<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the Fiscal Year Ended December 31, 1996
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
MERCK & CO., INC.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
Incorporated in New Jersey I.R.S. Employer
Identification No. 22-1109110
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
28, 1997: 1,209,992,221.
Aggregate market value of Common Stock (no par value) held by non-
affiliates on December 31, 1996 based on closing price on February 28, 1997:
$111,113,000,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of Form 10-K
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Annual Report to stockholders for the fiscal year Parts I and II
ended December 31, 1996
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 23, 1997
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<PAGE>
PART I
ITEM 1. BUSINESS.
Merck & Co., Inc. is a leading research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of human and animal
health products and services. The Company's industry segment is the Human and
Animal Health Products and Services segment, which includes Merck-Medco Managed
Care, L.L.C. (formerly Medco Containment Services, Inc.) ("Merck-Medco"),
acquired in November 1993.
The following table shows the sales of various classes of the Company's
products and services:
<TABLE>
<CAPTION>
($ IN MILLIONS) 1996 1995 1994
--------------- ----- ---- ----
<S> <C> <C> <C>
Elevated cholesterol $ 4,055.9 $ 3,211.1 $ 2,599.0
Hypertension/heart failure 3,512.4 3,021.3 2,752.6
Anti-ulcerants 1,143.6 1,019.8 1,565.7
Antibiotics 822.3 848.3 827.4
Ophthalmologicals 693.1 570.6 482.3
Vaccines/biologicals 586.8 529.9 485.3
Benign prostatic hyperplasia 450.1 405.8 322.7
Osteoporosis 281.8 45.2 4.6
Other Merck human health 71.3 221.3 376.7
Other human health 7,167.3 5,726.7 4,103.9
Animal health/crop protection 1,044.1 1,041.9 1,027.4
Specialty chemical - 39.2 422.2
--------- --------- ---------
Total $19,828.7 $16,681.1 $14,969.8
========= ========= =========
</TABLE>
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
elevated cholesterol products, which include Zocor (simvastatin) and Mevacor
(lovastatin); hypertension/heart failure products which include Vasotec
(enalapril maleate), the largest-selling product among this group, Prinivil
(lisinopril) and Vaseretic (enalapril maleate and hydrochlorothiazide), as well
as Cozaar (losartan potassium) and Hyzaar (losartan potassium and
hydrochlorothiazide), both of which were launched in 1995; anti-ulcerants, of
which Pepcid (famotidine) is the largest-selling, succeeding Prilosec
(omeprazole), the largest-selling prior to its 1994 transfer to the Astra Merck
joint venture; antibiotics, of which Primaxin (imipenem and 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, are the largest-selling; benign prostatic hyperplasia,
which includes Proscar (finasteride), a treatment for symptomatic benign
prostate enlargement; osteoporosis, which includes Fosamax (alendronate sodium),
for treatment in postmenopausal women, launched in the United States in October
1995; and other Merck human health products, which include Crixivan (indinavir
sulfate), an HIV protease inhibitor, cleared for marketing in the United States
by the U.S. Food and Drug Administration ("FDA") in March 1996, 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 Merck-Medco sales of non-Merck
products and Merck-Medco human health services, principally managed prescription
drug programs.
Animal health/crop protection products include medicinals used to control
and alleviate 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. The animal
health/crop protection group also includes 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.
2
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In January 1996, the Company submitted a New Drug Application ("NDA") to
the FDA for Crixivan. 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 April 1996, Vaqta (hepatitis A
vaccine), a new vaccine for the prevention of hepatitis A, was cleared for
marketing and launched in the United States. The Company has also submitted
licensing applications for Vaqta in Canada, China, the United Kingdom and
Germany (where it was cleared and launched in 1995). The Company filed on April
29, 1996 a supplement with the FDA for a new indication for Fosamax for the
prevention of osteoporosis in postmenopausal women. In February 1997, an FDA
Advisory Committee unanimously recommended that the FDA clear for marketing
Fosamax for this new indication. The FDA is not bound by the decision of its
advisory committee. Fosamax is licensed to the Company by Istituto Gentili of
Italy. On October 4, 1996, the FDA cleared Comvax (haemophilus b conjugate
-----------
(meningococcal protein conjugate) and hepatitis B (recombinant) vaccine), a
combination vaccine indicated for protection against diseases caused by
haemophilus influenzae type b and hepatitis B, for marketing in the United
- ----------- ----------
States.
Divestitures -- 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 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.
Strategic Alliances -- In 1982, the Company entered into an agreement with
Astra AB ("Astra") to develop and market Astra products in the United States.
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
business carried on by Astra Merck Inc., in which the Company and Astra each own
a 50% share. The joint venture develops and markets Astra's new prescription
medicines in the United States. Joint venture sales consist primarily of
Prilosec, the first of a class of medications known as proton pump inhibitors
which slow the production of acid from the cells of the stomach lining. In
December 1996, the FDA cleared Prilosec for use as initial therapy in the
treatment of heartburn and other symptoms associated with gastroesophageal
reflux disease.
In 1989, the Company formed a joint venture with Johnson & Johnson to
develop, market and manufacture consumer healthcare products in the United
States. In April 1995, the joint venture obtained FDA clearance in the United
States for marketing Pepcid AC Acid Controller (famotidine), an over-the-counter
form of the Company's ulcer medication Pepcid. This 50% owned joint venture was
expanded into Europe in 1993, and Canada in 1996. The 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.
In 1991, the Company and E.I. du Pont de Nemours and Company ("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 and is providing administrative
services. The Company contributed cash and European marketing rights to several
of its prescription medicines and is providing research and development funding
and expertise and international industry expertise. 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.
3
<PAGE>
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
was discharged in 1996.
Effective April 1992, the Company, through the Merck Vaccine Division, and
Connaught Laboratories, Inc. ("Connaught"), recently renamed Pasteur Merieux
Connaught USA ("PMC USA"), an affiliate of Pasteur Merieux Serums et Vaccins
("Pasteur Merieux"), recently renamed Pasteur Merieux Connaught ("PMC"), 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,
----------- ----------
tetanus, pertussis and poliomyelitis. In addition, the Company and Connaught
have agreed that PMC USA will promote selected Company vaccine products.
In 1994, the Company, through the Merck Vaccine Division, and PMC formed 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. The Company and PMC 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 made 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 1995, Merck-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 several involving women's health. The joint venture company,
Innovative Health Solutions, L.P., will introduce its first health management
programs in 1997.
In December 1996, Merck and Rhone-Poulenc announced plans to combine their
respective animal health and poultry genetics businesses to form an equally
owned joint venture to be called Merial. The joint venture, which is subject to
approval by European, French and U.S. authorities, is expected to be fully
operational by the second quarter of 1997. The Company also announced in
December 1996 that it intends to divest its crop protection business.
Competition -- The markets in which the Company's business is conducted are
highly competitive and, in many cases, highly regulated. 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
4
<PAGE>
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.
Merck-Medco's pharmacy benefit management business is highly competitive.
Merck-Medco competes with other pharmacy benefit managers, insurance companies
and other providers of health care and/or administrators of healthcare programs.
Merck-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 7.
It is generally the Company's position to limit individual product price
increases of its human health products in the United States to the projected
Consumer Price Index ("CPI") plus 1 percent on an annual basis and to limit the
net weighted average price change for all human health products to the projected
general rate of inflation as measured by the CPI.
Distribution -- The Company sells its human health products to drug
wholesalers and retailers, hospitals, clinics, government agencies and managed
healthcare providers such as health maintenance organizations and other
institutions. The Company's professional representatives communicate the
effectiveness, safety and value of the Company's products to healthcare
professionals in private practice, group practices and managed-care
organizations. Animal health/crop protection products are sold to
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 healthcare 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 on reforms to the healthcare system will be
protracted. 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
5
<PAGE>
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% off average manufacturer's
price ("AMP") through September 30, 1992, and has received a minimum rebate of
15.1% 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 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% 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 five CDC contracts in 1996 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, wholesale
distribution and approval for marketing 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
6
<PAGE>
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 healthcare programs.
Each state in which Merck-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, Crixivan,
Enacard (enalapril maleate) for use in dogs, ivermectin-containing products,
Fosamax, Hyzaar, Mefoxin (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
(cyclobenza-prine hydrochloride), HydroDiuril (hydrochlorothiazide), Indocin
(indomethacin), Moduretic (amiloride HCl and hydrochlorothiazide), Sinemet
(carbidopa and levodopa), 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.
7
<PAGE>
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 term restoration (as compensation for regulatory delays) to the new GATT
20-year term. Patents on several products of the Company are impacted. The
favorable ruling of the Federal District Court was affirmed on appeal to the
Federal Circuit Court. A petition for a writ of certiorari to the U.S. Supreme
Court filed by other companies was recently denied.
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 1996 on patent and know-how licenses and other
rights amounted to $105.9 million. The Company also paid royalties amounting to
$214.7 million in 1996 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 6,995 people are employed in the Company's research
activities. Expenditures for the Company's research and development programs
were $1,487.3 million in 1996, $1,331.4 million in 1995 and $1,230.6 million in
1994 and will be approximately $1.7 billion in 1997. 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 1987 through 1996 exceeded $10.0 billion with a compound annual growth
rate of 12%. Research and development costs incurred by the joint ventures in
which the Company participates, totaling $440.7 million in 1996, are not
included in the Company's consolidated research and development expenses.
