994, and 44% in 1993. The decline in the percentage of
sales outside the United States since 1993 is due primarily to higher domestic
sales resulting from the Medco acquisition.
($ in Millions)
Year Domestic Sales Total Sales
---- -------------- -----------
1986 2,105 4,129
1987 2,500 5,061
1988 2,996 5,940
1989 3,487 6,550
1990 4,039 7,671
1991 4,617 8,603
1992 5,180 9,663
1993 5,914 10,498
1994 10,150 14,970
1995 11,321 16,681
Amounts after 1992 include the impact of Medco from the date of acquisition on
November 18, 1993. Amounts after 1993 include the impact of the formation of a
joint venture with Astra on November 1, 1994.
The Company's worldwide business is subject to risks of currency
fluctuations and governmental actions. The Company does not regard these risks
as a deterrent to further expansion of its operations abroad. However, the
Company closely reviews its methods of operations, particularly in less
developed countries, and adopts strategies responsive to changing economic and
political conditions.
The ongoing integration of the European market is affecting businesses
operating within the European Union (EU), particularly companies such as Merck
that maintain research facilities, manufacturing plants and marketing and sales
organizations in several countries. Merck is in the process of rationalizing its
EU operations.
Over the years, the Company has divested and restructured to reduce its
operational exposure in countries where economic conditions or government
policies make it difficult to earn fair
30
<PAGE>
returns. At the same time, Merck is actively pursuing opportunities in countries
located in Latin America, Eastern Europe, Asia Pacific and other countries where
changes in government and in fiscal and regulatory policies are making it
possible for Merck to earn fair, economic returns. While none of these actions
individually has significantly affected operations, the overall impact has been
favorable.
OPERATING RESULTS
Total sales for 1995 increased 11% from 1994. The effect of a weakening U.S.
dollar against foreign currencies increased 1995 sales growth by two percentage
points, while price changes reduced growth by one percentage point. Sales for
1995 were affected by the formation of a joint venture with Astra and the
divestiture of Synetic (a Medco subsidiary) in 1994, as well as the divestitures
of Calgon Vestal Laboratories, Kelco and MBC in 1995. Adjusting for these
effects, 1995 sales grew 21%, with unit volume up 20%. Total sales for 1994
increased 43%. Sales for 1994 reflect a full year's impact of the Medco
acquisition in 1993 and the effect of the formation of the Astra Merck joint
venture in 1994. Excluding Medco sales of non-Merck products and including Medco
sales of Merck products for the full year 1993 to achieve comparability, and
adjusting for the effects of the joint venture formation and the sale of the
Calgon Water Management business in 1993, 1994 sales grew 9%, with unit volume
up 8%. Foreign exchange increased 1994 sales growth by one percentage point,
while price changes had essentially no impact. The effects of changes in the
value of foreign currencies are measured net of price increases in
hyperinflationary countries, principally in Latin America.
COMPONENTS OF SALES GROWTH
-------------------------
TOTAL SALES SALES VOLUME NET PRICING FOREIGN
GROWTH GROWTH ACTIONS EXCHANGE RATES
------------ ------------- ------------ ----------------
1991 12.1% 9.8% 2.2% 0.1%
1992 12.3 10.3 1.2 0.8
1993 6.8 8.6 0.1 -1.9
1994 8.6 8.4 -0.6 0.8
1995 20.9 19.9 -0.7 1.7
This chart illustrates the effects of price, volume and exchange on the
Company's sales. Growth for 1995 has been adjusted for the effect of the Astra
Merck joint venture formation and the sale of Synetic (a Medco subsidiary) in
1994, as well as the sales of Calgon Vestal Laboratories, Kelco, and Medco
Behavioral Care in 1995. Growth for 1994 has been adjusted to exclude Medco
sales of non-Merck products and include Medco sales of Merck products for the
full year 1993 to achieve comparability, as well as for the effect of the Astra
Merck joint venture formation. Growth for 1993 has been adjusted to exclude the
effects of the sale of the Calgon Water Management business and the acquisition
of Medco in 1993. The Company has grown predominantly through sales volume over
the last five years. The unfavorable effect of price on sales growth in 1995
reflects a continual decline from a 2.2% favorable effect in 1991, while the
effect of exchange has varied over the same period.
In 1995, sales of human and animal health products and services grew 14%.
Favorable foreign exchange rates increased this sales growth by two percentage
points, and price changes had a one point unfavorable effect. Adjusting for the
effects of the Astra Merck joint venture formation and the Synetic divestiture
in 1994, as well as the MBC divestiture in 1995, sales in this category grew 21%
in total and 20% on a volume basis in 1995. Domestic sales growth was 15%, or
25% adjusted for the aforementioned effects. Foreign sales grew 14%, including a
five percentage point increase from the effect of exchange. The unit volume
growth from the sales of Merck's human and animal health products was paced by
Vasotec, Vaseretic, Prinivil, Zocor, Pepcid, Primaxin and Proscar. The
introduction of Varivax, Cozaar, Hyzaar, Fosamax and Trusopt also added to the
sales growth.
Vasotec, Merck's angiotensin converting enzyme (ACE) inhibitor for reducing
high blood pressure and treating heart failure, recorded solid growth. During
1995, it again established a new Merck product sales record, and retained its
position as the leading branded product in the worldwide cardiovascular market.
Vasotec is also indicated to decrease the rate of development of overt heart
failure and to reduce hospitalizations for heart failure in people with left
ventricular dysfunction - a weakening of the heart's main pumping chamber (as
measured by an ejection fraction of 35% or less) - but with no heart failure
symptoms. Vaseretic, a combination of Vasotec and hydrochlorothiazide, also
prescribed for the treatment of high blood pressure, continued strong growth.
Prinivil, which also treats high blood pressure and acts as an adjunctive
therapy for treatment of heart failure, recorded solid growth as well. In 1995,
Prinivil received a new label indication in the United States to improve
survival after acute heart attack.
Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, the two
leading drugs in the U.S. cholesterol-lowering market, continued their
outstanding performance, holding about 40% of the worldwide market. Zocor,
Merck's second cholesterol-lowering agent, and the leading cholesterol reducer
in Europe, continued its exceptional performance and became the fastest growing
lipid-lowering medicine in 1995. The significant growth was primarily driven by
the results of the landmark Scandinavian Simvastatin Survival Study (4S). The
study was presented at the American Heart Association in 1994 and showed that
Zocor reduced the overall risk of death by 30% and the risk of coronary death by
42%. Based on the 4S results, several countries have approved a new indication
for Zocor and in June 1995, the F.D.A. cleared Zocor as the first and only
cholesterol-lowering medication indicated to save lives and prevent heart
attacks in people with heart disease and high cholesterol. With fewer than one-
third of patients who have coronary disease currently receiving cholesterol-
lowering therapy, there remains a strong potential for the continued growth of
Zocor. Unit sales of Mevacor were down in 1995 primarily in the United States
due to strong competition. In early 1995, Merck received clearance from the
F.D.A. to market Mevacor as the only lipid-lowering drug indicated to slow the
progression of atherosclerosis (clogging of the arteries) in patients with
coronary artery disease and elevated cholesterol, as part of the treatment plan
to reduce elevated cholesterol levels.
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<PAGE>
Pepcid, an H2-receptor antagonist for treatment of duodenal ulcers and the
short-term treatment of gastric ulcers and gastroesophageal reflux disease
(GERD), continues its solid performance despite competition from generic
cimetidine, newer antisecretory agents and the introduction of OTC H2
antagonists. In April 1995, the Merck and Johnson & Johnson joint venture
obtained F.D.A. clearance in the United States for marketing Pepcid AC Acid
Controller (Pepcid AC), a non-prescription formulation of Pepcid. Pepcid AC is
the first OTC product that has been shown to both relieve and prevent heartburn
and acid indigestion. Strong sales can be attributed to consumer satisfaction
and acceptance of the product by doctors and pharmacists.
Proscar recorded significant volume growth in 1995. It is the only drug
indicated to treat the symptoms of benign prostate enlargement that also shrinks
the prostate. In early 1995, the F.D.A. granted clearance for revised
prescribing information for Proscar, citing clinical evidence that the majority
of men taking Proscar experience statistically significant improvement in
urinary symptoms as measured by total symptom score, some in as little as two
weeks after beginning therapy. Information added to the updated prescribing
information for Proscar was based on the analysis of patients treated in the 12-
month, placebo-controlled clinical trials with Proscar and open extensions
providing data for 36 months and, in a smaller group of patients, for 48 months.
In October 1995, the results of the Scandinavian Reduction of the Prostate Study
(SCARP), the first long-term, placebo-controlled study with Proscar, were
released. The results confirmed that treatment not only provides symptomatic
relief, but that it can also halt and even reverse the progression of benign
prostate enlargement, and that the improvement is maintained over an extended
period of time.
In March 1995, the F.D.A. licensed Merck to market Varivax, a live-virus
vaccine, for protection against chickenpox in healthy individuals (12 months of
age and older) who have not had the disease. The American Academy of Pediatrics
(A.A.P.) and the Advisory Committee on Immunization Practices to the Centers for
Disease Control and Prevention recommended the universal use of Varivax in early
childhood, and for susceptible older children and adolescents. The A.A.P. also
indicated that Varivax will become a standard part of their recommended
childhood immunization schedule. By the end of 1995, more than 1.5 million
Americans had received Varivax, making it the most rapidly accepted vaccine
since Merck introduced the measles vaccine in 1963.
Cozaar, Merck's new antihypertensive, and Hyzaar, a combination of Cozaar
and the diuretic hydrochlorothiazide, were both cleared for marketing in the
United States by the F.D.A. in April 1995, and were both launched in the United
States in May. These products have also been launched in several international
markets, and are the first in a new class of drugs that block a potent hormone
called angiotensin II, resulting in gradual, smooth, 24-hour blood pressure
reduction. In clinical studies, Cozaar and Hyzaar had excellent tolerability
profiles and were highly effective. Those patients taking Cozaar had a low
incidence of certain adverse reactions that are characteristic of other
antihypertensive treatments.
Fosamax, a breakthrough prescription medicine to treat osteoporosis in
women after menopause, was cleared for marketing in the United States by the
F.D.A. in late September 1995, and was launched in mid-October. By the end of
1995, Fosamax was also cleared for marketing in more than 30 countries,
including the United Kingdom, Italy, Sweden and Mexico. Fosamax builds healthy
bone, restoring some of the bone lost as a result of osteoporosis. Fosamax is a
new treatment choice and the first non-hormonal medicine for women after
menopause who have osteoporosis. About one-in-three women over the age of 50
suffer from this bone-weakening disease.
Results from two three-year pivotal studies support the conclusion that
Fosamax builds healthy bone at the spine and hip and significantly increases
bone mineral density at other sites, suggesting that the gains in bone mineral
density at the spine and hip did not occur because of a loss of bone mineral
density elsewhere in the skeleton. While these studies were not designed to
detect fracture risk, further analysis showed that Fosamax reduced by 48% the
number of women who suffered new spinal fractures compared with women treated
with placebo.
Trusopt, the first carbonic anhydrase inhibitor made in a topical (eyedrop)
formulation, was launched in May 1995 in the United States. It has also been
launched in many European countries and initial sales are very strong everywhere
it has been launched. Trusopt is indicated for the treatment of elevated
intraocular pressure in patients with ocular hypertension or open-angle
glaucoma. Trusopt has been proven effective in the consistent lowering of
intraocular pressure in most patients and may be used both as monotherapy and
adjunctive therapy.
Sales of other human health products and services contributed significantly
to 1995 sales growth. Other human health principally includes sales of non-Merck
products by Medco, which currently manages pharmaceutical benefits for
approximately 47 million plan participants, up from 41 million at the end of
1994. For three quarters of those individuals, Medco manages both their retail
pharmacy and mail service prescriptions, providing fully integrated drug benefit
services. As a result, the number of prescriptions managed by Medco grew to 171
million in 1995, up from 131 million prescriptions in 1994.Sales of ivermectin,
a broad-spectrum antiparasitic, were down modestly in 1995 primarily due to
depressed cattle and swine economies in the United States. A group of longer-
established products, including Noroxin, Mefoxin, Aldomet, Indocin, Clinoril and
Dolobid, while still producing strong revenues, also continued to decline in
unit volume due to generic and therapeutic competition.
In 1994, sales of human and animal health products and services grew 46%.
Favorable foreign exchange rates increased sales growth by one percentage point.
Price changes had essentially no impact. Excluding Medco sales of non-Merck
products and including Medco sales of Merck products for the full year 1993 to
achieve comparability, and adjusting for the effect of the Astra Merck joint
venture formation, sales grew 9% in total and on a volume basis in 1994.
Domestic sales growth was 78%, or 11% excluding the aforementioned effects.
Foreign sales grew 6%, including a two percentage
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<PAGE>
point increase from the effect of exchange. The unit volume gain from the sale
of Merck's human and animal health products was paced by Vasotec, Vaseretic,
Prinivil, Zocor, Pepcid, Prilosec, Proscar and ivermectin.
The decline in specialty chemical sales in 1995 reflects the sales of
Calgon Vestal Laboratories and Kelco in the first quarter of 1995. The decline
in specialty chemical sales in 1994 principally reflects the sale of the Calgon
Water Management business in the second quarter of 1993.
COSTS, EXPENSES AND OTHER
- --------------------------------------------------------------------------------
($ in millions) 1995 Change 1994 Change 1993
- --------------------------------------------------------------------------------
Materials and
production .............. $7,456.3 +25% $5,962.7 +139% $2,497.6
Marketing and
administrative .......... 3,297.8 +4% 3,177.5 +9% 2,913.9
Research and development.. 1,331.4 +8% 1,230.6 +5% 1,172.8
Gains on sales of
specialty chemical
businesses .............. (682.9) * -- * --
Restructuring charge ..... 175.0 * -- * 775.0
Gain on joint venture
formation ............... -- * (492.0) * --
Provision for joint venture
obligation .............. -- * 499.6 * --
Other (income)
expense, net ............ 306.3 +74% 176.2 +387% 36.2
- --------------------------------------------------------------------------------
$11,883.9 +13% $10,554.6 +43% $7,395.5
================================================================================
*Not applicable
In 1995, materials and production costs increased 25%. Adjusting for the
effects of the 1994 Astra Merck joint venture formation and sale of Synetic, as
well as the 1995 sales of Calgon Vestal Laboratories, Kelco and MBC, materials
and production costs increased 34%, compared to a 21% sales growth rate on the
same basis. Adjusting for the aforementioned effects, and excluding exchange and
inflation, these costs increased 29%, compared to a 20% unit sales volume gain
in 1995. The higher growth rate in these costs over the sales volume growth is
primarily attributable to growth in Medco's historically lower-margin business.
The increase driven by Medco is partially offset by cost controls and
productivity improvements from the Company's continuing efforts to streamline
and restructure operations. In 1994, materials and production costs increased
139%, primarily due to the inclusion of a full year's impact of the Medco
acquisition. Excluding Medco's cost of non-Merck products and including the cost
of Medco sales of Merck products for the full year 1993 to achieve
comparability, and adjusting for the effect of the 1994 Astra Merck joint
venture formation, materials and production costs increased 10%, compared to a
9% sales growth rate on the same basis. Excluding the aforementioned effects,
exchange and inflation, these costs increased 7%, compared to an 8% unit sales
volume gain in 1994, also reflecting cost controls and productivity
improvements.
Marketing and administrative expenses increased 4% in 1995. Adjusting for
the effects of the 1994 Astra Merck joint venture formation and the sale of
Synetic, as well as the 1995 sales of Calgon Vestal Laboratories, Kelco and MBC,
marketing and administrative expenses increased 12%. Adjusting for the
aforementioned effects, and excluding exchange and inflation, these expenses
increased 6%. The increase in marketing and administrative expenses in 1995
primarily reflects the commitment of resources to support the launches of
several new products in 1995. Marketing and administrative expenses increased 9%
in 1994. Excluding the effects of exchange and inflation, these expenses
increased 5%, primarily due to the inclusion of a full year's impact of the
Medco acquisition. Marketing and administrative expenses as a percentage of
sales were 20% in 1995, 21% in 1994 and 28% in 1993. The improvement in these
ratios reflects the lower marketing and administrative costs relative to sales
of Medco, continuing cost controls, productivity improvements and the beneficial
effects from the restructuring programs.
Research and development expenses increased 8% in 1995. Excluding the
effects of exchange and inflation, these expenses increased 3%. Research and
development expenses increased 5% in 1994. Excluding the effects of exchange and
inflation, these expenses were essentially level with 1993. Not included in
consolidated research and development expenses are costs incurred by the
Company's joint ventures, which totaled $376.9 million in 1995 and $319.4
million in 1994.
Research and development in the pharmaceutical industry is inherently a
long-term process. The data below show an unbroken trend of year-to-year
increases in research and development spending. For the period 1986 to 1995, the
compounded annual growth rate in research and development was 12%.
EXPENDITURES
------------
($ in Millions)
Year Total R & D Expenditures
------ --------------------------
1986 480
1987 566
1988 669
1989 751
1990 854
1991 988
1992 1,112
1993 1,173
1994 1,231
1995 1,331
This chart excludes research and development costs incurred by the
Company's joint ventures, which were $376.9 milion in 1995.
In the first quarter of 1995, the Company recorded gains of $682.9 million
on the sales of Calgon Vestal Laboratories and Kelco. (See Note 3 to the
financial statements for further information.)
In the first quarter of 1995, the Company recorded a pretax restructuring
charge of $175.0 million. The restructuring actions involve manufacturing
facility consolidation, rationalization and work-force reduction in Europe and
the United States. The consolidation and rationalization actions, which will be
completed by 1999, involve fixed asset write-off and
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<PAGE>
closure costs. The restructuring charge includes $31.0 million directly related
to the elimination of approximately 450 positions. This work-force reduction is
expected to reduce annual employment costs by approximately $29.0 million. The
total initiative is expected to result in substantial additional production-
related savings and will not materially impact the Company's liquidity.
In the second quarter of 1993, the Company recorded a pretax restructuring
charge of $775.0 million. The restructuring charge is the sum of two distinct
programs one near term and the other longer term. The near-term initiative
reduced the work force by approximately 2,100 positions, a substantial number of
which were permanently eliminated. Work-force reductions were achieved through
an early retirement program in the United States and appropriate programs
elsewhere at a cost of $450.0 million. This program proceeded as planned and was
completed in 1994. The longer-term initiative involves the consolidation and
rationalization of manufacturing facilities and distribution centers, further
reducing the work force, primarily outside the United States, at a cost of an
additional $325.0 million. Future cash outlays resulting from these initiatives
are not expected to have a material impact on the Company's liquidity. These
initiatives have reduced annual employment costs by approximately $165.0 million
and will result in substantial additional production-related savings.
In 1994, the Company recorded a gain of $492.0 million on the sale to Astra
of an interest in a joint venture and a provision of $499.6 million in
recognition of an obligation to the DuPont Merck joint venture. (See Note 4 to
the financial statements for further information.)
In 1995, other expense, net, increased primarily as a result of $500.5
million of nonrecurring charges consisting of $278.5 million for losses on sales
of assets, $161.2 million for endowment of The Merck Company Foundation and
$60.8 million for settlement of claims. This effect was partially offset by a
$289.7 million increase in equity income from affiliates, primarily resulting
from the formation of the Astra Merck joint venture, as well as higher interest
income, lower interest expense and favorable exchange resulting from the
translation of the Company's balance sheet. In 1994, other expense, net,
increased primarily due to a full year's effect of amortization of goodwill and
other intangibles and interest expense resulting from the Medco acquisition as
well as higher income applicable to minority interests. This effect was
partially offset by higher equity income from affiliates and lower exchange
losses resulting from translation of the Company's balance sheet. (See Note 15
to the financial statements for further information.)
EARNINGS
- ----------------------------------------------------------------------------
($ in millions except
per share amounts) 1995 Change 1994 Change/(1)/ 1993
- ----------------------------------------------------------------------------
Net income $3,335.2 +11% $2,997.0 +38% $2,166.2
As a % of sales 20.0% 20.0% 20.6%
As a % of average
total assets 14.6% 14.3% 14.0%
Earnings per
common share $2.70 +13% $2.38 +27% $1.87
============================================================================
(1) Excluding the 1993 restructuring charge, 1994 net income and earnings per
share growth rates would have been 12% and 3%, respectively.
Net income was up 11% in 1995 and up 38% in 1994. Excluding the 1993
restructuring charge, 1994 net income increased 12%. Net income as a percentage
of sales was 20.0% in 1995 and 1994, compared to 20.6% in 1993. The decline in
the ratio for 1995 and 1994 from 1993, is principally due to the inclusion of a
full year's impact of the Medco acquisition and reflects Medco's historically
lower-margin business. The impact of the Medco acquisition on this ratio was
mitigated by unit sales volume growth, favorable product mix in Merck's human
and animal health business, productivity improvements and continuing cost
controls. Foreign currency exchange had a favorable impact in 1995 and 1994. The
Company's effective income tax rate in 1995 was 30.5%, compared with 32.1% in
1994. The lower effective tax rate in 1995 primarily relates to joint ventures,
which also affected pretax income growth. Specifically, pretax income growth was
reduced by the inclusion of the Company's share of taxes related to the Astra
Merck joint venture and the European vaccine joint venture with Pasteur, both
formed in the fourth quarter of 1994. Prior to the formation of these joint
ventures, the taxes related to these businesses were included in the Company's
tax provision. Therefore, the reduction in pretax growth is offset by
a corresponding reduction in the Company's tax rate in 1995, resulting in no
effect on net income growth. Net income as a percentage of average total assets
was 14.6% in 1995, 14.3% in 1994 and 14.0% in 1993, with the improvements
attributed to the continued growth in operations and the Company's asset
management efforts. Earnings per share grew 13% in 1995, compared to 3% in 1994,
excluding the 1993 restructuring charge. In 1995, earnings per share increased
at a faster rate than net income as a result of treasury stock purchases. The
dilution in 1994 earnings per share growth, as compared to net income growth, is
principally due to the additional shares issued in November 1993 to complete the
Medco acquisition.
DISTRIBUTION OF INCOME
----------------------
($ in Millions)
ADDITION ADDITION TO ADDITION TO
TO RETAINED EARNINGS RETAINED EARNINGS
RETAINED + +
Year EARNINGS DIVIDENDS DIVIDENDS + TAXES ON INCOME
---- -------- ------------------ ---------------------------
1986 397 676 1,073
1987 541 906 1,405
1988 660 1,207 1,871
1989 814 1,495 2,283
1990 993 1,781 2,699
1991 1,201 2,122 3,167
1992 1,340 2,447 3,564
1993 927 2,166 3,103
1994 1,534 2,997 4,415
1995 1,757 3,335 4,797
Amounts for 1994 include a full year's impact of the Medco acquisition in
1993 and the impact of the formation of the Astra Merck joint venture in 1994.
Amounts for 1993 include the impact of the acquisition of Medco and a
restructuring charge. Amounts for 1992 exclude the cumulative effect of
accounting changes.
Pricing pressures have made it increasingly difficult for the Company to
recover the effect of inflation on costs and expenses. To the extent possible,
the Company's objective is
34
<PAGE>
to offset the impact of inflation through productivity and technological
improvements, business restructuring, cost containment programs and price
increases.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires adoption no later than fiscal 1996.
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company will adopt this Statement as of January 1, 1996,
which will have no effect on results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which requires adoption no
later than fiscal 1996. The Statement provides a choice of accounting methods,
the fair value method or the current intrinsic value method, with disclosure of
the fair value impact. Both methods require the Company to estimate, using an
option pricing model, the fair value of equity instruments issued to employees
at the date of grant. The fair value method requires recognition of compensation
cost ratably over the vesting period of the underlying equity instruments. The
intrinsic value method requires disclosure of pro forma net income and earnings
per share as if the fair value method had been applied. The Company will adopt
this Statement as of January 1, 1996, using the current intrinsic value method.
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. The Company has maintained a
leadership role in supporting environmental initiatives and fostering pollution
prevention by actions including the elimination of, or the application of best
available technology to reduce air emissions of known or suspect carcinogens at
its facilities worldwide. At the end of 1995, projects were in place that are
expected to reduce all environmental releases of toxic chemicals by 90% from
1987 levels. In 1995, the Company incurred capital expenditures of approximately
$87.0 million for environmental protection facilities. Capital expenditures for
this purpose are forecasted to exceed $300.0 million for the years 1996 through
2000. In addition, the Company's operating and maintenance expenditures for
pollution control were approximately $68.5 million in 1995. Expenditures for
this purpose for the years 1996 through 2000 are forecasted to exceed $420.0
million. The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, as well as under other Federal and state statutes. While it
is not feasible to predict or determine the outcome of these
proceedings, management does not believe that they should result in a materially
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources. The Company is also remediating environmental
contamination resulting from past industrial activity at certain of its sites.
Expenditures for environmental purposes were $17.7 million in 1995, and are
estimated at $145.0 million for the years 1996 through 2000. The Company has
taken an active role in identifying and providing for these costs; and,
therefore, management does not believe that these expenditures should result in
a materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources.
Along with other pharmaceutical manufacturers and pharmaceutical benefits
managers (PBMs), the Company has received notice from the Federal Trade
Commission (F.T.C.) that it intends to investigate agreements, alliances,
activities and acquisitions involving pharmaceutical manufacturers and PBMs. The
Company has cooperated fully with the F.T.C. investigation, and believes that it
is currently operating in all material respects in accordance with applicable
standards. While it is not feasible to predict or determine the outcome of the
investigation, management does not believe that it should result in a materially
adverse effect on the Company's financial position, results of operations or
liquidity.
CAPITAL EXPENDITURES
Capital expenditures were $1.0 billion in 1995 and 1994. Expenditures in
the United States were $793.5 million in 1995 and $772.1 million in 1994.
Expenditures during 1995 included $533.2 million for production facilities,
$83.2 million for research and development facilities, $92.7 million for safety
and environmental projects and $296.4 million for administrative and general
site projects. Not included above are capital expenditures incurred by the
Company's joint ventures, which totaled $154.3 million in 1995, including $66.1
million for research and development facilities.
Capital authorizations in 1995 were $1.1 billion, an increase of 62% from
1994's level of $682.6 million. This increase is driven by investment in
manufacturing facilities to support new and in-line products. Capital
expenditures approved but not yet spent at December 31, 1995, were $595.5
million. These commitments include investments in production facilities ($274.0
million), research and development facilities ($93.7 million), safety and
environmental projects ($58.9 million) and administrative and general site
projects ($168.9 million).
Depreciation was $463.3 million in 1995 and $475.6 million in 1994, of
which $332.8 million and $345.7 million, respectively, applied to locations in
the United States.
CAPITAL EXPENDITURES
--------------------
($ in Millions)
YEAR TOTAL CAPITAL EXPENDITURES
---- --------------------------
1986 211
1987 254
1988 373
1989 433
1990 671
1991 1,042
1992 1,067
1993 1,013
1994 1,009
1995 1,005
This chart excludes capital expenditures incurred by the Company's joint
ventures, which were $154.3 million in 1995.