8
<PAGE>
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 Propecia (finasteride), a treatment for male pattern baldness, for which
the Company submitted an NDA to the FDA in December 1996; Singulair (montelukast
sodium), an oral leukotriene D4 receptor antagonist for the treatment of
asthma, for which the Company filed an NDA with the FDA on February 21, 1997;
Aggrastat (tirofiban hydrochloride), an intravenous platelet blocker for the
treatment of cardiovascular disorders; Maxalt (rizatriptan), a migraine
treatment; and Cosopt (dorzolamide hydrochloride and timolol maleate), a
combination of Timoptic-XE and Trusopt. Other products in development include
an oral growth hormone secretagogue, a new product to treat arthritis pain and
inflammation, an injectable antibiotic, an antifungal agent and certain new
vaccines.
All product or service marks appearing in type form different from that of
the surrounding text are trademarks or service marks owned by or licensed to
Merck & Co., Inc., its subsidiaries or affiliates; except that Cozaar and Hyzaar
are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington,
DE.
EMPLOYEES
At the end of 1996, the Company had 49,100 employees worldwide, with 30,400
employed in the United States, including Puerto Rico. Approximately 29.5% 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 the application of best
available technology to reduce air emissions of known or suspect carcinogens at
its facilities worldwide. In 1996, the Company evaluated emission data reported
in accordance with Superfund Amendments and Reauthorization Act ("SARA")
regulations to the Environmental Protection Agency ("EPA") as adjusted for
foreign operations using SARA criteria to determine if the voluntary goal of a
90% reduction from a 1987 baseline of emissions had been attained. Despite a 60%
increase in production since 1987, the Company did reduce emissions 90% from the
baseline year. In 1996, the Company incurred capital expenditures of
approximately $29.2 million for environmental protection facilities. Capital
expenditures for this purpose are forecasted to exceed $350.0 million for the
years 1997 through 2001. In addition, the Company's operating and maintenance
expenditures for pollution control were approximately $78.4 million in 1996.
Expenditures for this purpose for the years 1997 through 2001 are forecasted to
exceed $492.0 million. The Company is also remediating environmental
contamination resulting from past industrial activity at certain of its sites.
Expenditures for environmental purposes were $18.9 million in 1996 and are
estimated at $136.0 million for the years 1997 through 2001. 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.
9
<PAGE>
GEOGRAPHIC AREA INFORMATION
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales by subsidiaries outside the United States were 30%
of sales in 1996 and 32% of sales in 1995 and 1994.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
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 53 of the Company's 1996 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, 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 provide services throughout the country.
Merck-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, countries in Western Europe,
Central and South America, Africa and the Far East.
Capital expenditures for 1996 were $1,196.7 million compared with $1,005.5
million for 1995. In the United States, these amounted to $937.8 million for
1996 and $793.5 million for 1995. Abroad, such expenditures amounted to $258.9
million for 1996 and $212.0 million for 1995.
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 and projected capacities adequate for current and projected needs for
existing Company products. Some capacity of the plants is being converted, with
any needed modification, to the requirements of newly introduced and future
products.
ITEM 3. LEGAL PROCEEDINGS.
The Company, including Merck-Medco, is party to a number of antitrust
suits, certain of which have been certified as class actions, 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 Merck-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 to settle the federal class
action alleging conspiracy, which represents the single largest group of retail
pharmacy claims, pursuant to which the Company is obligated to pay $51.8
million, in four equal annual installments. In April 1996, the court declined
to approve the settlement. Subsequently, the Company and several other
defendants entered into an amended settlement agreement, which provides for the
same monetary payment and addresses the court's concerns
10
<PAGE>
as expressed in its April 1996 opinion. In June 1996, the court granted approval
of the amended settlement agreement, to which objecting retail class members
filed appeals in July 1996. The Company has not engaged in any conspiracy and no
admission of wrongdoing has been made or is included in the amended 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 with 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 Merck-Medco, the Company and Merck-
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 Merck-Medco and requires that Merck-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 federal
or state agencies or private litigants, 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, 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 the 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. In November 1996, the Company reached a settlement of this
matter with the EPA which included (i) a $1.85 million civil penalty and (ii)
capital improvements to be made at the facility in the amount of approximately
$5.0 million to establish satisfactory environmental controls. Under the terms
of the Kelco Sale Agreement, the Company retained responsibility for the cost of
the settlement.
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. In March 1996, the Company, along with other
pharmaceutical manufacturers, received a notice from the FTC that it was
conducting an investigation into pricing practices. The Company has cooperated
fully with these investigations, 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 investigations, it does
not believe that either 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.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
_________________
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1997)
RAYMOND V. GILMARTIN -- Age 55
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 48
January, 1997 -- President, Human Health-The Americas -- responsible for the
Company's prescription drug business in the United States, Canada and Latin
America, worldwide coordination of marketing policies and medical and scientific
affairs
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
PAUL R. BELL -- Age 51
Effective April, 1997 -- President, Human Health-Asia Pacific -- responsible for
the Company's prescription drug business in the Far East, Australia, New Zealand
and Japan
March, 1994 -- Vice President and Managing Director, Merck Sharp & Dohme
(Australia) Pty. Limited (MSD Australia), a wholly-owned subsidiary of the
Company
September, 1988 -- Managing Director, MSD Australia
CELIA A. COLBERT -- Age 40
January, 1997 -- Vice President, Secretary and Assistant General Counsel
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
CAROLINE DORSA -- Age 37
January, 1997 -- Vice President and Treasurer
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
12
<PAGE>
R. GORDON DOUGLAS JR. -- Age 62
January, 1994 -- President, Merck Vaccines
April, 1991 -- President, Merck Vaccine Division
KENNETH C. FRAZIER -- Age 42
January, 1997 -- Vice President, Public Affairs and Assistant General Counsel --
responsible for public affairs, corporate legal activities and The Merck Company
Foundation
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 55
December, 1993 -- President, Merck Manufacturing Division (MMD)
August, 1993 -- Senior Vice President, Operations, MMD
September, 1991 -- Senior Vice President, Administration, Planning and Quality,
MMD
JUDY C. LEWENT -- Age 48
January, 1997 -- Senior Vice President and Chief Financial Officer --
responsible for financial and corporate development functions, internal auditing
and the Company's joint venture relationships
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
HENRI LIPMANOWICZ -- Age 58
January, 1997 -- President, Human Health-Asia Pacific -- responsible for the
Company's prescription drug business in the Far East, Australia, New Zealand and
Japan
January, 1995 -- President, Human Health-Intercontinental Region and Japan --
responsible for the Company's prescription drug business 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
13
<PAGE>
PER G. H. LOFBERG -- Age 49
December, 1995 -- President, Merck-Medco Managed Care, L.L.C., 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.
MARY M. MCDONALD -- Age 52
January, 1997 -- Senior Vice President and General Counsel -- responsible for
legal and public affairs functions and The Merck Company Foundation
January, 1993 -- Senior Vice President and General Counsel
April, 1991 -- Vice President and General Counsel
PETER E. NUGENT -- Age 54
September, 1993 -- Vice President, Controller
July, 1989 -- Vice President, Corporate Taxes
JOHN M. PRESTON -- Age 50
April, 1993 -- President, Merck AgVet Division
July, 1992 -- Executive Vice President, Merck AgVet Division
September, 1991 -- Vice President, Business Affairs, MSD AGVET Division
EDWARD M. SCOLNICK -- Age 56
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 (MMD), computer
resources and corporate licensing
December, 1993 -- Executive Vice President, Science and Technology and
President, MRL -- responsible for worldwide research function and activities of
MMD 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.
BENNETT M. SHAPIRO -- Age 57
September, 1990 -- Executive Vice President, Worldwide Basic Research, Merck
Research Laboratories
14
<PAGE>
DEBORAH K. SMITH -- Age 49
June, 1996 -- Senior Vice President, Human Resources
Prior to June, 1996, Ms. Smith held numerous senior human resources positions
(1972 to 1995) at Xerox Corporation and most recently was Senior Vice President,
Human Resources (1995 to 1996) of Bausch & Lomb Incorporated.
PER WOLD-OLSEN -- Age 49
January, 1997 -- President, Human Health-Europe, Middle East & Africa --
responsible for the Company's prescription drug business in Europe, the Middle
East and Africa
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
All officers listed above serve at the pleasure of the Board of Directors.
None of these officers, other than Mr. Gilmartin (who has an employment
agreement with the Company which is an exhibit to this Form 10-K) was elected
pursuant to any arrangement or understanding between the officer and the Board.
There are no family relationships among the officers listed above.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required for this item is incorporated by reference to
pages 41 and 55 of the Company's 1996 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 table included on page
55 of the Company's 1996 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 32 through 41 of the Company's 1996 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, 1996 and 1995, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1996 and the report dated January 28, 1997 of Arthur Andersen LLP,
independent public accountants, are incorporated by reference to pages 42
through 53 and page 54 of the Company's 1996 Annual Report to stockholders.
(b) SUPPLEMENTARY DATA
Selected quarterly financial data for 1996 and 1995 are incorporated by
reference to page 41 of the Company's 1996 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, 1997. Information on executive officers is set
forth in Part I of this document on pages 12 (beginning with the caption
"Executive Officers of the Registrant") through 15. The required information on
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to pages 25 (beginning with the caption "Section 16(a)
Beneficial Ownership Reporting Compliance") to 26 of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held April 23, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference to
page 7 (beginning with the caption "Compensation of Directors"), and 9 through
18 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held April 23, 1997.