35
<PAGE>
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations continues to be the Company's primary source of
funds to finance operating needs and capital expenditures. Pretax cash flows
from operations for 1995 were essentially equivalent to 1994 and reflect the
impact of the endowment of The Merck Company Foundation, increased pension
funding and timing of receipts and disbursements. In 1995, cash from operations
was used to fund capital expenditures of $1.0 billion, to pay Company dividends
of $1.5 billion and to partially fund the purchase of treasury shares. At
December 31, 1995, the total of worldwide cash and investments was $5.3 billion,
including $3.3 billion in cash, cash equivalents and short-term investments and
$2.0 billion of long-term investments. The above totals include $1.3 billion in
cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the
Company has a 50.87% ownership interest.
SELECTED DATA
- --------------------------------------------------------------
($ in millions) 1995 1994 1993
- --------------------------------------------------------------
Working capital............... $2,928.0 $1,473.1 $(161.1)
Total debt to total
liabilities and equity...... 7.5% 5.9% 14.3%
Cash provided by operations
to total debt............... 1.6:1 3.2:1 1.1:1
==============================================================
Working capital levels are more than adequate to meet the operating
requirements of the Company. The increase in working capital in 1995 reflects
both continued normal growth of the Company as well as proceeds from the sales
of the Company's specialty chemical businesses. Also, in December 1995, the
Company's wholly-owned subsidiary, Merck Sharp & Dohme Overseas Finance, S.A.,
issued $1.0 billion par value of variable rate nonconvertible Preferred Equity
Certificates. These proceeds will be used to fund a portion of the Company's
stock repurchase program and for other general corporate purposes. The increase
in the ratio of total debt to total liabilities and equity in 1995 reflects
increased debt issued during the year.
In 1994, improvements in working capital and the ratios of total debt to
total liabilities and equity and cash provided by operations to total debt
reflect both normal growth of the Company and the reduction in commercial paper
borrowings used to finance the Medco acquisition. The repayment of commercial
paper borrowings was funded by operating cash flows and proceeds received from
Astra on the sale of an interest in a joint venture.
The 1993 ratios were impacted by the acquisition of Medco in November 1993
for approximately $6.6 billion. The Company issued $4.2 billion of equity
securities and paid $2.4 billion in cash, of which $1.8 billion was financed
with commercial paper and $250.0 million was financed with long-term debt. The
balance of the purchase price paid in cash was financed from internal sources.
From 1993 to 1995, the Company purchased $2.6 billion of treasury shares
under two programs authorized by the Board of Directors in 1993 and 1994. The
1993 program was completed in 1994. In November 1995, the Board of Directors
approved purchases of up to an additional $3.0 billion of Merck shares. Through
December 31, 1995, $1.6 billion of shares had been purchased under the 1994
program. Since 1984, the Company has purchased 292.4 million shares at a total
cost of $6.6 billion.
From 1993 to 1995, short-term borrowings were affected by purchases of
treasury shares resulting in periodic reductions in working capital and
increases in the ratio of total debt to total liabilities and equity. The
favorable ratio of cash provided by operations to total debt is an indication of
the ability of the Company to cover its debt obligations.
A significant portion of the Company's cash flows are denominated in
foreign currencies. The Company relies on sustained cash flows generated from
foreign sources to support its long-term commitment to U.S. dollar-based
research and development. To the extent the dollar value of cash flows is
diminished as a result of a strengthening dollar, the Company's ability to fund
research and other dollar-based strategic initiatives at a consistent level may
be impaired. To protect against the reduction in value of foreign currency cash
flows, the Company has instituted balance sheet and revenue hedging programs to
partially hedge this risk.
The objective of the balance sheet hedging 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. To achieve this objective, the Company will
hedge foreign currency risk on monetary assets and liabilities where hedging is
cost beneficial. The Company seeks to fully hedge exposure denominated in
developed country currencies, such as those of Japan, Europe and Canada, and
will either partially hedge or not hedge at all, exposure in other currencies,
particularly exposure in hyperinflationary countries where hedging instruments
may not be available at any cost. The Company will minimize the effect of
exchange on unhedged exposure, principally by managing operating activities and
net asset positions at the local level. The Company manages its net asset
exposure principally with forward exchange contracts. These contracts enable the
Company to buy and sell foreign currencies in the future at fixed exchange
rates. On net monetary assets hedged, forward contracts offset the consequences
of changes in foreign exchange on the amount of U.S. dollar cash flows derived
from the net assets. Contracts used to hedge net monetary asset exposure have
average maturities at inception of less than one year. The cash flows generated
from these forward contracts are reported as arising from operating activities
in the Consolidated Statement of Cash Flows. The balance sheet hedging program
has significantly reduced the volatility of U.S. dollar cash flows derived from
foreign currency denominated net monetary assets.
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
36
<PAGE>
derived from foreign currency denominated sales. To achieve this objective, the
Company will partially hedge forecasted 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. 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 Company manages its forecasted
transaction exposure principally with purchased local currency put options. On
the forecasted transactions hedged, these option contracts effectively reduce
the potential for a strengthening U.S. dollar to decrease the future U.S. dollar
cash flows derived from foreign currency denominated sales. Purchased
local currency put options provide the Company with a right, but not an
obligation, to sell foreign currencies in the future at a pre-determined price.
If the value of the U.S. dollar weakens relative to other major currencies
when the options mature, the options would expire unexercised, enabling the
Company to benefit from favorable movements in exchange, except to the extent of
premiums paid for the contracts. Over the last three years the program has had a
minimal cumulative effect on cash flows, principally because of the prevailing
weakness in the U.S. dollar compared with other major currencies. However, the
program has prevented a loss in value of cash flows during interim periods of
relative strength in the U.S. dollar for the portion of revenues hedged. The
cash flows associated with these contracts are reported as arising from
operating activities in the Consolidated Statement of Cash Flows.
The Company's strong financial position, as evidenced by its triple-A
credit ratings from Moody's and Standard & Poor's on outstanding debt issues,
provides a high degree of flexibility in obtaining funds on competitive terms.
The ability to finance ongoing operations primarily from internally generated
funds is desirable because of the high risks inherent in research and
development required to develop and market innovative new products and the
highly competitive nature of the pharmaceutical industry.
In September 1995, the Company issued $500.0 million of 10-year euronotes
bearing a coupon of 6.8% payable annually. Proceeds from the sale of these
securities will be used for general corporate purposes.
In 1993, Merck filed a shelf registration with the Securities and Exchange
Commission under which the Company could issue up to $1.0 billion of debt
securities. Proceeds from the sale of these securities are to be used for
general corporate purposes. In 1993, the Company initiated a medium-term note
program under this shelf and issued $80.0 million of structured floating rate
medium-term notes. In January 1996, the Company issued $250.0 million of 30-year
debentures under the shelf, bearing a coupon of 6.3% payable semi-annually. The
1993 shelf registration, together with $85.0 million unused capacity from a
$500.0 million 1991 shelf registration, provide $755.0 million of shelf
capacity.
CONDENSED INTERIM FINANCIAL DATA
- -----------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- -----------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------
Sales............................. $4,556.9 $4,171.1 $4,135.7 $3,817.3
Materials and
production costs................ 2,125.9 1,858.2 1,746.0 1,726.2
Marketing/administrative
expenses........................ 910.9 767.2 849.6 770.0
Research/development
expenses........................ 381.1 332.5 329.7 288.2
Other income, net................. (73.9) (33.8) (31.1) (62.9)
Income before taxes............... 1,212.9 1,247.0 1,241.5 1,095.8
Net income........................ 857.8 861.9 858.1 757.4
Earnings per common share......... $ .70 $ .70 $ .69 $ .61
=============================================================================
1994
- -----------------------------------------------------------------------------
Sales............................. $3,871.5 $3,792.0 $3,792.0 $3,514.3
Materials and
production costs................ 1,526.5 1,451.9 1,528.7 1,455.6
Marketing/administrative
expenses........................ 874.2 820.7 726.7 755.9
Research/development
expenses........................ 365.0 308.4 290.9 266.3
Other expense, net................ 20.0 39.3 100.2 24.2
Income before taxes............... 1,085.8 1,171.7 1,145.5 1,012.3
Net income........................ 773.0 784.8 764.1 675.2
Earnings per common share......... $ .61 $ .62 $ .61 $ .54
=============================================================================
In the chart above, sales for the fourth quarter of 1994 and the full year
1995 were reduced as a result of the fourth quarter 1994 formation of the Astra
Merck joint venture and the sale of Synetic. Sales for 1995 were also reduced by
the first quarter 1995 sales of Calgon Vestal Laboratories and Kelco and the
fourth quarter 1995 sale of MBC.
DIVIDENDS PAID PER COMMON SHARE
Year 4th Q 3rd Q 2nd Q 1st Q
1995 ............................ $1.24 $.34 $.30 $.30 $.30
1994 ............................ 1.14 .30 .28 .28 .28
==============================================================================
COMMON STOCK MARKET PRICES
- ------------------------------------------------------------------------------
1995 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------
High .................................... $67 1/4 $57 7/8 $51 1/4 $45 1/8
Low .................................... 55 5/8 47 1/4 41 1/4 36 3/8
- ------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------
High .................................... $39 1/2 $36 1/8 $32 1/4 $38
Low ..................................... 34 29 28 1/8 28 3/4
==============================================================================
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
37
<PAGE>
CONSOLIDATED Merck & Co., Inc. and Subsidiaries
STATEMENT OF INCOME
- ------------------------------------------------------------------------------
Years Ended December 31
($ in millions except per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------
SALES ................................. $16,681.1 $14,969.8 $10,498.2
COSTS, EXPENSES AND OTHER
Materials and production .............. 7,456.3 5,962.7 2,497.6
Marketing and administrative .......... 3,297.8 3,177.5 2,913.9
Research and development .............. 1,331.4 1,230.6 1,172.8
Gains on sales of specialty chemical
businesses ............................ (682.9) -- --
Restructuring charge .................. 175.0 -- 775.0
Gain on joint venture formation ....... -- (492.0) --
Provision for joint venture obligation -- 499.6 --
Other (income) expense, net ........... 306.3 176.2 36.2
- ------------------------------------------------------------------------------
11,883.9 10,554.6 7,395.5
- ------------------------------------------------------------------------------
INCOME BEFORE TAXES ................... 4,797.2 $4,415.2 3,102.7
TAXES ON INCOME ....................... 1,462.0 $1,418.2 936.5
- ------------------------------------------------------------------------------
Net Income ............................ $ 3,335.2 $ 2,997.0 $ 2,166.2
==============================================================================
EARNINGS PER COMMON SHARE ............. $ 2.70 $ 2.38 $ 1.87
==============================================================================
CONSOLIDATED STATEMENT Merck & Co., Inc. and Subsidiaries
OF RETAINED EARNINGS
Years Ended December 31
($ in millions) 1995 1994 1993
- ------------------------------------------------------------------------------
BALANCE, JANUARY 1 .................... $10,942.0 $ 9,393.2 $ 8,466.0
- ------------------------------------------------------------------------------
NET INCOME ............................ 3,335.2 2,997.0 2,166.2
COMMON STOCK DIVIDENDS DECLARED ....... (1,578.0) (1,463.1) (1,239.0)
NET UNREALIZED GAIN ON INVESTMENTS .... 41.4 14.9 --
- ------------------------------------------------------------------------------
BALANCE, DECEMBER 31 .................. $12,740.6 $10,942.0 $ 9,393.2
==============================================================================
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
CONSOLIDATED STATEMENT Merck & Co., Inc. and Subsidiaries
OF BALANCED SHEET
December 31
($ in millions) 1995 1994
- -------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents ............................. $ 1,847.4 $ 1,604.0
Short-term investments ................................ 1,502.4 665.7
Accounts receivable ................................... 2,495.7 2,351.5
Inventories ........................................... 1,872.5 1,660.9
Prepaid expenses and taxes ............................ 899.5 639.6
- -------------------------------------------------------------------------------
Total current assets .................................. 8,617.5 6,921.7
- -------------------------------------------------------------------------------
INVESTMENTS ........................................... 1,969.6 1,416.9
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (at cost)
Land .................................................. 206.3 212.6
Buildings ............................................. 2,783.2 2,604.5
Machinery, equipment and office furnishings ........... 4,055.9 4,029.4
Construction in progress .............................. 663.6 826.4
- -------------------------------------------------------------------------------
7,709.0 7,672.9
Less allowance for depreciation ....................... 2,439.9 2,376.6
- -------------------------------------------------------------------------------
5,269.1 5,296.3
- -------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLES (net of accumulated
amortization of $411.5 million in 1995 and $291.1 million
in 1994) ................................................. 6,826.3 7,212.3
- -------------------------------------------------------------------------------
OTHER ASSETS 1,149.3 1,009.4
- -------------------------------------------------------------------------------
$23,831.8 $21,856.6
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............... $ 3,105.2 $ 2,715.4
Loans payable and current portion of long-term debt .... 423.1 146.7
Income taxes payable ................................... 1,743.0 2,206.5
Dividends payable ...................................... 418.2 380.0
- -------------------------------------------------------------------------------
Total current liabilities .............................. 5,689.5 5,448.6
- -------------------------------------------------------------------------------
LONG-TERM DEBT ......................................... 1,372.8 1,145.9
- -------------------------------------------------------------------------------
DEFERRED INCOME TAXES AND NONCURRENT LIABILITIES ....... 2,747.5 2,914.3
- -------------------------------------------------------------------------------
MINORITY INTERESTS ..................................... 2,286.3 1,208.8
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock
Authorized - 2,700,000,000 shares
Issued - 1,483,463,327 shares - 1995
- 1,483,167,594 shares - 1994 ................... 4,742.5 4,667.8
Retained earnings ....................................... 12,740.6 10,942.0
- -------------------------------------------------------------------------------
17,483.1 15,609.8
Less treasury stock, at cost
254,614,794 shares - 1995
235,341,571 shares - 1994 .............................. 5,747.4 4,470.8
- -------------------------------------------------------------------------------
Total stockholders' equity .............................. 11,735.7 11,139.0
- -------------------------------------------------------------------------------
$23,831.8 $21,856.6
===============================================================================
The accompanying notes are an integral part of this financial statement.