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, 1997.
16
<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,
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent public accountants are incorporated herein by reference to the
Company's 1996 Annual Report to stockholders, as noted on page 16 of this
document:
Consolidated statement of income for the years ended December 31, 1996, 1995 and
1994
Consolidated statement of retained earnings for the years ended December 31,
1996, 1995 and 1994
Consolidated balance sheet, December 31, 1996 and 1995
Consolidated statement of cash flows for the years ended December 31, 1996, 1995
and 1994
Notes to financial statements
Report of independent public accountants
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are either not required or not applicable.
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.
17
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <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 ***
effective February 27, 1996)
10(b) -- Base Salary Deferral Plan (as adopted on Filed with this document
October 22, 1996, effective January 1,
1997)
10(c) -- 1987 Incentive Stock Plan (as amended *
effective May 6, 1992)
10(d) -- 1991 Incentive Stock Plan (as amended **
effective February 23, 1994)
10(e) -- 1996 Incentive Stock Plan (as amended ***
on October 24, 1995, effective
January 1, 1996)
10(f) -- Non-Employee Directors Stock Option Plan *
(as adopted on April 28, 1992 and
restated May 6, 1992)
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as adopted on April 23, 1996) Form 10-Q Quarterly Report
for the period ended June 30,
1996
10(h) -- Supplemental Retirement Plan (as amended **
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to
Compensation (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(k) -- Medco Class A 1983 Non-Qualified Stock ****
Option Plan
10(l) -- Medco Class A Non-Qualified Stock Option ***
Agreement dated July 1, 1991 between
Merck-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 Merck-Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(n) -- Employment Agreement between Per G.H. Incorporated by reference to
Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of
1993 Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C> <C>
10(o) -- Amendment dated July 27, 1993 to ***
Employment Agreement between Per G.H.
Lofberg and Merck-Medco dated April 1,
1993
10(p) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to Form
respect to the Employment Agreement 10-Q Quarterly Report for the
between Per G.H. Lofberg and Merck-Medco period ended June 30, 1996
dated April 1, 1993 and amended July 27,
1993
10(q) -- Employment Agreement between Raymond V. Incorporated by reference to Form
Gilmartin and the Company dated June 9, 10-Q Quarterly Report for the
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
13 -- 1996 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 Form 10-K Annual Report for the fiscal year
ended December 31, 1995
**** 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)
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% 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.
(b) REPORTS ON FORM 8-K
During the three-month period ended December 31, 1996, one Current Report
was filed on Form 8-K under Item 5 --Other Events regarding the Company's
announcement of its plans to combine its animal health and poultry genetics
business with those of Rhone-Poulenc to form a 50-50 joint venture, to be called
Merial. This report was dated December 19, 1996 and filed December 23, 1996.
19
<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 17, 1997
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
RAYMOND V. GILMARTIN Chairman of the Board, March 17, 1997
President and Chief Executive
Officer; Principal Executive
Officer; Director
JUDY C. LEWENT Senior Vice President and Chief March 17, 1997
Financial Officer; Principal
Financial Officer
PETER E. NUGENT Vice President, Controller; March 17, 1997
Principal Accounting Officer
H. BREWSTER ATWATER, JR. Director March 17, 1997
DEREK BIRKIN Director March 17, 1997
LAWRENCE A. BOSSIDY Director March 17, 1997
WILLIAM G. BOWEN Director March 17, 1997
JOHNNETTA B. COLE Director March 17, 1997
LLOYD C. ELAM Director March 17, 1997
CHARLES E. EXLEY, JR. Director March 17, 1997
WILLIAM N. KELLEY Director March 17, 1997
EDWARD M. SCOLNICK Director March 17, 1997
SAMUEL O. THIER Director March 17, 1997
</TABLE>
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)
20
<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, 33-57421 and 333-
17045). It should be noted that we have not audited any financial statements of
the Company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
New York, New York
March 17, 1997
21
<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 ***
effective February 27, 1996)
10(b) -- Base Salary Deferral Plan (as adopted on Filed with this document
October 22, 1996, effective January 1,
1997)
10(c) -- 1987 Incentive Stock Plan (as amended *
effective May 6, 1992)
10(d) -- 1991 Incentive Stock Plan (as amended **
effective February 23, 1994)
10(e) -- 1996 Incentive Stock Plan (as amended ***
on October 24, 1995, effective
January 1, 1996)
10(f) -- Non-Employee Directors Stock Option Plan *
(as adopted on April 28, 1992 and
restated May 6, 1992)
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as adopted on April 23, 1996) Form 10-Q Quarterly Report
for the period ended June 30,
1996
10(h) -- Supplemental Retirement Plan (as amended **
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to
Compensation (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(k) -- Medco Class A 1983 Non-Qualified Stock ****
Option Plan
10(l) -- Medco Class A Non-Qualified Stock Option ***
Agreement dated July 1, 1991 between
Merck-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 Merck-Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(n) -- Employment Agreement between Per G.H. Incorporated by reference to
Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of
1993 Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C> <C>
10(o) -- Amendment dated July 27, 1993 to ***
Employment Agreement between Per G.H.
Lofberg and Merck-Medco dated April 1,
1993
10(p) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to Form
respect to the Employment Agreement 10-Q Quarterly Report for the
between Per G.H. Lofberg and Merck-Medco period ended June 30, 1996
dated April 1, 1993 and amended July 27,
1993
10(q) -- Employment Agreement between Raymond V. Incorporated by reference to Form
Gilmartin and the Company dated June 9, 10-Q Quarterly Report for the
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
13 -- 1996 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 Form 10-K Annual Report for the fiscal
year ended December 31, 1995
**** 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)
<PAGE>
================================================================================
EXHIBIT 10(b)
MERCK & CO., INC.
BASE SALARY DEFERRAL PLAN
(AS ADOPTED OCTOBER 22, 1996;
EFFECTIVE JANUARY 1, 1997)
================================================================================
<PAGE>
MERCK & CO., INC. BASE SALARY DEFERRAL PLAN
1. ELIGIBILITY
The employees eligible to defer base salary under the Merck & Co., Inc. Base
Salary Deferral Plan (the "Plan") are those employees of Merck & Co., Inc., and
its subsidiaries (the "Company") whose positions are in Grade 1 and/or are
subject to Section 16 of the Securities Exchange Act of 1934.
2. PARTICIPATION
An eligible employee may become a participant in the Plan (a "Participant") by
filing a timely written deferral election with the Company. Any deferrals shall
be made under and in conformance with the Merck & Co., Inc. Deferral Program
which is incorporated herein.
3. DEFERRAL ELECTION
(a) ANNUAL BASE SALARY
A Participant may elect to defer an aggregate amount of annual base salary
determined as of January 1 of the calendar year in which such deferral will
occur, exclusive of any bonus or any other compensation or allowance paid
or payable by the Company or its affiliates (the "Annual Base Salary"). The
maximum amount which a Participant may defer in any calendar year under
this Plan shall be the lesser of (1) fifty percent (50%) of the
Participant's Annual Base Salary or (2) the Participant's Annual Base
Salary in excess of the amount determined under Section 401(a)(17) of the
Internal Revenue Code. The minimum amount a Participant may elect to defer
is five percent (5%) of Annual Base Salary.
(b) EFFECTIVE DATE OF ELECTION
A Participant's election to defer a portion of Annual Base Salary shall be
made pursuant to procedures established by the Company and shall be made
prior to the commencement of any pay period to which such election applies.
A Participant's election of investment measures and distribution schedule
shall apply to all base salary deferrals for the applicable calendar year
and shall be irrevocable during that calendar year. The election to defer a
portion of Annual Base Salary is revocable; however, any modification of a
Participant's election to defer a portion of Annual Base Salary shall be
effective only with respect to pay periods which begin after the date such
direction is received by the Company or payment dates which occur later in
time.
4. ADMINISTRATION
The Plan shall be administered by the Compensation and Benefits Committee of the
Board of Directors of the Company (the "Committee"). The Committee may establish
such rules and regulations as it deems necessary for the proper administration
of the Plan and make such determinations and take such action in connection with
the Plan as it deems necessary.
<PAGE>
5. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN IN WHOLE OR IN PART
The Committee may discontinue the Plan at any time and may from time to time
amend or revise the terms of the Plan provided that such discontinuance or
amendment shall not materially adversely affect any rights with respect to any
pay period which has already commenced.
6. MISCELLANEOUS
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.
-2-
<PAGE>
EXHIBIT 11
MERCK & CO., INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
----------------------------------------
(In millions except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
Net Income and Adjusted Earnings:
- ----------------------------------
<S> <C> <C> <C>
Net Income.............................................. $3,881.3 $3,335.2 $2,997.0
Effect on Earnings of Compensation Expense Relating to
Stock Option and Incentive Plans...................... 12.3 17.9 5.2
Effect on Earnings of Interest on Debentures............ - - .2
-------- -------- --------
Adjusted Earnings for Fully Diluted Earnings Per Share.. $3,893.6 $3,353.1 $3,002.4
======== ======== ========
<CAPTION>
Weighted Average Shares and Share Equivalents Outstanding:
- ----------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Shares Outstanding (As Reported).......... 1,213.6 1,236.1 1,257.2
Common Share Equivalents Issuable Under Stock Option and
Incentive Plans.......................................... 31.3 33.0 18.3
Common Share Equivalents Issuable on Assumed Conversion
of Debentures............................................ .3 .4 .7
------- ------- -------
Weighted Average Shares and Share Equivalents Outstanding.. 1,245.2 1,269.5 1,276.2
======= ======= =======
Earnings Per Share (As Reported)........................... $3.20 $2.70 $2.38
===== ===== =====
Fully Diluted Earnings Per Share (a)....................... $3.13 $2.64 $2.35
===== ===== =====
</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
-----------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before Taxes and
Cumulative Effect of
Accounting Charges $5,540.8 $4,797.2 $4,415.2 $3,102.7 $3,563.6 $3,166.7
Add:
One-third of rents 41.0 28.1 36.0 35.0 34.0 31.1
Interest expense, net 103.2 60.3 96.0 48.0 23.6 26.0
Preferred stock dividends 70.0 2.1 - - - -
-------- -------- -------- -------- -------- --------
Earnings $5,755.0 $4,887.7 $4,547.2 $3,185.7 $3,621.2 $3,223.8
======== ======== ======== ======== ======== ========
One-third of rents $ 41.0 $ 28.1 $ 36.0 $ 35.0 $ 34.0 $ 31.1
Interest expense 138.6 98.7 124.4 84.7 72.7 68.7
Preferred stock dividends 70.0 2.1 - - - -
-------- -------- -------- -------- -------- --------
Fixed Charges $ 249.6 $ 128.9 $ 160.4 $ 119.7 $ 106.7 $ 99.8
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges 23 38 28 27 34 32
== == == == == ==
</TABLE>
For purposes of computing these ratios, "earnings" consist of income before
income 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) 1996 1995 1994
- --------------------------------------------------------------------------------
Elevated cholesterol....................... $ 4,055.9 $ 3,211.1 $ 2,599.0
Hypertension/heart failure................. 3,512.4 3,021.3 2,752.6
Anti-ulcerants............................. 1,143.6 1,019.8 1,565.7
Antibiotics................................ 822.3 848.3 827.4
Ophthalmologicals.......................... 693.1 570.6 482.3
Vaccines/biologicals....................... 586.8 529.9 485.3
Benign prostatic hyperplasia............... 450.1 405.8 322.7
Osteoporosis............................... 281.8 45.2 4.6
Other Merck human health................... 71.3 221.3 376.7
Other human health......................... 7,167.3 5,726.7 4,103.9
Animal health/crop protection.............. 1,044.1 1,041.9 1,027.4
Specialty chemical......................... -- 39.2 422.2
- --------------------------------------------------------------------------------
$19,828.7 $16,681.1 $14,969.8
================================================================================
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
elevated cholesterol products, which include Zocor and Mevacor;
hypertension/heart failure products which include Vasotec, the largest-selling
product among this group, Prinivil and Vaseretic, as well as Cozaar and Hyzaar,
both of which were launched in 1995; anti-ulcerants, of which Pepcid is the
largest-selling, 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, are the largest-selling; benign prostatic hyperplasia,
which includes Proscar, a treatment for symptomatic benign prostate enlargement;
osteoporosis, which includes Fosamax, for treatment in postmenopausal women,
launched in the United States in October 1995; and other Merck human health
products, which include Crixivan, an HIV protease inhibitor, cleared for
marketing in the United States by the U.S. Food and Drug Administration (F.D.A.)
in March 1996, 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 medicinals used to control
and alleviate 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. This category also includes crop
protection products, coccidiostats for the treatment of poultry diseases, and
poultry breeding stock.
In December 1996, Merck and Rhone-Poulenc announced plans to combine their
respective animal health businesses, discussed in greater detail under Strategic
Alliances. The Company also announced in December that it plans to divest its
crop protection business. As and when these transactions are completed, Merck
will cease to report animal health/crop protection sales.
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.
Merck sells its human health products to drug wholesalers and retailers,
hospitals, clinics, government agencies and managed health-care providers such
as health maintenance organizations and other institutions. The Company's
professional representatives communicate the effectiveness, safety and value of
our products to health-care professionals in private practice, group practices
and managed-care organizations. Animal health/crop protection products are sold
to veterinarians, distributors, wholesalers, retailers, feed manufacturers,
veterinary suppliers and laboratories.
COMPETITION AND THE HEALTH-CARE ENVIRONMENT
The markets in which the Company's business is conducted are highly
competitive and, in many cases, highly regulated. 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 have significantly reduced the sales
growth of certain products by decreasing the patient reimbursement cost of the
drug, restricting the volume of drugs that physicians can prescribe, and
increasing the use of generic 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.
32
<PAGE>
In the United States, legislative bodies are working to expand health-care
access and reduce the associated costs. The debate on reforms to the health-care
system will be protracted. 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.
BUSINESS STRATEGIES
Consistent with our strategy to grow through volume, the Company is firmly
committed to a policy of constraining price increases, given stable market
conditions and government policies that foster innovation. Since 1990, this
policy has limited the net weighted average price changes for all human health
products to the projected general rate of inflation as measured by the U.S.
Consumer Price Index (CPI), and, since 1993, has further limited 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.
The Company is discovering new innovative products and developing new
indications for existing products - the result of its continuing commitment to
research. The Company is also developing innovative sales, marketing and
education techniques; establishing joint ventures, licensing agreements and
health-care partnerships with large managed-care organizations and other payors,
and demonstrating to payors and providers the cost effectiveness of Merck
products. Additionally, achievement of productivity gains has become a permanent
strategy. The Company expects that these gains will continue to offset inflation
at the manufacturing level. Actions undertaken include plant optimization,
implementing lowest cost processes, improving technology transfer between
research and manufacturing, re-engineering of core and administrative processes
and delayering the organization.
To enhance its competitive position in the fast growing area of managed
care, Merck acquired Medco Containment Services, Inc. in 1993. Medco provides
pharmaceutical benefits management services in the United States to control
prescription drug benefit costs. Medco manages prescription drug programs
through its mail order and retail pharmacy networks and offers a series of
health management programs that improve drug therapy, promote better health
outcomes and lower the long-term cost of care associated with certain chronic
diseases. Medco sells its pharmaceutical benefits management services to
corporations, labor unions, insurance companies, Blue Cross and Blue Shield
organizations, Federal and state employee plans, health maintenance and other
similar organizations.
STRATEGIC ALLIANCES
To expand its research base and realize synergies from combining capabilities,
opportunities and assets, the Company has formed a number of joint ventures. In
1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 1993, the Company's
total sales of Astra products reached a level that triggered the first step in
the establishment of a joint venture business carried on by Astra Merck Inc., in
which Merck and Astra each own a 50% share. The joint venture, formed in
November 1994, develops and markets Astra's new prescription medicines in the
United States. Astra Merck sales are not reported in the Company's consolidated
sales. Merck sales of Astra products for 1994 prior to November were $733.2
million. Joint venture sales were $1.8 billion for 1996 and $1.3 billion for
1995, consisting primarily of Prilosec, the first of a class of medications
known as proton pump inhibitors which slows the production of acid from the
cells of the stomach lining. In 1996, the joint venture received clearance from
the F.D.A. to market Prilosec in combination with the antibiotic Biaxin(R)
(clarithromycin). The combination therapy will be indicated for the treatment of
patients with Helicobacter pylori infection and active duodenal ulcers to
-------------------
eradicate H. pylori, the bacteria now believed to cause approximately 90% of
---------
duodenal ulcers. Astra Merck has also received F.D.A. clearance to market
Prilosec for the short-term treatment of active, benign gastric ulcers and, in
December 1996, approval to market Lexxel, a combination product for the
treatment of hypertension.
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of non-prescription medicines for U.S. consumers. This 50%
owned joint venture was expanded into Europe in 1993, and into Canada in 1996.
Sales of product marketed by the joint venture were $530.2 million for 1996 and
$403.5 million for 1995, consisting primarily of gastrointestinal products
including Pepcid AC Acid Controller, a non-prescription formulation of Pepcid,
Merck's H2-receptor antagonist, and Mylanta. Pepcid AC continues to lead the
high-growth U.S. acid relief market.
In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an
independent, research-driven, worldwide pharmaceutical joint venture, equally
owned by each party. DuPont contributed its entire pharmaceutical and
radiopharmaceutical imaging agents businesses and is providing administrative
services. Merck contributed cash and European marketing rights to several of its
prescription medicines and is providing research and development funding and
expertise and international industry expertise. Joint venture sales were $1.3
billion for 1996 and $1.2 billion for 1995, consisting primarily of
cardiovascular, radiopharmaceutical and central nervous system products.
33
<PAGE>
In 1994, Merck and Pasteur Merieux Serums et Vaccins (Pasteur) established
a 50% owned joint venture to market vaccines and to collaborate in the
development of combination vaccines for distribution in Europe. Joint venture
vaccine sales were $663.0 million for 1996 and $598.6 million for 1995.
In December 1996, Merck and Rhone-Poulenc announced plans to combine their
respective animal health businesses to form an equally owned joint venture to be
called Merial. The joint venture, which is subject to approval by European,
French and U.S. authorities, is expected to be fully operational by the second
quarter of 1997. Sales of the Company's animal health products, which will no
longer be reported as part of the Company's consolidated sales once the venture
is operational, were $843.2 million in 1996. This transaction is not expected to
have a significant effect on the Company's financial position, liquidity or
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 30%
of sales in 1996 and 32% of sales in 1995 and 1994.