39
<PAGE>
CONSOLIDATED STATEMENT Merck & Co., Inc. and Subsidiaries
OF RETAINED EARNINGS
Years Ended December 31
($ in millions) 1995 1994 1993
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before taxes ........................ $ 4,797.2 $ 4,415.2 $ 3,102.7
Adjustments to reconcile income before taxes
to cash provided from operations before taxes:
Gains on sales of specialty chemical
businesses ................................ (682.9) -- --
Restructuring charge ...................... 175.0 -- 775.0
Gain on joint venture formation ........... -- (492.0) --
Provision for joint venture obligation .... -- 499.6 --
Depreciation and amortization ............. 667.2 681.6 386.5
Other ..................................... 483.9 (10.7) (62.9)
Net changes in assets and liabilities:
Accounts receivable ...................... (244.1) (265.0) (263.1)
Inventories .............................. (271.8) (26.2) (46.6)
Accounts payable and accrued liabilities.. 383.1 290.6 (122.9)
Noncurrent liabilities ................... (290.8) (123.5) 67.9
Other .................................... (43.0) 28.1 71.8
- -------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES
BEFORE TAXES ................................ 4,973.8 4,997.7 3,908.4
INCOME TAXES PAID ........................... (2,029.6) (857.8) (859.9)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ... 2,944.2 4,139.9 3,048.5
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................ (1,005.5) (1,009.3) (1,012.7)
Purchase of Medco, net of cash and cash
equivalents acquired ....................... -- -- (1,869.4)
Purchase of securities, subsidiaries and
other investments ......................... (13,772.3) (14,814.5) (9,521.4)
Proceeds from joint venture formation, net of
cash transferred .......................... -- 759.3 --
Proceeds from sale of securities, subsidiaries
and other investments ...................... 12,430.1 15,082.3 9,863.5
Proceeds from sales of specialty chemical
businesses, net of cash transferred ........ 1,321.1 -- --
Other ....................................... (295.7) (50.2) (47.7)
- -------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES ....... (1,322.3) (32.4) (2,587.7)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings ......... 40.5 (1,580.2) 910.8
Proceeds from issuance of debt .............. 549.5 336.6 353.8
Payments on debt ............................ (108.2) (152.4) (39.4)
Proceeds from issuance of preferred stock of
subsidiaries ............................... 1,019.6 -- --
Purchase of treasury stock .................. (1,570.9) (704.5) (371.0)
Dividends paid to stockholders .............. (1,539.8) (1,434.1) (1,174.4)
Proceeds from exercise of stock options ..... 264.0 138.6 83.4
Other ....................................... (56.1) (6.2) 22.6
- -------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES ....... (1,401.4) (3,402.2) (214.2)
- -------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS ........................... 22.9 69.3 7.7
- -------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents ... 243.4 774.6 254.3
Cash and Cash Equivalents at Beginning of Year 1,604.0 829.4 575.1
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ... $ 1,847.4 $ 1,604.0 $ 829.4
===============================================================================
The accompanying notes are an integral part of this financial statement.
40
<PAGE>
NOTES TO Merck & Co., Inc. and Subsidiaries
FINANCIAL STATEMENTS ($ in millions except per share amounts)
1. NATURE OF OPERATIONS
Merck is a leading research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products and services. Human health products include therapeutic and preventive
agents, generally sold by prescription, for the treatment of human disorders.
Human health services include primarily managed prescription drug programs.
Animal health/crop protection products include animal medicinals, used for
control and alleviation of disease in livestock, small animals and poultry, and
agricultural insecticides.
Customers for human health products and services include drug wholesalers
and retailers, hospitals, clinics, governmental agencies, corporations, labor
unions, retirement systems, insurance carriers, managed health-care providers
such as health maintenance organizations and other institutions. Customers for
the Company's animal health/crop protection products include veterinarians,
distributors, wholesalers, retailers, feed manufacturers, veterinary suppliers
and laboratories.
2. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. For those consolidated
subsidiaries where Company ownership is less than 100%, the outside
stockholders' interest in each of the Company's accounts is shown as Minority
interests in the consolidated financial statements. The Company follows the
equity method for 20% or more owned affiliates.
Foreign Currency Translation -- The U.S. dollar is the functional currency for
the Company's foreign subsidiaries.
Cash and Cash Equivalents -- Cash equivalents are comprised of certain highly
liquid investments with original maturities of less than three months.
Inventories -- The majority of domestic inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. Remaining inventories are valued at
the lower of first-in, first-out (FIFO) cost or market.
Depreciation -- Depreciation is provided over the estimated useful lives of the
assets, principally using the straight-line method. For tax purposes,
accelerated methods are used.
Earnings Per Share -- Earnings per common share are based on the weighted
average number of shares outstanding. These weighted averages were 1,236.1
million, 1,257.2 million and 1,156.5 million in 1995, 1994 and 1993,
respectively. Common stock equivalents do not have a significant dilutive
effect.
Goodwill and Other Intangibles -- Goodwill of $3.8 billion in 1995 and $4.1
billion in 1994 (net of accumulated amortization) represents the excess of
acquisition costs over the fair value of net assets of businesses purchased and
is amortized on a straight-line basis over periods up to 40 years. Other
acquired intangibles principally include customer relationships of $3.0 billion
in 1995 and $3.1 billion in 1994 (net of accumulated amortization) that arose in
connection with the acquisition of Medco Containment Services, Inc. Other
acquired intangibles are recorded at cost and are amortized on a straight-line
basis over their estimated useful lives ranging from predominantly 28 to 40
years. The Company continually reviews goodwill and other intangibles to assess
recoverability from future operations using undiscounted cash flows. Impairments
would be recognized in operating results if a permanent diminution in value
occurred.
Use of Estimates -- The financial statements are prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts that
are based on management's best estimates and judgments.
Reclassifications -- Certain reclassifications have been made to prior year
amounts to conform with current year presentation.
3. ACQUISITION, DIVESTITURES AND RESTRUCTURINGS
On November 18, 1993, the Company acquired all the outstanding shares of Medco
Containment Services, Inc. for approximately $6.6 billion. Merck-Medco Managed
Care (Medco) principally provides services designed to reduce prescription drug
benefit costs through managed prescription drug programs. The purchase price
consisted of $2.4 billion in cash, 114.0 million common shares with a market
value of $3.8 billion, and 36.1 million options valued at $387.1 million, net of
tax. The acquisition was accounted for by the purchase method and, accordingly,
Medco's results of operations have been included with the Company's since the
acquisition date. The fair value of assets acquired and liabilities assumed
totaled $5.0 billion and $2.4 billion, respectively. The excess of the purchase
price over the fair value of net assets acquired is being amortized on a
straight-line basis over 40 years.
41
<PAGE>
Summarized below are unaudited pro forma combined results of operations for
the year ended December 31, 1993 assuming the acquisition occurred at the
beginning of the year:
1993
- -------------------------------------------------------------------------
Sales ......................................................... $13,047.1
Net income .................................................... 2,170.9
Earnings per common share ..................................... $ 1.73
=========================================================================
The unaudited pro forma combined results of operations are not necessarily
indicative of the results of operations that would have occurred had the two
companies actually combined during the period presented or of future results of
operations of the combined companies.
In June 1993, the Company sold its Calgon Water Management business for
$307.5 million to English China Clays plc. The gain from the sale is included in
Other (income) expense, net. (See Note 15 for further information.) The Company
completed the sale of its remaining specialty chemical businesses in 1995. In
January, the Company sold its Calgon Vestal Laboratories business for $261.5
million to Bristol-Myers Squibb. In February, the Company sold its Kelco
business to Monsanto for $1.075 billion. These divestitures resulted in pretax
gains of $682.9 million recorded in the first quarter. These specialty chemical
businesses were not significant to the Company's financial position or results
of operations.
In its continued effort to focus on core businesses, in October 1995, the
Company sold Medco Behavioral Care (MBC), a managed mental health-care service
business, to MBC management and Kohlberg Kravis Roberts & Co. for $340.0
million. The sale of this business did not have a significant impact on the
Company's financial position and will not significantly affect ongoing results
of operations.
The Company recorded a pretax restructuring charge of $775.0 million in
1993 in connection with an initiative to streamline and restructure worldwide
operations through staff reductions and consolidation of manufacturing and
distribution facilities.
In the first quarter of 1995, the Company recorded a pretax restructuring
charge of $175.0 million. The restructuring actions involve manufacturing
facility consolidation, rationalization and work-force reduction in Europe and
the United States.
4. STRATEGIC ALLIANCES
In 1989, the Company entered into an agreement with DuPont to form a long-term
research and marketing collaboration. Effective January 1, 1991, the Company
formed a 50%-owned joint venture with DuPont, creating an independent, research-
driven, worldwide pharmaceutical firm. DuPont contributed its entire
pharmaceutical and radiopharmaceutical imaging agents businesses and is
providing administrative services. The Company is providing research and
development expertise, development funds, certain European marketing rights to
several of its prescription medicines, international industry expertise and
cash. In January 1995, the joint venture began co-promotion of Merck's
prescription medicines, Prinivil and Prinzide,in the United States. Joint
venture sales for 1995 were $1.2 billion, consisting primarily of
cardiovascular, radiopharmaceutical and central nervous system products.
In December 1994, the Company agreed to arrangements that, among other
things, eliminated the Company's right to offset the consequences of
disproportionate allocations of the DuPont Merck joint venture income and
expense against the Company's right to receive a disproportionate share of
income arising from its 1989 long-term research and marketing agreement with
DuPont. Accordingly, the Company recorded a $499.6 million provision for an
obligation to the joint venture. This obligation is a function of the favorable
performance of assets contributed by DuPont to the joint venture through
December 31, 1994, and certain Merck contractual commitments. This obligation
will be discharged by the end of 1996. The elimination of the offset resulting
from the December 1994 agreement will have no material effect on the Company's
liquidity or future cash flows. The anticipated favorable results from the 1989
agreement are being reported when realized.
In 1989, the Company formed a joint venture with Johnson & Johnson to
develop and market a broad range of non-prescription medicines for U.S.
consumers. In January 1990, the joint venture acquired the U.S. self-
medication business of ICI Americas, Inc. (ICI), and ICI acquired the U.S.rights
to the Company's antidepressant Elavil, along with other considerations. In
January 1993, Merck and Johnson & Johnson extended their U.S. joint venture
agreement to include Europe. Also in January 1993, Merck contributed its
existing over-the-counter (OTC) medications business in Spain to a new joint
venture company. In September 1993, the European joint venture established a new
company in the United Kingdom to market Merck and Johnson & Johnson OTC
medications. In January 1994, Merck and Johnson & Johnson acquired Laboratoires
J.P. Martin, a leading self-medication business in France. In April 1995, the
joint venture obtained F.D.A. clearance in the United States for marketing
Pepcid AC Acid Controller, a non-prescription formulation of Pepcid, Merck's
H2-receptor antagonist. Sales of product marketed by the joint venture were
$403.5 million for 1995, consisting primarily of gastrointestinal products.
In 1991, Merck formed a separate vaccine division to enhance its existing
vaccine business and also to expand its presence through acquisitions, licensing
agreements and outside research collaborations. In 1992, Merck and Connaught
Laboratories, Inc., an affiliate of Pasteur Merieux Serums et Vaccins
(Pasteur), finalized an agreement to collaborate on the development and
marketing of combination pediatric vaccines and to promote selected vaccine
products in the United States. In November 1994, Merck and Pasteur formed a
joint venture to market vaccines and to collaborate in the development of
combination vaccines for distribution in Europe. This joint venture is not
expected to have a significant impact on comparability of net income in the near
term. Joint venture vaccine sales for 1995 were $598.6 million.
In 1982, the Company entered into an agreement with Astra AB (Astra) to
develop and market Astra products in the United States. Under the first phase of
the agreement, Merck marketed three Astra products, Prilosec, Plendil and
Tonocard,
42
<PAGE>
in exchange for a royalty. In July 1993, the Company's total sales of Astra
products reached a level that triggered the first step in the establishment of a
separate entity for operations related to Astra products. On November 1, 1994,
Astra paid Merck $820.0 million for an interest in a joint venture that is
carried on in a company called Astra Merck Inc., in which Merck and Astra each
own a 50% share. The Company recorded a $492.0 million gain from this
transaction. This joint venture develops and markets in the United States most
new prescription medicines from Astra's research. The formation of the joint
venture has not had a material impact on comparability of net income. As of
November 1, 1994, Astra Merck product sales are no longer reported in
consolidated sales. Sales for 1994 prior to November 1 were $733.2 million.
Joint venture sales for 1995 were $1.3 billion, consisting primarily of
Prilosec, for which the joint venture received F.D.A. approval in the United
States as the first and only acid pump inhibitor to maintain healing of erosive
esophagitis.
During 1995, Medco entered into a joint venture with the Wyeth-Ayerst
Division of American Home Products Corporation to develop, market and implement
health management programs for women's health and certain other important
therapeutic areas. The joint venture company commenced operations during the
year and will introduce its first health management programs in 1996. The
formation of this joint venture is not expected to have a significant impact on
the Company's financial position or ongoing results of operations.