[CHART]
DISTRIBUTION OF 1996 FOREIGN SALES
----------------------------------
Splits
------
Europe 55%
Asia/Pacific 30%
Other Foreign 15%
------
Total 100%
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 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 a strong research and manufacturing presence within Europe and
marketing and sales organizations throughout. Merck is continually seeking to
improve the efficiency and productivity of 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 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 1996 increased 19% from 1995. The effect of a strengthening
U.S. dollar against foreign currencies decreased 1996 sales growth by one
percentage point. Sales for 1996 were affected by the divestitures of Medco
Behavioral Care (MBC) in October 1995 and Kelco in February 1995. Adjusting for
these effects, sales grew 21% in 1996 in total and on a volume basis. Total
sales for 1995 increased 11% from 1994. Foreign exchange increased 1995 sales
growth by two percentage points. 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%.
[GRAPHIC]
COMPONENTS OF HUMAN/ANIMAL SALES GROWTH
---------------------------------------
TOTAL SALES SALES VOLUME NET PRICING FOREIGN
GROWTH GROWTH ACTIONS EXCHANGE RATES
----------- ------------ ----------- --------------
1992 13.1 % 11.1 % 1.1 % 0.9 %
1993 6.8 8.6 0.1 -1.9
1994 8.7 8.5 -0.6 0.8
1995 11.8 10.1 -0.6 2.3
1996 16.0 17.5 0.3 -1.8
This chart illustrates the effects of price, volume and exchange on sales of
Merck human and animal health products. Growth for 1995 and 1994 has been
adjusted for the effect of the Astra Merck joint venture formation. The human
and animal health business has grown predominantly through sales volume over the
last five years. Price had a slightly favorable effect on sales growth in 1996,
a variable decline from 1.1% in 1992, while the effect of exchange has varied
over the same period.
34
<PAGE>
In 1996, sales of Merck human and animal health products grew 16%. Foreign
exchange rates had a two percentage point unfavorable effect on sales growth,
while price changes had essentially no effect. In measuring these effects,
changes in the value of foreign currencies are calculated net of price increases
in hyperinflationary countries, principally in Latin America. Domestic sales
growth was 20%, while foreign sales grew 12% including a four percentage point
unfavorable effect from exchange. The unit volume growth from the sales of
Merck's human and animal health products was paced by Zocor, Vasotec, Vaseretic,
Prinivil, Pepcid and Proscar, the 1995 introductions of Cozaar, Hyzaar, Fosamax
and Trusopt in the United States and many major European markets, the 1995
launch of Varivax in the United States, and the 1996 introductions of Crixivan
and Vaqta.
Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, hold
about 40% of the worldwide cholesterol-lowering market, and combined sales have
shown significant growth in 1996. During 1996, Zocor established a new Merck
product sales record and established its position as the leading branded product
in the worldwide cholesterol-lowering market, fueled by the results of the
landmark Scandinavian Simvastatin Survival Study (4S) and additional key studies
on the benefits of using this class of products to lower cholesterol in high
risk patients. The 4S study proved that Zocor saves lives and prevents heart
attacks and strokes in people with heart disease and high cholesterol. Other
important benefits arising from the study include fewer hospitalizations and
surgical procedures for these conditions. Zocor remains the only medication with
an indication to reduce all-cause mortality in patients with elevated
cholesterol and coronary heart disease. There is strong potential for the
continued growth of Zocor since fewer than one third of patients in the United
States who have coronary disease are currently receiving cholesterol-lowering
therapy. Mevacor is the first cholesterol-lowering drug shown to reduce both
plaque of the carotid arteries and heart attacks in patients with no history of
coronary artery disease. The Asymptomatic Carotid Artery Progression Study
(ACAPS) found that patients taking Mevacor experienced significantly fewer major
cardiac events than patients treated with a placebo. The study's results were
added to the clinical pharmacology section of the labeling for Mevacor in the
United States and Canada.
Vasotec, Merck's angiotensin converting enzyme (ACE) inhibitor indicated
for treating high blood pressure, heart failure and asymptomatic left
ventricular dysfunction, recorded solid growth. It is the leading branded ACE
inhibitor product in the worldwide cardiovascular market and is the only ACE
inhibitor indicated for the treatment of these three conditions. Vaseretic, a
combination of Vasotec and hydrochlorothiazide, prescribed for the treatment of
high blood pressure, continued solid growth. Prinivil, which also treats high
blood pressure and acts as an adjunctive therapy for treatment of heart failure,
recorded strong growth as well.
Pepcid, an H2-receptor antagonist for treatment of duodenal ulcers and the
short-term treatment of gastric ulcers and gastroesophageal reflux disease
(GERD), continued its solid performance. In the fourth quarter of 1996, Pepcid
became the second most prescribed H2-receptor antagonist in the United States,
despite competition from generic products in its class and the introduction of
lower dose over-the-counter (OTC) formulations of the same class of drugs.
Proscar is the only medical treatment available that effectively and safely
over the long term improves urinary symptoms by acting to shrink the enlarged
prostate. The volume growth of Proscar in 1996 is attributable to increasing
acceptance by urologists and the results from six major clinical studies
involving 2,600 men which showed that Proscar provides effective long-term
disease management of symptomatic benign prostate enlargement, a disease that
affects 50% of men over the age of 50. New studies suggest that Proscar can halt
and even reverse the progression of the disease, especially in markedly enlarged
prostates.
Cozaar and Hyzaar (a combination of Cozaar and the diuretic
hydrochlorothiazide), Merck's newest antihypertensive drugs, were 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. These products, which were
introduced in the United States in May 1995 are now marketed in over 40
countries. Physicians have adopted Iosartan, the active ingredient of Cozaar and
Hyzaar, faster than any new antihypertensive product launched in this decade.
Both products are highly effective and show exceptional tolerability.
Fosamax, Merck's non-hormonal breakthrough medicine for the treatment of
osteoporosis in postmenopausal women, has been introduced in 47 countries,
including the United States where it became available in October 1995. More than
1.3 million patients worldwide are now being treated with Fosamax and
prescription trends are strong. Merck has filed a supplement with the F.D.A. for
a new indication for Fosamax - the prevention of osteoporosis in postmenopausal
women. The application is based on major studies that show Fosamax can prevent
osteoporotic fractures and bone loss that leads to the disease. In one study,
Fosamax reduced by about one half the risk of hip and vertebral fractures and
reduced by 20% hospitalizations in postmenopausal women with osteoporosis who
had previous vertebral fractures. In February 1997, an F.D.A. Advisory Committee
unanimously recommended that the F.D.A. clear for marketing Fosamax for the
prevention of osteoporosis. (The F.D.A. is not bound by the decision of its
advisory committee.) In the United States, the annual cost of hip fractures is
estimated at $10.0 billion. Data presented in September 1996 confirmed that
Fosamax prevents bone loss and restores bone mass in postmenopausal women - with
a tolerability profile similar to that of placebo - which shows that Fosamax is
a promising alternative to hormone replacement therapy for preventing
osteoporosis. Merck continues to educate women about the consequence of
osteoporosis and the benefits of treatment with Fosamax through major consumer
campaigns.
35
<PAGE>
Sales of Trusopt, the first carbonic anhydrase inhibitor made in a topical
(eyedrop) formulation, have proceeded at a strong pace since it was first
introduced in the United States in May 1995. Since its launch, Trusopt has
become the most widely prescribed anti-glaucoma medicine in the United States
and in several countries in Europe. The product 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.
Cleared for marketing in March 1995, Varivax, a live-virus vaccine for
protection against chickenpox in healthy individuals (12 months of age and
older) who have not had the disease, also contributed to the volume growth in
1996. In 1996, Merck reached an agreement with the U.S. Centers for Disease
Control and Prevention (C.D.C.) to supply Varivax for use in children served by
the Federally funded Vaccines for Children program. About 60% of children in the
United States are vaccinated through Federal and state-funded programs. The
American Academy of Pediatrics (A.A.P.) and the Advisory Committee on
Immunization Practices to the C.D.C. in 1995 recommended the universal use of
Varivax in early childhood, and for susceptible older children and adolescents.
The A.A.P. also recommended Varivax become a standard part of their recommended
childhood immunization schedule. At the end of 1996, more than 4.5 million doses
of Varivax were distributed in the United States, making it the most rapidly
accepted vaccine since Merck introduced the measles vaccine in 1963.
After unusually fast regulatory reviews, Crixivan, Merck's new protease
inhibitor for the treatment of HIV infection in adults, was cleared for
marketing in 1996 by the F.D.A. in March, by the Canadian authorities in
September and by the European Commission for all 15 countries in the European
Union in October. In addition, Crixivan is available in more than 20 other
countries. Crixivan is a potent inhibitor of the HIV protease enzyme that is
critical to the replication of the virus that causes AIDS. It can be taken in
combination with other anti-HIV therapies or alone by adults with HIV infection
when single therapy is warranted. Data from three studies released in January
1997 demonstrate remarkable results when Crixivan is used in combination with
two other anti-HIV drugs - both reverse transcriptase inhibitors. In an update
of an earlier study, researchers reported that the triple-combination therapy
sustained viral suppression up to 68 weeks in 86% of patients (18 of 21) whose
virus in the bloodstream had been lowered below the limit of detection in the
assay used. In another study, researchers reported, for the first time,
significant results using triple-combination therapy in patients with very
advanced AIDS: about 65% (55 of 85) had HIV in the bloodstream reduced to
undetectable levels, based upon the limits of the assay, after 24 weeks. In a
third study of people newly infected with HIV, researchers found that all
patients (11 of 11) had undetectable virus levels after four to nine months of
triple therapy.
In April 1996, the F.D.A. licensed Merck to market Vaqta, a new vaccine for
the prevention of hepatitis A in persons two years of age and older. Hepatitis A
is a highly contagious virus that is spread through contaminated food or water
and attacks the liver and can cause victims to be ill for several weeks. Because
there is no treatment for hepatitis A and the medical and economic consequences
of the disease are substantial, immunization of high risk individuals is
recommended by the C.D.C. Vaqta has been launched in the United States, Germany
and Canada, with other introductions expected to follow.
Sales of other human health products and services contributed significantly
to 1996 sales growth. Other human health principally includes sales of non-Merck
products by Medco, which currently manages pharmaceutical benefits for over 49
million plan participants, up from 47 million at the end of 1995. As a result,
the number of prescriptions managed by Medco grew to over 235 million in 1996,
up from 171 million prescriptions in 1995. This growth was based on winning new
accounts and expanding services to existing customers, which strengthened the
Company's leadership position.
Sales of ivermectin, a broad-spectrum antiparasitic, were down in 1996 due
to increased competition and a weak cattle market. A group of longer-established
products, including Noroxin, Mefoxin, Moduretic and Aldomet, while still
contributing to 1996 revenues, also continued to decline in unit volume due to
generic and therapeutic competition.
In 1995, sales of Merck human and animal health products grew 5%. Favorable
foreign exchange rates increased this sales growth by two percentage points, and
price changes had a one point unfavorable effect. Adjusting for the effect of
the Astra Merck joint venture formation, sales grew 12% in total and 10% on a
volume basis in 1995. Domestic sales growth was 10% adjusted for the
aforementioned effect. 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.
36
<PAGE>
The decline in specialty chemical sales reflects the sales of Calgon Vestal
Laboratories and Kelco in the first quarter of 1995.
COSTS, EXPENSES AND OTHER
- -------------------------------------------------------------------------------
($ in millions) 1996 CHANGE 1995 Change 1994
- -------------------------------------------------------------------------------
Materials and
production............. $ 9,319.2 +25% $ 7,456.3 +25% $ 5,962.7
Marketing and
administrative......... 3,841.3 +16% 3,297.8 + 4% 3,177.5
Research and
development............ 1,487.3 +12% 1,331.4 + 8% 1,230.6
Equity income
from affiliates........ (600.7) +73% (346.3) * (56.6)
Gains on sales of
specialty chemical
businesses............. - * (682.9) * -
Gain on joint venture
formation.............. - * - * (492.0)
Provision for joint
venture
obligation............. - * - * 499.6
Other (income)
expense, net........... 240.8 -71% 827.6 * 232.8
- -------------------------------------------------------------------------------
$ 14,287.9 +20% $ 11,883.9 +13% $ 10,554.6
===============================================================================
* Over 100% or nonrecurring
In 1996, materials and production costs increased 25%. Adjusting for the
effects of the 1995 sales of MBC and Kelco, materials and production costs
increased 29%, compared to a 21% sales growth rate on the same basis. Adjusting
for the aforementioned effects, and excluding exchange and inflation, these
costs increased 23%, compared to a 21% unit sales volume gain in 1996. 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 goal to reduce manufacturing costs. 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.
Marketing and administrative expenses increased 16% in 1996. Adjusting for
the effects of the 1995 sales of MBC and Kelco, marketing and administrative
expenses increased 18%. Adjusting for the aforementioned effects, and excluding
exchange and inflation, these expenses increased 16%. The increase in marketing
and administrative expenses in 1996 primarily reflects the continued commitment
of resources to support the 1995 and 1996 product launches, spending to support
disease management programs and investments in information technology which will
enhance Merck-Medco's strong capabilities in improving and managing prescription
drugs. 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%, primarily due to the commitment of resources to support the
launches of new products in 1995. Marketing and administrative expenses as a
percentage of sales were 19% in 1996, 20% in 1995 and 21% in 1994. 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 restructuring programs.
Research and development expenses increased 12% in 1996. Excluding the
effects of exchange and inflation, these expenses increased 9%. Research and
development expenses increased 8% in 1995. Excluding the effects of exchange and
inflation, these expenses increased 3%. Not included in consolidated research
and development expenses are costs incurred by the Company's joint ventures,
which totaled $440.7 million in 1996 and $376.9 million in 1995.
37
<PAGE>
Research and development in the pharmaceutical industry is inherently a
long-term process. The data below show an unbroken trend of year-to-year
increases in research and development spending. For the period 1987 to 1996, the
compounded annual growth rate in research and development was 12%.
[GRAPHIC]
R&D EXPENDITURES
----------------
($ in millions)
Year Total R&D Expenditures
---- ----------------------
1987 566
1988 669
1989 751
1990 854
1991 988
1992 1,112
1993 1,173
1994 1,231
1995 1,331
1996 1,487
This chart excludes research and development costs incurred by the Company's
joint ventures, which were $440.7 million in 1996.
Equity income from affiliates reflects an improving trend resulting
primarily from the favorable performance of our joint ventures with Astra and
DuPont.
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.) These gains were substantially
offset by $675.5 million of nonrecurring charges included in Other (income)
expense, net. These charges consist of $278.5 million for losses on sales of
assets, $175.0 million for restructuring actions, $161.2 million for endowment
of The Merck Company Foundation and $60.8 million for settlement of claims. The
restructuring actions involve manufacturing facility consolidation,
rationalization and work-force reduction in Europe and the United States.
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 1996, other expense, net, decreased primarily due to $675.5 million of
nonrecurring charges recorded in 1995 which substantially offset the gains on
the sales of Calgon Vestal Laboratories and Kelco. Also contributing to the
year-to-year improvement were higher interest income and favorable exchange
resulting from the translation of the Company's balance sheet. This effect was
partially offset by higher interest expense and higher income allocable to
minority interests. In 1995, other expense, net, increased primarily as a result
of the aforementioned $675.5 million of nonrecurring charges. This effect was
partially offset by higher interest income, lower interest expense and favorable
exchange resulting from the translation of the Company's balance sheet. (See
Note 15 to the financial statements for further information.)
EARNINGS
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 1996 CHANGE 1995 Change 1994
- --------------------------------------------------------------------------------
Net income ............ $3,881.3 +16% $3,335.2 +11% $2,997.0
As a % of sales ..... 19.6% 20.0% 20.0%
As a % of average
total assets ...... 16.1% 14.6% 14.3%
Earnings per
common share ........ $3.20 +19% $2.70 +13% $2.38
================================================================================
Net income was up 16% in 1996 and 11% in 1995. Net income as a percentage
of sales was 19.6% in 1996, compared to 20.0% in 1995 and 1994. The decline in
the ratio for 1996 is principally due to the higher growth rate in Medco's
historically lower-margin business and the commitment of resources to the
Company's new product launches offset in part by the growth and favorable mix in
Merck's human and animal health business and productivity improvements. Foreign
currency exchange had essentially no impact in 1996 as compared to a favorable
impact in 1995. The Company's effective income tax rate in 1996 was 30.0%,
compared with 30.5% in 1995. The lower effective tax rate in 1996 primarily
relates to joint ventures, which also affected pretax income growth.
Specifically, pretax income growth was reduced by the Company's share of the
increase in taxes related to the Astra Merck joint venture and the European
vaccine joint venture with Pasteur. Prior to the formation of these joint
ventures in 1994, taxes related to these businesses were included in the
Company's tax provision. Thus, the impact on pretax growth is offset by a
corresponding reduction in the Company's tax rate, resulting in no effect on net
income growth. Net income as a percentage of average total assets was 16.1% in
1996, 14.6% in 1995 and 14.3% in 1994, with the improvements attributed to the
continued growth in operations and the Company's asset management efforts.
Earnings per share grew 19% in 1996, compared to 13% in 1995. In 1996 and 1995,
earnings per share increased at a faster rate than net income as a result of
treasury stock purchases.
38
<PAGE>
DISTRIBUTION OF 1996 SALES
AND EQUITY INCOME
[CHART]
Splits
------
Raw Materials and Production Cost 46%
Operating Expense 27%
Taxes and Net Interest 8%
Dividends 9%
Retained Earnings 10%
---
Total 100%
----
ENVIRONMENTAL AND OTHER 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 the application of best
available technology to reduce air emissions of known or suspect carcinogens at
its facilities worldwide. Projects which were in place at the end of 1995 have
reduced environmental releases and transfers of toxic chemicals, based on
Environmental Protection Agency (E.P.A.) reporting standards, by 90% from 1987
levels. In 1996, the Company incurred capital expenditures of approximately
$29.2 million for environmental protection facilities. Capital expenditures for
this purpose are forecasted to exceed $350.0 million for the years 1997 through
2001. In addition, the Company's operating and maintenance expenditures for
pollution control were approximately $78.4 million in 1996. Expenditures for
this purpose for the years 1997 through 2001 are forecasted to exceed $492.0
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 $18.9 million in 1996, and are estimated at
$136.0 million for the years 1997 through 2001. These amounts do not consider
potential insurance recoveries. 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.