Summarized below are net sales by therapeutic class for these joint
ventures for the year ended December 31, 1995:
1995
- -----------------------------------------------------------------------------
Gastrointestinals
Ethical .......................................................... $1,223.4
OTC .............................................................. 307.2
- -----------------------------------------------------------------------------
1,530.6
- -----------------------------------------------------------------------------
Vaccines ........................................................... 598.6
Cardiovasculars .................................................... 521.9
Radiopharmaceuticals ................................................ 304.0
Central nervous system .............................................. 247.5
Other ............................................................... 289.2
- -----------------------------------------------------------------------------
$3,491.8
=============================================================================
5. AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Investments in affiliates accounted for using the equity method are included in
Other assets and were $737.8 million at December 31, 1995 and $604.5 million at
December 31, 1994. Affiliates accounted for using the equity method did not
constitute a significant component of the Company's financial position or
results of operations prior to 1995. Summarized information for these affiliates
for 1995 is as follows:
Year Ended December 31 1995
- -----------------------------------------------------------------------------
Sales .............................................................. $3,632.9
Materials and production costs ..................................... 873.4
Other expense, net ................................................. 1,493.8
Income before taxes ................................................ 1,265.7
=============================================================================
December 31
- -----------------------------------------------------------------------------
Current assets ..................................................... $1,326.0
Noncurrent assets .................................................. 2,914.3
Current liabilities ................................................ 897.5
Noncurrent liabilities ............................................. 1,163.6
=============================================================================
6. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 1995 and 1994. Fair values were estimated
based on market prices, where available, or dealer quotes.
1995 1994
----------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------
Cash and cash equivalents ............... $1,847.4 $1,847.4 $1,604.0 $1,604.0
Short-term investments .................. 1,502.4 1,502.4 665.7 665.9
Long-term investments ................... 1,969.6 1,965.6 1,416.9 1,405.8
Purchased currency options .............. 122.1 110.8 97.6 42.5
Forward exchange contracts
and currency swaps .................... 80.3 80.3 27.2 27.2
Interest rate swaps ..................... 14.4 27.2 -- --
- -------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------
Loans payable and current portion
of long-term debt ...................... $ 423.1 $ 425.4 $ 146.7 $ 143.4
Long-term debt .......................... 1,372.8 1,424.7 1,145.9 1,114.0
Written currency options ................ .2 .2 .5 .5
Forward exchange contracts
and currency swap ...................... 6.1 6.1 45.2 45.2
Interest rate swaps ..................... -- -- -- 9.4
===============================================================================
The Company has established revenue and balance sheet hedging programs to
protect against reductions in value and volatility of future foreign currency
cash flows caused by changes in foreign exchange rates. The objectives and
strategies of these programs are described in the Analysis of Liquidity and
Capital Resources section of the Financial Review.
The Company hedges forecasted revenues denominated in foreign currencies
with purchased currency options. When the dollar strengthens against foreign
currencies, the decline in the value of future foreign currency cash flows is
partially offset by the recognition of gains in the value of purchased currency
options designated as hedges of the period. Conversely, when the dollar weakens,
the increase in the value of future foreign currency cash flows is reduced only
by the recognition of the premium paid to acquire the options designated as
hedges of the period. Market value gains and premiums on these contracts are
recognized in Sales when the hedged transaction is recognized. The carrying
value of purchased currency options is reported in Prepaid expenses and taxes or
Other assets.
The Company continuously reviews its portfolio of purchased options and
will adjust its portfolio to accommodate changes in exposure to forecasted
revenues. The most cost-effective means of decreasing coverage provided by
purchased options is to write options with terms identical to purchased options
that are no longer necessary. Deferred gains or losses that accumulate on
purchased options prior to writing an offsetting position will remain deferred
and are recognized when the hedged transaction occurs. Subsequent changes in the
market value of the written options and related purchased options are recorded
in earnings. Because the changes in market value of the purchased options
equally offset the written
43
<PAGE>
options, there is no net impact on earnings. The carrying value of written
currency options is reported in Accounts payable and accrued liabilities or
Deferred income taxes and noncurrent liabilities.
Deferred gains and losses on currency options used to hedge forecasted
revenues amounted to $27.2 million and $38.5 million at December 31, 1995 and
$3.2 million and $58.3 million at December 31, 1994, respectively.
The Company also hedges certain exposures to fluctuations in foreign
currency exchange rates that occur prior to conversion of foreign currency
denominated monetary assets and liabilities into U.S. dollars. Prior to
conversion to U.S. dollars, these assets and liabilities are translated at spot
rates in effect on the balance sheet date. The effects of changes in spot rates
are reported in earnings and included in Other (income) expense, net. The
Company hedges its exposure to changes in foreign exchange with forward
contracts. Because monetary assets and liabilities are marked to spot and
recorded in earnings, forward contracts designated as hedges of the monetary
assets and liabilities are also marked to spot with the resulting gains and
losses similarly recognized in earnings. Gains and losses on forward contracts
are included in Other (income) expense, net and offset losses and gains on the
net monetary assets and liabilities hedged. The carrying value of forward
exchange contracts is reported in Accounts receivable, Other assets, Accounts
payable and accrued liabilities or Deferred income taxes and noncurrent
liabilities.
At December 31, 1995 and 1994, the Company had contracts to exchange
foreign currencies, principally the Japanese yen, French franc and Deutschemark,
for U.S. dollars in the following notional amounts:
1995 1994
- -----------------------------------------------------------------------------
Purchased currency options ............................. $2,453.4 $1,793.8
Written currency options ............................... 48.3 114.6
Forward sale contracts ................................. 1,469.9 1,463.6
Forward purchase contracts ............................. 422.3 404.5
=============================================================================
The Company uses interest rate swap contracts on certain borrowing and
investing transactions. Interest rate swap contracts are intended to be an
integral part of borrowing and investing transactions and, therefore, are not
recognized at fair value. Interest differentials paid or received under these
contracts are recognized as adjustments to the effective yield of the underlying
financial instruments hedged. Interest rate swap contracts would only be
recognized at fair value if the hedged relationship is terminated. Gains or
losses accumulated prior to termination of the relationship would be amortized
as a yield adjustment over the shorter of the remaining life of the contract or
the remaining period to maturity of the underlying instrument hedged. If the
contract remained outstanding after termination of the hedged relationship,
subsequent changes in market value of the contract would be recognized in
earnings. The Company does not use leveraged swaps and, in general, does not use
leverage in any of its investment activities that would put principal capital at
risk.
At December 31, 1995, the Company had an interest rate swap contract with
a notional amount of $82.0 million to convert a portion of its variable rate
investments to fixed rates. This contract matures in 1996. The Company also had
a combined interest rate and currency swap contract with a notional amount of
$279.6 million to convert a variable rate Dutch guilder investment to a variable
rate U.S. dollar investment. The market value of this five-year contract is
reported in Other assets with unrealized gains and losses recorded, net of tax,
in Stockholders' equity.
The Company also had two interest rate swap contracts outstanding with a
combined notional amount of $352.3 million to convert fixed rates on debt issues
to floating rates slightly below commercial paper rates. The maturities of these
contracts coincide with the maturities of the underlying debt instruments
hedged. The debt issues include $200.0 million in zero coupon euronotes and
200.0 million in Swiss franc eurobonds. Concurrent with the issuance of the
Swiss franc eurobonds, the Company entered into an interest rate and currency
swap. The currency swap is accounted for similar to forward exchange contracts.
(See Note 8 for further information.) The interest rate and currency swaps on
the debt issues described above essentially provide the Company with variable
rate, U.S. dollar denominated debt at rates of interest lower than rates the
Company could otherwise obtain had it actually issued variable rate U.S. dollar
debt.
As part of its ongoing control procedures, the Company monitors
concentrations of credit risk associated with financial institutions with which
it conducts business. Credit risk is minimal as credit exposure limits are
established to avoid a concentration with any single financial institution. The
Company also monitors the credit worthiness of its customers to which it grants
credit terms in the normal course of business. Concentrations of credit risk
associated with these trade receivables are considered minimal due to the
Company's diverse customer base. Bad debts have been minimal. The Company does
not normally require collateral or other security to support credit sales.
Effective January 1, 1994, the Company adopted the provisions of Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, which
requires certain investments to be recorded at fair value or amortized cost. In
accordance with this Statement, the Company has classified its investments as
available-for-sale and held-to-maturity. Available-for-sale investments are
carried at fair value with unrealized gains and losses recorded, net of tax and
minority interests, in Stockholders' equity. Held-to-maturity investments are
carried at amortized cost. Prior to 1994, these investments were carried at the
lower of cost or market. Adoption of this Statement did not materially impact
the Company's financial position and had no impact on operating results. At
January 1, 1994, the unrealized gain associated with available-for-sale
investments of $37.5 million, net of tax and minority interests, was included in
Retained earnings.
At December 31, 1995, available-for-sale investments include debt and
equity securities carried at their fair values of $2.0 billion ($1.3 billion of
which mature within one year) and
44
<PAGE>
$820.6 million, respectively. Gross unrealized gains and losses amounted to
$11.9 million and $3.5 million for debt securities and $230.0 million and $24.3
million for equity securities, respectively. Held-to-maturity investments are
carried at amortized cost of $700.0 million ($200.0 million of which mature
within one year) and have a fair value of $696.0 million.
7. INVENTORIES
Inventories at December 31 consisted of:
1995 1994
- ---------------------------------------------------------------------
Finished goods ............................. $1,078.3 $ 926.7
Raw materials and work in process .......... 716.2 684.7
Supplies ................................... 78.0 65.6
- ---------------------------------------------------------------------
Total (approximates current cost) .......... 1,872.5 1,677.0
Reduction to LIFO cost ..................... -- 16.1
- ---------------------------------------------------------------------
$1,872.5 $1,660.9
=====================================================================
Inventories valued at LIFO comprised approximately 44% and 42% of
inventories at December 31, 1995 and 1994, respectively.
8. LOANS PAYABLE AND LONG-TERM DEBT
Loans payable at December 31, 1995 consisted primarily of the current portion of
long-term debt. The remainder was principally borrowings by foreign
subsidiaries. The weighted average interest rate for these borrowings was 7.3%
and 5.3% at December 31, 1995 and 1994, respectively.
Long-term debt at December 31 consisted of:
1995 1994
- ---------------------------------------------------------------------
6.8% euronotes due 2005...................... $ 498.8 $ --
5.3% euronotes due 1998 ..................... 251.8 252.4
7.8% notes due 1996 ......................... -- 249.6
Zero coupon euronotes due 1997 .............. 181.3 170.9
5.4% Swiss franc eurobonds due 1997 ......... 174.0 153.5
6.0% medium-term note due 1997 .............. 99.9 99.8
Other ....................................... 167.0 219.7
- ---------------------------------------------------------------------
$1,372.8 $1,145.9
=====================================================================
At December 31, 1995, the Company had an interest rate swap contract to
convert the 6.1% fixed rate on the zero coupon euronotes to a variable rate
slightly below commercial paper rates. In addition, the Company entered into an
interest rate and currency swap concurrent with the issuance of the Swiss franc
eurobonds. The contract converts the fixed rate on the eurobonds to a variable
rate slightly below commercial paper rates, payable in U.S. dollars, and enables
the Company to buy 200 million Swiss francs at maturity at a fixed exchange
rate. Accordingly, any exchange gain or loss on these bonds will be entirely
offset by the change in the carrying value of the contract.
Other consists primarily of pollution control, industrial revenue financing
and foreign borrowings at varying rates up to 9.3%.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 1996, $297.5 million; 1997, $462.8 million; 1998, $264.6
million; 1999, $8.3 million; and 2000, $10.3 million.
9. CONTINGENT LIABILITIES
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, principally product liability and
intellectual property cases. Additionally, the Company, along with numerous
other defendants, is a party in several antitrust actions brought by retail
pharmacies and consumers, alleging conspiracies in restraint of trade and price
discrimination, one of which has been certified as a Federal class action and
three of which have been certified as state class actions. The Company and
several other defendants have entered into an agreement, subject to court
approval, to settle the Federal class action alleging conspiracy, pursuant to
which the Company would pay $51.8 million, payable in four equal annual
installments. The Company has not engaged in any conspiracy and no admission of
wrongdoing has been made or is included in the agreement, which was entered into
in order to avoid the cost of litigation and the risk of an inaccurate adverse
verdict by a jury presented by a case of this size and complexity. While it is
not feasible to predict or determine the final outcome of these proceedings,
management does not believe that they should result in a materially adverse
effect on the Company's financial position, results of operations or
liquidity.
The Company is also a party to a number of proceedings brought under
the Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund, as well as under other Federal and state statutes.
While it is not feasible to predict or determine the outcome of these
proceedings, management does not believe that they should result in a materially
adverse effect on the Company's financial position, results of operations or
liquidity. The Company is also remediating environmental contamination resulting
from past industrial activity at certain of its sites. The Company has taken an
active role in identifying and providing for these costs; and, therefore,
management does not believe that these expenditures should result in a
materially adverse effect on the Company's financial position, results
of operations, liquidity or capital resources.
10. PREFERRED STOCK OF SUBSIDIARY COMPANY
In December 1995, the Company's wholly-owned subsidiary, Merck Sharp & Dohme
Overseas Finance, S.A., issued $1.0 billion par value of variable rate
nonconvertible Preferred Equity Certificates (PECs). The proceeds will be used
to fund a portion of the Company's stock repurchase program and for other
general corporate purposes. Beginning in January 1997 to the date fixed for
redemption in 2094, the PECs are redeemable at the option of the issuer at the
par value plus accumulated and unpaid dividends. The PECs are included in
Minority interests in the consolidated financial statements.
11. STOCKHOLDERS' EQUITY
In 1995, common stock increased by $74.7 million, principally as a result of
issuances of treasury stock for exercises of stock options and distributions
under incentive plans. In 1994,common stock increased by $91.3 million,
principally as a result of conversions of subordinated debentures assumed in
45
<PAGE>
conjunction with the Medco acquisition into 2.6 million shares of Merck common
stock. In 1993, the increase of $4.4 billion was principally due to shares
issued and employee stock options converted to Merck options in connection with
the acquisition of Medco.