In November 1994, the Company, along with other pharmaceutical
manufacturers and pharmaceutical benefits managers (PBMs), received a notice
from the Federal Trade Commission (F.T.C.) that it intended to investigate
agreements, alliances, activities and acquisitions involving pharmaceutical
manufacturers and PBMs. In March 1996, the Company, along with other
pharmaceutical manufacturers, received a notice from the F.T.C. that it was
conducting an investigation into pricing practices. The Company has cooperated
fully with the F.T.C. in each of these investigations, 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
either of these investigations, management does not believe that they should
result in a materially adverse effect on the Company's financial position,
results of operations or liquidity.
CAPITAL EXPENDITURES
Capital expenditures were $1.2 billion in 1996 and $1.0 billion in 1995.
Expenditures in the United States were $937.8 million in 1996 and $793.5 million
in 1995. Expenditures during 1996 included $630.4 million for production
facilities, $160.7 million for research and development facilities, $29.2
million for environmental projects and $376.4 million for administrative, safety
and general site projects. Not included above are capital expenditures incurred
by the Company's joint ventures, which totaled $111.7 million in 1996, including
$36.5 million for research and development facilities. Capital expenditures
approved but not yet spent at December 31, 1996 were $879.6 million. Capital
expenditures for 1997 are estimated to be $1.8 billion.
Depreciation was $521.7 million in 1996 and $463.3 million in 1995, of
which $369.0 million and $332.8 million, respectively, applied to locations in
the United States.
[GRAPHIC]
CAPITAL EXPENDITURES
--------------------
($ in millions)
Year Total Capital Expenditures
---- --------------------------
1987 254
1988 373
1989 433
1990 671
1991 1,042
1992 1,067
1993 1,013
1994 1,009
1995 1,005
1996 1,197
This chart excludes capital expenditures incurred by the Company's joint
ventures, which were $111.7 million in 1996.
39
<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. In 1996, pretax cash
flows from operations were $6.5 billion, reflecting the continued growth of the
Company's earnings. 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 1996, cash from operations was used to fund capital expenditures of $1.2
billion, to pay Company dividends of $1.7 billion and to partially fund the
purchase of treasury shares. At December 31, 1996, the total of worldwide cash
and investments was $4.7 billion, including $2.2 billion in cash, cash
equivalents and short-term investments and $2.5 billion of long-term
investments. The above totals include $1.2 billion in cash and investments held
by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership
interest.
SELECTED DATA
- -------------------------------------------------------------------------------
($ in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Working capital .................. $2,897.4 $3,870.2 $2,291.4
Total debt to total
liabilities and equity ......... 7.3% 7.5% 5.9%
Cash provided by operations
to total debt .................. 3.1:1 1.6:1 3.2:1
===============================================================================
Working capital levels are more than adequate to meet the operating
requirements of the Company. The increase in working capital in 1995 reflects
proceeds from the sales of the Company's specialty chemical businesses and the
issuance of $1.0 billion par value of variable rate nonconvertible Preferred
Equity Certificates. These proceeds were used to fund a portion of the Company's
stock repurchase program and for other general corporate purposes.
From 1994 to 1996, debt levels were affected by purchases of treasury
shares and other operating requirements, 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.
From 1994 to 1996, the Company purchased $4.8 billion of treasury shares
under three programs authorized by the Board of Directors in 1993, 1994 and
1995. The 1993 program was completed in 1994, and the 1994 program was completed
in 1996. In February 1997, the Board of Directors approved purchases of up to an
additional $5.0 billion of Merck shares. Through December 31, 1996, $2.1 billion
of shares had been purchased under the 1995 program. For the period 1987 to
1996, the Company has purchased 213.8 million shares at a total cost of $8.1
billion.
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. The remaining capacity under the shelf is $670.0
million.
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.
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, Germany, France 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.
40
<PAGE>
The objective of the revenue hedging program is to reduce the potential for
longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar
value of future cash flows derived from foreign currency denominated sales. 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. 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.
In addition to the balance sheet and revenue hedging programs, the Company
hedges interest rates on certain fixed and variable rate borrowing and investing
transactions. Interest rates are hedged with swap contracts that exchange the
cash flows from interest rates on the underlying financial instruments for those
derived from interest rates inherent in the contracts. For foreign currency
denominated borrowing and investing transactions, cross-currency interest rate
swap contracts are used, which, in addition to exchanging cash flows derived
from rates, exchange currencies at both inception and termination of the
contracts. On investing transactions, swap contracts allow the Company to
receive variable rate returns and limit foreign exchange risk, while, on
borrowing transactions, these contracts allow the Company to borrow at more
favorable rates than otherwise attainable through direct issuance of variable
rate U.S. dollar debt. The cash flows associated with these contracts are
reported as arising from operating activities in the Consolidated Statement of
Cash Flows.
CONDENSED INTERIM FINANCIAL DATA
- ------------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------
Sales ................... $ 5,406.1 $4,983.4 $4,908.8 $4,530.4
Materials and
production costs ...... 2,473.9 2,328.4 2,283.8 2,233.1
Marketing/administrative
expenses .............. 1,139.0 941.8 946.2 814.3
Research/development
expenses .............. 423.3 366.8 347.7 349.5
Equity income from
affiliates .............. (160.7) (146.2) (128.4) (165.4)
Other expense, net ...... 60.6 55.2 65.1 59.9
Income before taxes ..... 1,470.0 1,437.4 1,394.4 1,239.0
Net income .............. 1,043.5 1,001.9 972.1 863.8
Earnings per common share $.87 $.83 $.80 $.70
- ------------------------------------------------------------------------------
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
Equity income from
affiliates .............. (107.5) (75.3) (71.5) (92.0)
Other expense, net ...... 33.6 41.5 40.4 29.1
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
==============================================================================
In the chart above, sales for 1995 and 1996 were affected by the first
quarter 1995 sale of Kelco and the fourth quarter 1995 sale of MBC.
DIVIDENDS PAID PER COMMON SHARE
- -------------------------------------------------------------------------------
Year 4th Q 3rd Q 2nd Q 1st Q
- -------------------------------------------------------------------------------
1996 ......................... $1.42 $.40 $.34 $.34 $.34
1995 ......................... 1.24 .34 .30 .30 .30
===============================================================================
COMMON STOCK MARKET PRICES
- -------------------------------------------------------------------------------
1996 4th Q 3rd Q 2nd Q 1st Q
- -------------------------------------------------------------------------------
High ................... $84 1/4 $70 7/8 $66 1/8 $71 3/8
Low .................... 69 1/8 58 1/4 56 1/2 60 1/2
- -------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------
High ................... $67 1/4 $57 7/8 $51 1/4 $45 1/8
Low .................... 55 5/8 47 1/4 41 1/4 36 3/8
===============================================================================
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
41
<PAGE>
Merck & Co., Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
Years Ended December 31
($ in millions except per share amounts) 1996 1995 1994
- -----------------------------------------------------------------------------
Sales ................................ $19,828.7 $16,681.1 $14,969.8
- -----------------------------------------------------------------------------
Costs, Expenses and Other
Materials and production ............. 9,319.2 7,456.3 5,962.7
Marketing and administrative ......... 3,841.3 3,297.8 3,177.5
Research and development ............. 1,487.3 1,331.4 1,230.6
Equity income from affiliates ........ (600.7) (346.3) (56.6)
Gains on sales of specialty
chemical businesses ............... - (682.9) -
Gain on joint venture formation ...... - - (492.0)
Provision for joint venture obligation - - 499.6
Other (income) expense, net .......... 240.8 827.6 232.8
- -----------------------------------------------------------------------------
14,287.9 11,883.9 10,554.6
- -----------------------------------------------------------------------------
Income Before Taxes .................. 5,540.8 4,797.2 4,415.2
Taxes on Income ...................... 1,659.5 1,462.0 1,418.2
- -----------------------------------------------------------------------------
Net Income ........................... $ 3,881.3 $ 3,335.2 $ 2,997.0
=============================================================================
Earnings Per Common Share ............ $3.20 $2.70 $2.38
=============================================================================
Merck & Co., Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
- --------------------------------------------------------------------------------
Years Ended December 31
($ in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Balance, January 1 .................. $12,740.6 $10,942.0 $9,393.2
- -------------------------------------------------------------------------------
Net Income .......................... 3,881.3 3,335.2 2,997.0
Common Stock Dividends Declared ..... (1,793.4) (1,578.0) (1,463.1)
Net Unrealized (Loss)
Gain on Investments ............... (10.8) 41.4 14.9
- -------------------------------------------------------------------------------