A summary of treasury stock transactions (shares in thousands) follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- ----------------
Shares Cost Shares Cost Shares Cost
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1 ........ 235,341.6 $4,470.8 226,676.6 $3,948.0 221,878.1 $3,667.8
Purchases 33,377.2 1,570.9 18,975.0 704.5 10,040.4 371.0
Issued primarily
under stock
option and
incentive plans .. (14,104.0) (294.3) (10,310.0) (181.7) (5,241.9) (90.8)
--------- -------- --------- -------- --------- --------
Balance,
December 31 254,614.8 $5,747.4 235,341.6 $4,470.8 226,676.6 $3,948.0
========= ======== ========= ======== ========= ========
</TABLE>
At December 31, 1995, 1994 and 1993, 10 million shares of preferred stock,
without par value, were authorized; none were issued.
12. STOCK OPTION AND INCENTIVE PLANS
The Company has stock option plans under which employees and non-employee
directors may be granted options to purchase shares of Company common stock at
the fair market value at the time of the grant. The Company has also adopted
several of the Medco employee stock option plans. In connection with the Medco
acquisition, stock options outstanding on the date of acquisition were converted
into options to purchase shares of Company common stock with an equivalent
value. In addition, in September 1991 and October 1993, the Company made special
grants of options to substantially all employees worldwide to purchase 300
shares of stock under each grant. A total of approximately 20.6 million options
were granted.
A summary of information relative to the Company's stock option plans
follows:
Number Average
of Shares Price
- ---------------------------------------------------------
Outstanding at January 1, 1993 40,384,535 $32.40
Equivalent options assumed 36,108,076 16.51
Granted 15,854,640 34.25
Exercised (4,985,266) 16.73
Forfeited (948,262) 38.89
- ---------------------------------------------------------
Outstanding at December 31, 1993 86,413,723 26.93
Granted 19,973,017 31.53
Exercised (9,878,486) 14.01
Forfeited (2,843,918) 34.41
- ---------------------------------------------------------
Outstanding at December 31, 1994 93,664,336 29.05
GRANTED 14,193,077 43.38
EXERCISED (13,955,704) 18.96
FORFEITED (2,480,703) 34.89
- ---------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1995 91,421,006 $32.65
EXERCISABLE AT DECEMBER 31, 1995 29,272,456 $26.46
=========================================================
At December 31, 1995 and 1994, 15,842,665 shares and 11,607,626 shares,
respectively, were available for future grants under the terms of these plans.
The Company has incentive compensation plans that provide cash awards to
employees and may provide deferred awards to certain executives and other key
employees. For 1995, total awards under the plans were $95.1 million.
13. RETIREMENT PLANS
In addition to required governmental retirement plans, the Company and certain
of its subsidiaries have retirement plans for eligible employees that provide
benefits based upon age, years of service and compensation. Certain plans also
consider primary social security payments in calculating benefits. The expenses
for these governmental, Company and subsidiary plans were $285.6 million in
1995, $301.3 million in 1994 and $262.3 million in 1993. Expenses for Company
and subsidiary plans were $109.0 million in 1995, $140.1 million in 1994 and
$97.0 million in 1993.
Net pension cost for the Company's plans includes the following components:
1995 1994 1993
- ------------------------------------------------------------
Service cost - benefits
earned during the year ....... $ 98.7 $ 109.8 $ 97.4
Interest cost on projected
benefit obligation ........... 139.8 134.7 135.7
Net amortization and deferral .. 185.9 (105.9) 74.4
Actual return on assets ........ (315.4) 1.5 (210.5)
- ------------------------------------------------------------
Net pension cost ............... $ 109.0 $ 140.1 $ 97.0
============================================================
The net pension cost attributable to international plans and included above
was $47.2 million in 1995, $42.5 million in 1994 and $41.8 million in 1993.
In 1993, net losses of $254.8 million were recorded pursuant to Statement
No. 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, due to work-force reduction
programs associated with the 1993 restructuring efforts and sale of the Calgon
Water Management business.
The Company's funding policy for Employee Retirement Income Security Act
of 1974 and foreign plans is to contribute amounts to maintain assets in excess
of the projected benefit obligations. Company contributions over the next
several years are expected to continue to improve the funded status of the
worldwide plans. The plans' assets are diversified in stocks, bonds, short-term
and other investments.
46
<PAGE>
The plans' funded status at December 31 was as follows:
1995 1994
----------------- -----------------
OVER UNDER Over Under
FUNDED FUNDED Funded Funded
- --------------------------------------------------------------------------------
Plan assets at market value ........... $1,726.2 $ 19.5 $1,328.7 $ 42.5
- --------------------------------------------------------------------------------
Accumulated benefit obligation
Vested .............................. 1,197.5 62.3 1,051.6 86.6
Nonvested ........................... 250.5 27.8 178.4 33.1
- --------------------------------------------------------------------------------
1,448.0 90.1 1,230.0 119.7
- --------------------------------------------------------------------------------
Plan assets in excess of (less than)
accumulated benefit obligation ...... 278.2 (70.6) 98.7 (77.2)
Projected compensation increases ...... 466.4 132.6 297.1 95.2
- --------------------------------------------------------------------------------
Projected benefit obligation in
excess of plan assets ............... (188.2) (203.2) (198.4) (172.4)
Unamortized transitional net
(asset) obligation .................. (97.4) 8.9 (117.8) 9.1
Unrecognized net loss ................. 380.3 43.6 216.6 24.9
Unrecognized prior service cost ....... 48.9 14.3 92.2 19.2
- --------------------------------------------------------------------------------
Net pension asset (liability) ......... $ 143.6 $ (136.4) $ (7.4) $(119.2)
================================================================================
International plan assets at market value, included in the above table,
were $592.9 million in 1995 and $544.0 million in 1994. The accumulated benefit
obligation of international plans, included in this table, was $545.8 million in
1995 and $484.0 million in 1994.
The discount rate used in determining the projected benefit obligation and
costs was 7% at December 31, 1995, 8.5% at December 31, 1994 and 7.5% at
December 31, 1993. The rate of future compensation increases used in determining
the projected benefit obligation and costs was 4.5% at December 31, 1995, and 5%
at December 31, 1994 and 1993. The expected long-term rate of return on plan
assets was 10% at December 31, 1995, 1994 and 1993.
In the aggregate, average international plan assumptions do not vary
significantly from U.S. assumptions.
14. OTHER POSTRETIRMENT BENEFITS
The Company provides health-care (in excess of Medicare) and life insurance
benefits for eligible active and retired employees, principally in the United
States. The Company reserves the right to modify such benefits in the future.
The expected costs of providing postretirement health-care and life insurance
benefits are accrued over the employee service period. The cost of
postretirement benefits other than pensions was $7.6 million In 1995, $42.1
million in 1994 and $79.9 million in 1993. The cost of health-care and life
insurance benefits for active employees was $125.0 million in 1995, $130.4
million in 1994 and $122.5 million in 1993.
Net postretirement benefit cost includes the following components:
1995 1994 1993
- -----------------------------------------------------------------------------
Service cost - benefits
earned during the year .......................... $ 16.8 $ 31.7 $ 31.0
Interest cost on accumulated
postretirement benefit obligation ............... 44.0 58.4 69.2
Net amortization and deferral ..................... 54.1 (52.4) 2.1
Actual return on assets ........................... (107.3) 4.4 (22.4)
- ------------------------------------------------------------------------------
Net postretirement benefit cost ................... $ 7.6 $ 42.1 $ 79.9
==============================================================================
Net postretirement benefit cost in 1995 and 1994 includes the effects of
changes in certain cost-sharing provisions and the Company's method of providing
certain benefits.
In addition to net postretirement benefit cost, net losses of $71.7 million
were recorded in 1993 pursuant to Statement No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, due to work-force reduction
programs associated with the 1993 restructuring efforts and sale of the Calgon
Water Management business.
The Company contributes to a retiree health-care qualified trust that will
be used to pay a portion of its postretirement benefit liability. The plans'
assets are diversified in stocks, bonds and short-term and other investments.
The plans' funded status at December 31 was as follows:
1995 1994
- --------------------------------------------------------------------------
Plan assets at market value $ 473.8 $ 363.6
- --------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees ...................................... 392.4 363.3
Other fully eligible participants ............. 45.3 90.4
Other active participants ..................... 231.0 295.0
- --------------------------------------------------------------------------
668.7 748.7
- --------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets ...................... (194.9) (385.1)
Unrecognized net (gain) loss .................... (98.4) 41.9
Unrecognized plan changes ....................... (154.2) (163.0)
- --------------------------------------------------------------------------
Net postretirement benefit liability ........... $(447.5) $(506.2)
==========================================================================
The discount rate used in determining the accumulated postretirement
benefit obligation and costs was 7% at December 31, 1995, 8.5% at December 31,
1994 and 7.5% at December 31, 1993. The expected long-term rate of return on
plan assets was 10% in 1995, 1994 and 1993. The health-care cost trend rate was
9.3% at December 31, 1995. The rate will
47
<PAGE>
gradually decline to 5.0% over an 8-year period. The effect of increasing the
health-care cost trend rate by one percentage point in each year would increase
the accumulated post retirement benefit obligation at December 31, 1995 by $70.5
million and the total service and interest cost components of the 1995 net
postretirement benefit cost by $9.0 million.
15. OTHER (INCOME) EXPENSE, NET
1995 1994 1993
- --------------------------------------------------------------
Interest income $(191.0) $(153.9) $(138.9)
Interest expense 98.7 124.4 84.7
Exchange (gains) losses (7.8) 26.2 68.2
Minority interests 91.9 93.4 50.3
Equity (income) loss
from affiliates (346.3) (56.6) 26.1
Amortization of goodwill and
other intangibles 192.0 193.9 28.2
Other, net 468.8 (51.2) (82.4)
- --------------------------------------------------------------
$306.3 $ 176.2 $ 36.2
==============================================================
The improving trend in exchange (gains) losses primarily reflects a
reduction in exchange losses from Brazilian operations. Such losses were largely
offset by local pricing actions.
Minority interests include third parties' share of exchange gains and
losses arising from translation of the financial statements into U.S. dollars.
The improving trend in equity (income) loss from affiliates primarily
reflects the 1994 formation of the Astra Merck joint venture. Dividends and
distributions received from affiliates accounted for using the equity method
were $296.1 million in 1995.
Amortization of goodwill and other intangibles in 1995 and 1994 reflects
the full year's impact of the Medco acquisition.
In 1995, other, net, includes $500.5 million of nonrecurring charges
consisting of $278.5 million for losses on sales of assets, $161.2 million for
endowment of The Merck Company Foundation and $60.8 million for settlement of
claims.
In 1993, other, net, includes a gain of $148.8 million from the Company's
sale of its Calgon Water Management business. This gain was largely offset by a
$78.8 million provision for environmental costs and a $60.0 million provision
for the funding of The Merck Company Foundation.
Interest paid was $85.5 million in 1995, $144.0 million in 1994 and $89.1
million in 1993.
16. TAXES ON INCOME
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
Tax Rate
1995 --------------------------
Amount 1995 1994 1993
- ------------------------------------------------------------------------------
U.S. statutory rate applied
to pretax income ..................... $1,679.0 35.0% 35.0% 35.0%
Differential arising from:
Tax exemption for Puerto Rico
operations ........................... (86.4) (1.8) (3.8) (5.1)
Equity income from affiliates ........ (70.9) (1.5) (.2) (.1)
Foreign operations ................... (44.2) (.9) (1.1) (1.4)
State taxes .......................... 73.0 1.5 2.2 2.8
Other, including
minority interests ................... (88.5) (1.8) -- (1.0)
- ------------------------------------------------------------------------------
$1,462.0 30.5% 32.1% 30.2%
==============================================================================
Domestic companies contributed approximately 76% in 1995, 73% in 1994 and 78%
in 1993 to consolidated pretax income.
Taxes on income consisted of:
1995 1994 1993
- ------------------------------------------------------------
Current provision
Federal ..................... $1,043.4 $1,003.1 $668.2
Foreign ..................... 455.1 359.0 311.4
State ....................... 149.4 152.6 123.9
- ------------------------------------------------------------
1,647.9 1,514.7 1,103.5
- ------------------------------------------------------------
Deferred provision
Federal ..................... (64.3) (166.6) (84.0)
Foreign ..................... (95.9) 72.2 (89.7)
State ....................... (25.7) (2.1) 6.7
- ------------------------------------------------------------
(185.9) (96.5) (167.0)
- ------------------------------------------------------------
$1,462.0 $1,418.2 $ 936.5
============================================================
48
<PAGE>
Deferred income taxes at December 31 consisted of:
1995 1994
------------------- -------------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------
Other intangibles ............. $ -- $1,243.1 $ -- $1,305.1
Accelerated depreciation ...... -- 524.9 -- 480.5
Inventory related ............. 463.6 180.3 337.7 176.4
Other postretirement benefits . 183.4 -- 199.5 --
Provision for joint venture
obligation .................. 174.4 -- 174.9 --
Restructuring charge 155.3 -- 123.9 --
Equity investments -- 153.4 -- 82.4
Equivalent Medco
options assumed 92.4 -- 139.5 --
Environmental related 81.7 -- 85.7 --
Compensation related 70.5 -- 59.1 --
Pension benefits 28.3 65.2 68.8 52.5
Leasing activity -- 40.7 -- 53.1
Other 663.5 428.7 574.5 412.7
- ---------------------------------------------------------------------------
1,913.1 2,636.3 1,763.6 2,562.7
Valuation allowance (15.0) -- (3.8) --
- ---------------------------------------------------------------------------
$1,898.1 $2,636.3 $1,759.8 $2,562.7
===========================================================================
At December 31, 1995 and 1994, current deferred tax assets of $722.8
million and $481.1 million, respectively, were included in Prepaid expenses and
taxes and current deferred tax liabilities of $98.0 million and $74.6 million,
respectively, were included in Income taxes payable. In addition, at December
31, 1995 and 1994, noncurrent deferred tax assets of $26.3 million and $32.2
million, respectively, were included in Other assets and noncurrent deferred tax
liabilities of $1.4 billion and $1.2 billion, respectively, were included in
Deferred income taxes and noncurrent liabilities. Income taxes paid in 1995,
1994 and 1993 were $2.0 billion, $857.8 million and $859.9 million,
respectively. The increase in 1995 primarily reflects taxes paid on the 1994
gain resulting from the sale to Astra of an interest in a joint venture, the
1995 gains on sales of subsidiaries and a change in law affecting the
calculation of Federal estimated payments.
At December 31, 1995, foreign earnings of $4.8 billion and domestic
earnings of $880.9 million have been retained indefinitely by subsidiary
companies for reinvestment. No provision is made for income taxes that would be
payable upon the distribution of such earnings, and it is not practicable to
determine the amount of the related unrecognized deferred income tax liability.
These earnings include income from manufacturing operations in Ireland, that
were tax exempt through 1990 and are taxed at 10% thereafter. In addition,the
Company has domestic subsidiaries operating in Puerto Rico under a tax incentive
grant that expires in 2008.
The Company's Federal income tax returns have been audited through 1989.
17. GEOGRAPHIC SEGMENT REPORTING
1995 1994 1993
- ----------------------------------------------------------------------------
CUSTOMER SALES
North America .................... $11,704.3 $10,561.6 $ 6,431.8
Europe ........................... 2,894.3 2,552.6 2,397.8
Asia Pacific ..................... 1,753.2 1,586.7 1,425.0
Other Foreign .................... 329.3 268.9 243.5
AFFILIATE SALES
North America .................... 1,640.3 1,390.2 1,224.9
Europe ........................... 798.8 611.3 573.8
Asia Pacific ..................... 59.1 44.8 37.2
Other Foreign .................... 1.5 .6 .8
Eliminations ..................... (2,499.7) (2,046.9) (1,836.6)
- ----------------------------------------------------------------------------
$16,681.1 $14,969.8 $10,498.2
============================================================================
INCOME BEFORE TAXES(1)
North America ................... $ 3,442.1 $ 3,182.7 $ 2,488.7
Europe .......................... 925.2 1,021.4 379.3
Asia Pacific .................... 323.4 277.3 241.9
Other Foreign ................... (17.4) 1.9 (34.3)
Eliminations .................... (259.4) (102.7) (23.1)
- ----------------------------------------------------------------------------
$ 4,413.9 4,380.6 3,052.5
Non-operating income ............ 383.3 34.6 50.2
- ----------------------------------------------------------------------------
$ 4,797.2 $ 4,415.2 $ 3,102.7
============================================================================
ASSETS
North America ................... $14,563.3 $14,538.9 $13,185.5
Europe .......................... 2,202.4 2,158.2 1,956.5
Asia Pacific .................... 1,542.3 1,310.3 1,277.6
Other Foreign ................... 196.9 151.6 112.2
Cash and Investments ............ 5,319.4 3,686.6 3,322.2
Other Corporate Assets .......... 1,513.3 1,147.9 1,016.2
Eliminations .................... (1,505.8) (1,136.9) (942.7)
- ----------------------------------------------------------------------------
$23,831.8 $21,856.6 $19,927.5
============================================================================
(1) Amounts for 1993 include a restructuring charge of $538.6 million for North
America, $222.8 million for Europe, $1.7 million for Asia Pacific and $11.9
million for Other Foreign.
Sales to affiliates by North America include products manufactured in the
United States that are shipped to facilities in foreign countries for
manufacture into finished products. Sales to affiliates are at negotiated prices
based on specific market conditions. Profits are shown within the geographic
areas at the time of sale; such profits, however, are included in consolidated
income when a sale is made to a customer. Research and development expenses are
included in the geographic area in which the expenses were incurred. Investments
in affiliates accounted for using the equity method are included in Other
Corporate Assets and earnings from these investments are included in Non-
operating income. These affiliates primarily operate in North America.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its operations abroad. However, the Company closely reviews its methods of
operations, particularly in less developed countries, and adopts strategies
responsive to changing economic and political conditions.
49
<PAGE>
MANAGEMENT'S REPORT
Primary responsibility for the integrity and objectivity of the Company's
financial statements rests with management. The financial statements report on
management's stewardship of Company assets. These statements are prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
Nonfinancial information included in the Annual Report has also been prepared by
management and is consistent with the financial statements.
To assure that financial information is reliable and assets are
safeguarded, management maintains an effective system of internal controls and
procedures, important elements of which include: careful selection, training and
development of operating and financial managers; an organization that provides
appropriate division of responsibility; and communications aimed at assuring
that Company policies and procedures are understood throughout the organization.
In establishing internal controls, management weighs the costs of such systems
against the benefits it believes such systems will provide. A staff of internal
auditors regularly monitors the adequacy and application of internal controls on
a worldwide basis.
To insure that personnel continue to understand the system of internal
controls and procedures, and policies concerning good and prudent business
practices, the Company periodically conducts the Management's Stewardship
Program for key management and financial personnel. This program reinforces the
importance and understanding of internal controls by reviewing key corporate
policies, procedures and systems. In addition, an ethical business practices
program has been implemented to reinforce the Company's long-standing commitment
to high ethical standards in the conduct of its business.
The independent public accountants have audited the Company's consolidated
financial statements as described in their report. Although their audits were
not designed for the purpose of forming an opinion on internal controls, the
Company's accounting systems, procedures and internal controls were subject to
testing and other auditing procedures sufficient to enable the independent
public accountants to render their opinion on the Company's financial
statements.
The recommendations of the internal auditors and independent public
accountants are reviewed by management. Control procedures have been implemented
or revised as appropriate to respond to these recommendations. No material
control weaknesses have been brought to the attention of management. In
management's opinion, for the year ended December 31, 1995, the internal control
system was strong and accomplished the objectives discussed herein.
/s/ Raymond V. Gilmartin /s/ Judy C. Lewent
Raymond V. Gilmartin Judy C. Lewent
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF
INDEPENDENT
PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of Merck & Co., Inc.:
We have audited the accompanying consolidated balance sheets of Merck & Co.,
Inc. (a New Jersey corporation) and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Merck & Co., Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York ARTHUR ANDERSEN LLP
January 23, 1996
50
<PAGE>
AUDIT
COMMITTEE'S REPORT
The Audit Committee of the Board of Directors is comprised of six outside
directors. The members of the Committee are: Charles E. Exley Jr., Chairman;
Carolyne K. Davis, Ph.D., Vice Chairman; Sir Derek Birkin; William N. Kelley,
M.D.; Samuel O. Thier, M.D., and Dennis Weatherstone. The Committee held three
meetings during 1995.
The Audit Committee meets with the independent public accountants,
management and internal auditors to assure that all are carrying out their
respective responsibilities. The Audit Committee reviews the performance and
fees of the independent public accountants prior to recommending their
appointment, and meets with them, without management present, to discuss the
scope and results of their audit work, including the adequacy of internal
controls and the quality of financial reporting. Both the independent public
accountants and the internal auditors have full access to the Audit Committee.
/s/ Charles E. Exley Jr.
Charles E. Exley Jr.
Chairman, Audit Committee
COMPENSATION
AND BENEFITS
COMMITTEE'S REPORT
The Compensation and Benefits Committee is comprised of five outside directors.
The members of the Committee are: H. Brewster Atwater Jr., Chairman; Lawrence A.
Bossidy, Vice Chairman; William G. Bowen, Ph.D.; Johnnetta B. Cole, Ph.D., and
Lloyd C. Elam, M.D. The Committee held five meetings during 1995.
The Compensation and Benefits Committee's major responsibilities include
providing for senior management succession and overseeing the Company's
compensation and benefit programs. The Committee seeks to provide rewards which
are highly leveraged to performance and clearly linked to Company and individual
results. The objective is to ensure that compensation and benefits are at levels
which enable Merck to attract and retain high quality employees. The Committee
views stock ownership as a vehicle to align the interests of employees with
those of the stockholders. A long-term focus is essential for success in the
pharmaceutical industry and is encouraged by making a high proportion of
executive officer compensation dependent on long-term performance and on
enhancing stockholder value.
/s/ H. Brewster Atwater Jr.
H. Brewster Atwater Jr.
Chairman, Compensation and Benefits Committee
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA/(1)/ Merck & Co., Inc. and Subsidiaries
($ in millions except per share amount) 1995 1994 1993/(2)/ 1992/(3)/ 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Results for Year:
Sales.................................. $16,681.1 $14,969.8 $10,498.2 $ 9,662.5 $8,602.7 $7,671.5 $6,550.5
Materials and production costs......... 7,456.3 5,962.7 2,497.6 2,096.1 1,934.9 1,778.1 1,550.3
Marketing/administrative expenses...... 3,297.8 3,177.5 2,913.9 2,963.3 2,570.3 2,388.0 2,013.4
Research/development expenses.......... 1,331.4 1,230.6 1,172.8 1,111.6 987.8 854.0 750.5
Gains on sales of specialty
chemical businesses.................. (682.9) -- -- -- -- -- --
Restructuring charge................... 175.0 -- 775.0 -- -- -- --
Gain on joint venture formation........ -- (492.0) -- -- -- -- --
Provision for joint venture obligation. -- 499.6 -- -- -- -- --
Other (income) expense, net............ 306.3 176.2 36.2 (72.1) (57.0) (47.4) (46.7)
Income before taxes.................... 4,797.2 4,415.2 3,102.7 3,563.6 3,166.7 2,698.8 2,283.0
Taxes on income........................ 1,462.0 1,418.2 936.5 1,117.0 1,045.0 917.6 787.6
Net income............................. 3,335.2 2,997.0 2,166.2 2,446.6 2,121.7 1,781.2 1,495.4
Earnings per common share.............. $2.70 $2.38 $1.87 $2.12 $1.83 $1.52 $1.26
Dividends declared..................... 1,578.0 1,463.1 1,239.0 1,106.9 920.3 788.1 681.5
Dividends paid per common share........ $1.24 $1.14 $1.03 $.92 $.77 $.64 $.55
Capital expenditures................... 1,005.5 1,009.3 1,012.7 1,066.6 1,041.5 670.8 433.0
Depreciation........................... 463.3 475.6 348.4 290.3 242.7 231.4 206.4
- -----------------------------------------------------------------------------------------------------------------------------
YEAR-END POSITION:
Working capital........................ $ 2,928.0 $ 1,473.1 $ (161.1) $ 782.4 $1,496.5 $ 939.2 $1,502.5
Property, plant and equipment (net).... 5,269.1 5,296.3 4,894.6 4,271.1 3,504.5 2,721.7 2,292.5
Total assets........................... 23,831.8 21,856.6 19,927.5 11,086.0 9,498.5 8,029.8 6,756.7
Long-term debt......................... 1,372.8 1,145.9 1,120.8 495.7 493.7 124.1 117.8
Stockholders' equity................... 11,735.7 11,139.0 10,021.7 5,002.9 4,916.2 3,834.4 3,520.6
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Net income as a % of:
Sales................................ 20.0% 20.0% 20.6% 25.3% 24.7% 23.2% 22.8%
Average total assets................. 14.6% 14.3% 14.0% 24.1% 24.2% 24.1% 23.2%
- -----------------------------------------------------------------------------------------------------------------------------
YEAR-END STATISTICS:
Average common shares
outstanding (millions)................ 1,236.1 1,257.2 1,156.5 1,153.5 1,159.9 1,172.1 1,188.3
Number of stockholders................. 243,000 244,700 231,300 161,200 91,100 82,300 75,600
Number of employees.................... 45,200 47,500 47,100/(4)/ 38,400 37,700 36,900 34,400
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1988 1987 1986 1985
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Results for Year:
Sales................................. $5,939.5 $5,061.3 $4,128.9 $3,547.5
Materials and production costs........ 1,526.1 1,444.3 1,338.0 1,272.4
Marketing/administrative expenses..... 1,877.8 1,682.1 1,269.9 1,009.0
Research/development expenses......... 668.8 565.7 479.8 426.3
Gains on sales of specialty
chemical businesses................. -- -- -- --
Restructuring charge.................. -- -- -- --
Gain on joint venture formation....... -- -- -- --
Provision for joint venture obligation -- -- -- --
Other (income) expense, net........... (4.2) (36.0) (32.1) (17.2)
Income before taxes................... 1,871.0 1,405.2 1,073.3 857.0
Taxes on income....................... 664.2 498.8 397.6 317.1
Net income............................ 1,206.8 906.4 675.7 539.9
Earnings per common share............. $1.02 $.74 $.54 $.42
Dividends declared.................... 546.3 365.2 278.5 235.1
Dividends paid per common share....... $.43 $.27 $.21 $.18
Capital expenditures.................. 372.7 253.7 210.6 237.6
Depreciation.......................... 189.0 188.5 167.2 163.6
- -----------------------------------------------------------------------------------------------------------------------------
YEAR-END POSITION:
Working capital....................... $1,480.3 $ 798.3 $1,094.3 $1,106.6
Property, plant and equipment (net)... 2,070.7 1,948.0 1,906.2 1,882.8
Total assets.......................... 6,127.5 5,680.0 5,105.2 4,902.2
Long-term debt........................ 142.8 167.4 167.5 170.8
Stockholders' equity.................. 2,855.8 2,116.7 2,541.2 2,607.7
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Net income as a % of:
Sales............................... 20.3% 17.9% 16.4% 15.2%
Average total assets................ 20.4% 16.8% 13.5% 11.4%
- -----------------------------------------------------------------------------------------------------------------------------
YEAR-END STATISTICS:
Average common shares
outstanding (millions)............... 1,186.9 1,221.2 1,253.9 1,282.7
Number of stockholders................ 68,500 56,900 48,300 47,000
Number of employees................... 32,000 31,100 30,700 30,900
=============================================================================================================================
</TABLE>
(1) Amounts after 1992 include the impact of Medco from the date of acquisition
on November 18, 1993.
(2) Amounts for 1993 include a restructuring charge of $.45 per share.
(3) Results of operations for 1992 exclude the cumulative effect of accounting
changes.
(4) Increase in 1993 is due to the inclusion of 10,300 Medco employees.
51
<PAGE>
Exhibit 21
MERCK & CO., INC. SUBSIDIARIES
Each of the subsidiaries below does business under the name in which
listed. A subsidiary of a subsidiary is indicated by indentation under the
immediate parent. All voting securities of the subsidiaries named are owned
directly or indirectly by the Company, except where otherwise indicated.
Certain other subsidiaries, principally overseas companies that are less than
wholly owned, have been omitted since, considered in the aggregate as a single
subsidiary, they would not constitute a significant subsidiary as of December
31, 1995.
Country or State
Name of Incorporation
---- -----------------
Chibret A/S Denmark
International Indemnity Limited Bermuda
Merck Ventures Canada, Ltd. Canada
Laboratorios Prosalud S.A. Peru
Merck-Medco Managed Care, Inc. Delaware
Apartment Lease Corporation New York
CM Delaware Corporation Delaware
DM-MG, Inc. Delaware
Flex Rx of Pennsylvania, Inc. Pennsylvania
Managed Care, Inc. Nevada
MCCO Corp. New Jersey
MCSI Corp. New Jersey
Medco Containment Insurance Company of New Jersey New Jersey
Medco Containment Insurance Company of New York New York
Medco Containment Life Insurance Company Iowa
Medco Holdings Corp. Delaware
Medical Marketing Group, Inc. Delaware
KSF Medical Publishing Company, Inc. New York
Medical Marketing, Inc. Delaware
MMGI Corp. New Jersey
Medco MM Corp. New Jersey
NJRE Corporation New Jersey
MW Holdings, Inc. Delaware
NRx Services, Inc. New York
NRx Federal Corp. Delaware
<PAGE>
National Administrative Services, Inc. Delaware
National Pharmacies, Inc. New Jersey
National Rx Services No. 2, Inc. Florida
National Rx Services No. 2, Inc. of Ohio Ohio
National Rx Services No. 3, Inc. of Ohio Ohio
National Rx Services, Inc. Ohio
National Rx Services, Inc. of Mass. Massachusetts
National Rx Services, Inc. of Missouri Missouri
National Rx Services, Inc. of Nevada Nevada
National Rx Services, Inc. of Oklahoma Oklahoma
National Rx Services, Inc. of Pennsylvania Pennsylvania
National Rx Services, Inc. of Texas Texas
National Rx Services, Inc. of Virginia Virginia
National Rx Services, Inc. of Washington Washington
National Rx Services, Inc. Florida
National Rx Services, Inc. California
New York Paid Independent Practice Association No. 1, Inc. New York
New York Paid Independent Practice Association No. 2, Inc. New York
New York Paid Independent Practice Association No. 3, Inc. New York
New York Paid Independent Practice Association No. 4, Inc. New York
New York Paid Independent Practice Association No. 5, Inc. New York
Paid Direct, Inc. Delaware
Paid Prescriptions, Inc. Nevada
Physician Marketing Services, Inc. Delaware
Replacement Distribution Center, Inc. Ohio
Merck and Company, Incorporated Delaware
Merck Capital Investments, Inc. Delaware
Merck Capital Resources, Inc. Delaware
Merck de Puerto Rico, Inc. Delaware
Merck Foreign Sales Corporation Ltd. Bermuda
Merck Holdings, Inc. Delaware
Frosst Laboratories, Inc. Delaware
Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal
2
<PAGE>
Hubbard Farms, Inc. Delaware
Hubbard Foods, Inc. New Hampshire
Hubbard France S.A.R.L. France
Merck Resource Management, Inc. Delaware
Merck Ventures, Inc. Delaware
Merck Sharp & Dohme de Venezuela C.A. Venezuela
Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme (I.A.) Corp. Delaware
Merck Sharp & Dohme (Argentina) Inc. Delaware
MSD Korea, Ltd. Korea
Merck Sharp & Dohme Ilaclari A.S. Turkey
Merck Sharp & Dohme Industrial e Exportadora Limitada Brazil
Merck Sharp & Dohme Farmaceutica e Veterinaria Ltda. Brazil
Merck Sharp & Dohme (International) Limited Bermuda
Merck Sharp & Dohme (Asia) Limited Hong Kong
Merck Sharp & Dohme (China) Limited Hong Kong
Merck Sharp & Dohme S.A. France
Merck Sharp & Dohme International Services B.V. Holland
Merck Sharp & Dohme - Lebanon S.A.L. Lebanon
Merck Sharp & Dohme (Middle East) Limited Cyprus
Merck Sharp & Dohme Overseas Finance S.A. Luxembourg
Merck Frosst Canada, Inc. Canada
Merck Sharp & Dohme (Australia) Pty. Limited Australia
Merck Sharp & Dohme B.V. Netherlands
C V Laboratories B.V. Netherlands
Hubbard Belgium International N.V. Belgium
Hubbard Deutschland GmbH Germany
Hubbard Italia SRL Italy
Hubbard Nederland B.V. Netherlands
Hubbard Poultry U.K. Limited Great Britain
Financiere MSD S.A.S. France
Laboratoires Merck Sharp & Dohme Chibret SNC France
Chibret Pharmazeutische GmbH Germany
Merck Sharp & Dohme GmbH Austria
Merck Sharp & Dohme (Italia) S.p.A. Italy
MSD Sharp & Dohme GmbH Germany
Dieckmann Arzneimittel GmbH Germany
MSD Chibropharm GmbH Germany
MSD Unterstutzungskasse GmbH Germany
Varipharm Arzneimittel GmbH Germany
3
<PAGE>
Merck Sharp & Dohme-Chibret AG Switzerland
MSD Technology L.P. Delaware
Merck Finance Co., Inc. Delaware
Merck Sharp & Dohme (Holdings) Limited Great Britain
British United Turkeys Limited Great Britain
Turkey Research & Development Limited Great Britain
Charles E. Frosst (U.K.) Limited Great Britain
Merck Sharp & Dohme Limited Great Britain
Merck Sharp & Dohme Finance Europe Great Britain
Thomas Morson & Son Limited Great Britain
Merck Sharp & Dohme Idea, Inc. Switzerland
Merck Sharp & Dohme (Sweden) A.B. Sweden
Merck Sharp & Dohme Trading & Service Limited
Liability Company Hungary
MSD Ireland (Holdings) S.A. Luxembourg
Fabrica de Productos Quimicos y Farmaceuticos
ABELLO, S.A. Spain
Fregenal Holdings S.A. Panama
Frosst Iberica, S.A. Spain
Laboratorios Quimico-Farmaceuticos Chibret, Lda. Portugal
Merck Sharp & Dohme de Espana, S.A. Spain
Merck Sharp & Dohme (Ireland) Bermuda
Blue Jay Investments C.V. Holland
MSD Finance, B.V. Netherlands
Neopharmed S.p.A. Italy
Ruskin Limited Bermuda
MSD (Norge) A/S Norway
Suomen MSD Oy Finland
Merck Sharp & Dohme of Pakistan Limited Pakistan
Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware
MH II Corp Delaware
MSD Chimie S.A. France
MSD Lakemedel (Scandinavia) A.B. Sweden
Prosalud Peruana S.A. Peru
TELERx Marketing, Inc. Pennsylvania
Merck Investment Co., Inc. Delaware
Merck Sharp & Dohme (Europe) Inc. Delaware
Merck Sharp & Dohme Industria Quimica e Veterinaria Limitada Brazil
Merck Sharp & Dohme, Limitada Portugal
4
<PAGE>
Merck Sharp & Dohme (New Zealand) Limited New Zealand
Charles E. Frosst (New Zealand) Limited New Zealand
Merck Sharp & Dohme Overseas Finance N.V. Neth. Antilles
Merck Sharp & Dohme (Panama) S.A. Panama
Merck Sharp & Dohme Peru S.C. Peru
Merck Sharp & Dohme (Philippines) Inc. Philippines
MI (FDL) Holdings, Inc. Delaware
MSD International Holdings, Inc. Delaware
Banyu Pharmaceutical Company, Limited/1/ Japan
Banyu A.S.C. Co., Ltd./1/ Japan
Nippon Merck-Banyu Co., Limited/1/ Japan
MSD (Japan) Co., Limited Japan
___________
/1/ 49.13% publicly held
5
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned does hereby appoint CELIA A. COLBERT, MARY M.
McDONALD and BERT I. WEINSTEIN and each of them, severally, his/her true and
lawful attorney or attorneys to execute on behalf of the undersigned (whether on
behalf of the Company, or as an officer or director thereof, or by attesting the
seal of the Company, or otherwise) the Form l0-K Annual Report of Merck & Co.,
Inc. for the fiscal year ended December 3l, l995 under the Securities Exchange
Act of l934, including amendments thereto and all exhibits and other documents
in connection therewith.
IN WITNESS WHEREOF, this instrument has been duly executed as of the
27th day of February, l996.
MERCK & CO., Inc.
By /s/ Raymond V. Gilmartin
---------------------------------
Raymond V. Gilmartin
(Chairman of the Board, President
and Chief Executive Officer)
/s/ Raymond V. Gilmartin Chairman of the Board, President
---------------------------- and Chief Executive Officer
Raymond V. Gilmartin (Principal Executive Officer; Director)
/s/ Judy C. Lewent Senior Vice President and Chief Financial
---------------------------- Officer
Judy C. Lewent (Principal Financial Officer)
/s/ Peter E. Nugent Vice President, Controller
---------------------------- (Principal Accounting Officer)
Peter E. Nugent
DIRECTORS
/s/ Derek Birkin /s/ Lloyd C. Elam
- -------------------------------- --------------------------------
Derek Birkin Lloyd C. Elam
/s/ Lawrence A. Bossidy /s/ Charles E. Exley, Jr.
- -------------------------------- --------------------------------
Lawrence A. Bossidy Charles E. Exley, Jr.
/s/ William G. Bowen /s/ William N. Kelley
- -------------------------------- --------------------------------
William G. Bowen William N. Kelley
/s/ Johnnetta B. Cole /s/ Samuel O. Thier
- -------------------------------- --------------------------------
Johnnetta B. Cole Samuel O. Thier
/s/ Carolyne K. Davis /s/ Dennis Weatherstone
- -------------------------------- --------------------------------
Carolyne K. Davis Dennis Weatherstone
<PAGE>
EXHIBIT 24
I, Nancy V. Van Allen, Assistant Secretary of MERCK & CO., Inc., a
Corporation duly organized and existing under the laws of the State of New
Jersey, do hereby certify that the following is a true copy of a resolution
adopted at a meeting of the Directors of said Corporation held in Whitehouse
Station, New Jersey, on February 27, l996, duly called in accordance with the
provisions of the By-Laws of said Corporation, and at which a quorum of
Directors was present:
"Special Resolution No. 7 - 1996
-------------------------------
RESOLVED, that the proposed form of Form l0-K Annual Report of the
Company for the fiscal year ended December 3l, l995 presented to this
meeting is hereby approved with such changes as the proper officers of the
Company, with the advice of counsel, deem appropriate; and
RESOLVED, that each officer and director who may be required to
execute the aforesaid Form l0-K Annual Report or any amendments thereto
(whether on behalf of the Company or as an officer or director thereof, or
by attesting the seal of the Company, or otherwise) is hereby authorized to
execute a power of attorney appointing Celia A. Colbert, Mary M. McDonald
and Bert I. Weinstein and each of them, severally, his/her true and lawful
attorney or attorneys to execute in his/her name, place and stead (in any
such capacity) such Form l0-K Annual Report and any and all amendments
thereto and any and all exhibits and other documents necessary or
incidental in connection therewith and to file the same with the Securities
and Exchange Commission, each of said attorneys to have power to act with
or without the others, and to have full power and authority to do and
perform in the name and on behalf of each of said officers and directors,
or both, as the case may be, every act whatsoever necessary or advisable to
be done in the premises as fully and to all intents and purposes as any
such officer or director might or could do in person."
IN WITNESS WHEREOF, I have hereunto subscribed my signature and
affixed the seal of the Corporation this 18th day of March, l996.
[Corporate Seal] /s/ Nancy V. Van Allen
----------------------------
Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
CONSOIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,847
<SECURITIES> 1,502
<RECEIVABLES> 2,496
<ALLOWANCES> 0<F1>
<INVENTORY> 1,873
<CURRENT-ASSETS> 8,618
<PP&E> 7,709
<DEPRECIATION> (2,440)
<TOTAL-ASSETS> 23,832
<CURRENT-LIABILITIES> 5,690
<BONDS> 1,373
4,743
0
<COMMON> 0
<OTHER-SE> 6,993
<TOTAL-LIABILITY-AND-EQUITY> 23,832
<SALES> 16,681
<TOTAL-REVENUES> 16,681
<CGS> 7,456
<TOTAL-COSTS> 7,456
<OTHER-EXPENSES> 1,331
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 99
<INCOME-PRETAX> 4,797
<INCOME-TAX> 1,462
<INCOME-CONTINUING> 3,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,335
<EPS-PRIMARY> 2.70
<EPS-DILUTED> 2.64
<FN>
<F1>NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