Balance, December 31 ................ $14,817.7 $12,740.6 $10,942.0
===============================================================================
42 The accompanying notes are an integral part of these financial statements.
<PAGE>
Merck & Co., Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31
($ in millions) 1996 1995
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ...................... $ 1,352.4 $ 1,847.4
Short-term investments ......................... 829.2 1,502.4
Accounts receivable ............................ 2,655.9 2,495.7
Inventories .................................... 2,148.8 1,872.5
Prepaid expenses and taxes ..................... 740.3 899.5
- --------------------------------------------------------------------------------
Total current assets ........................... 7,726.6 8,617.5
- --------------------------------------------------------------------------------
Investments .................................... 2,499.4 1,969.6
- --------------------------------------------------------------------------------
Property, Plant and Equipment (at cost)
Land ........................................... 206.9 206.3
Buildings ...................................... 2,949.8 2,783.2
Machinery, equipment and office furnishings .... 4,765.0 4,055.9
Construction in progress ....................... 804.7 663.6
- --------------------------------------------------------------------------------
8,726.4 7,709.0
Less allowance for depreciation ................ 2,799.7 2,439.9
- --------------------------------------------------------------------------------
5,926.7 5,269.1
- --------------------------------------------------------------------------------
Goodwill and Other Intangibles
(net of accumulated amortization
of $606.5 million in 1996 and
$411.5 million in 1995) ..................... 6,736.6 6,826.3
- --------------------------------------------------------------------------------
Other Assets ................................... 1,403.8 1,149.3
- --------------------------------------------------------------------------------
$24,293.1 $23,831.8
================================================================================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities ....... $ 2,937.8 $ 3,105.2
Loans payable and current portion of
long-term debt ............................... 606.1 423.1
Income taxes payable ........................... 802.6 800.8
Dividends payable .............................. 482.7 418.2
- --------------------------------------------------------------------------------
Total current liabilities ...................... 4,829.2 4,747.3
- --------------------------------------------------------------------------------
Long-Term Debt ................................. 1,155.9 1,372.8
- --------------------------------------------------------------------------------
Deferred Income Taxes and Noncurrent Liabilities 4,027.3 3,689.7
- --------------------------------------------------------------------------------
Minority Interests ............................. 2,310.2 2,286.3
- --------------------------------------------------------------------------------
Stockholders' Equity
Common stock
Authorized - 2,700,000,000 shares
Issued - 1,483,619,311 shares - 1996
- 1,483,463,327 shares -1995 .......... 4,967.5 4,742.5
Retained earnings .............................. 14,817.7 12,740.6
- --------------------------------------------------------------------------------
19,785.2 17,483.1
Less treasury stock, at cost
277,016,963 shares - 1996
254,614,794 shares - 1995 .................... 7,814.7 5,747.4
- --------------------------------------------------------------------------------
Total stockholders' equity ..................... 11,970.5 11,735.7
- --------------------------------------------------------------------------------
$24,293.1 $23,831.8
================================================================================
The accompanying notes are an integral part of this financial statement. 43
<PAGE>
Merck & Co., Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before taxes ............................... $5,540.8 $4,797.2 $4,415.2
Adjustments to reconcile income
before taxes to cash provided
from operations before taxes:
Gains on sales of specialty chemical businesses - (682.9) -
Gain on joint venture formation ............... - - (492.0)
Provision for joint venture obligation ........ - - 499.6
Depreciation and amortization ................. 730.9 667.2 681.6
Other ......................................... 175.1 630.1 (10.7)
Net changes in assets and liabilities:
Accounts receivable ......................... (224.7) (244.1) (265.0)
Inventories ................................. (267.6) (271.8) (26.2)
Accounts payable and accrued
liabilities ............................... 414.2 383.1 290.6
Noncurrent liabilities ...................... 143.0 (262.0) (123.5)
Other ....................................... 10.4 (43.0) 28.1
- ----------------------------------------------------------------------------------------
Cash Provided by Operating Activities
Before Taxes .................................... 6,522.1 4,973.8 4,997.7
Income Taxes Paid ................................. (1,094.4) (2,029.6) (857.8)
- ----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ......... 5,427.7 2,944.2 4,139.9
- ----------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures .............................. (1,196.7) (1,005.5) (1,009.3)
Purchase of securities, subsidiaries
and other investments ........................... (15,719.1) (13,772.3) (14,814.5)
Proceeds from joint venture formation,
net of cash transferred ......................... - - 759.3
Proceeds from sale of securities,
subsidiaries and other investments .............. 15,079.2 12,430.1 15,082.3
Proceeds from sales of specialty chemical
businesses, net of cash transferred ............. - 1,321.1 -
Other ............................................. (142.7) (295.7) (50.2)
- ----------------------------------------------------------------------------------------
Net Cash Used by Investing Activities ............. (1,979.3) (1,322.3) (32.4)
- ----------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in short-term borrowings ............... (7.1) 40.5 (1,580.2)
Proceeds from issuance of debt .................... 327.5 549.5 336.6
Payments on debt .................................. (341.7) (108.2) (152.4)
Proceeds from issuance of preferred
stock of subsidiaries ........................... - 1,019.6 -
Purchase of treasury stock ........................ (2,493.3) (1,570.9) (704.5)
Dividends paid to stockholders .................... (1,728.9) (1,539.8) (1,434.1)
Proceeds from exercise of stock options ........... 442.2 264.0 138.6
Other ............................................. (36.0) (56.1) (6.2)
- ----------------------------------------------------------------------------------------
Net Cash Used by Financing Activities ............. (3,837.3) (1,401.4) (3,402.2)
- ----------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents ....................... (106.1) 22.9 69.3
- ----------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents ............................ (495.0) 243.4 774.6
Cash and Cash Equivalents at Beginning of Year .... 1,847.4 1,604.0 829.4
- ----------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year .......... $ 1,352.4 $ 1,847.4 $ 1,604.0
========================================================================================
</TABLE>
44 The accompanying notes are an integral part of this financial statement.
<PAGE>
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 to
control and alleviate disease in livestock, small animals and poultry, and
agricultural insecticides.
Merck sells its human health products and services to drug wholesalers and
retailers, hospitals, clinics, government agencies, corporations, labor unions,
retirement systems, insurance carriers, managed health-care providers such as
health maintenance organizations and other institutions. Animal health/crop
protection products are sold to 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 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
1,213.6 million, 1,236.1 million and 1,257.2 million in 1996, 1995 and 1994,
respectively. Common stock equivalents do not have a significant dilutive
effect.
Goodwill and Other Intangibles - Goodwill of $3.8 billion in 1996 and 1995 (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 $2.9 billion in 1996 and $3.0 billion in 1995
(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.
Stock-Based Compensation - Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share are provided as if the fair value method had been applied.
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. DIVESTITURES
The Company completed the sale of its 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. These gains were substantially offset by $675.5 million of
nonrecurring charges included in Other (income) expense, net. (See Note 15.)
45
<PAGE>
4. STRATEGIC ALLIANCES
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 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.
In November 1994, Astra paid Merck $820.0 million for an interest in a joint
venture business carried on by 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 Astra's new prescription
medicines in the United States. The formation of the joint venture has not had a
material impact on comparability of net income. Astra Merck product sales are
not reported in the Company's consolidated sales. Sales for 1994 prior to
November were $733.2 million. Joint venture sales were $1.8 billion for 1996 and
$1.3 billion for 1995, consisting primarily of Prilosec, the first of a class of
medications known as proton pump inhibitors which slows the production of acid
from the cells of the stomach lining.
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of non-prescription medicines for U.S. consumers. This 50%
owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales
of product marketed by the joint venture were $530.2 million for 1996 and $403.5
million for 1995, consisting primarily of gastrointestinal products including
Pepcid AC Acid Controller, a non-prescription formulation of Pepcid, Merck's
H2-receptor antagonist, and Mylanta.
In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an
independent, research-driven, worldwide pharmaceutical joint venture, equally
owned by each party. DuPont contributed its entire pharmaceutical and
radiopharmaceutical imaging agents businesses and is providing administrative
services. The Company contributed cash and European marketing rights to several
of its prescription medicines and is providing research and development funding
and expertise and international industry expertise. Joint venture sales were
$1.3 billion for 1996 and $1.2 billion for 1995, 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 a 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
was discharged in 1996.
In 1994, Merck and Pasteur Merieux Serums et Vaccins (Pasteur) established
an equally owned 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 were $663.0 million for
1996 and $598.6 million for 1995.
Summarized below are net sales by therapeutic class for these joint
ventures for the years ended December 31, 1996 and 1995:
1996 1995
- --------------------------------------------------------------------------------
Gastrointestinals
Ethical ................................ $1,712.1 $1,223.4
OTC .................................... 420.5 307.2
- --------------------------------------------------------------------------------
2,132.6 1,530.6
- --------------------------------------------------------------------------------
Vaccines ................................. 663.0 598.6
Cardiovasculars .......................... 623.9 521.9
Radiopharmaceuticals ..................... 325.4 304.0
Central nervous system ................... 267.7 247.5
Other .................................... 276.9 289.2
- --------------------------------------------------------------------------------
$4,289.5 $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 $779.7 million at December 31, 1996 and $737.8 million at
December 31, 1995. Dividends and distributions received from these affiliates
were $476.2 million in 1996 and $296.1 million in 1995. These affiliates did not
constitute a significant component of the Company's financial position or
results of operations prior to 1995. Summarized information for these affiliates
is as follows:
Years Ended December 31 1996 1995
- --------------------------------------------------------------------------------
Sales ........................................ $4,441.4 $3,632.9
Materials and production costs ............... 959.4 873.4
Other expense, net ........................... 1,725.2 1,493.8
Income before taxes .......................... 1,756.8 1,265.7
================================================================================
December 31
- --------------------------------------------------------------------------------
Current assets ............................... $1,613.8 $1,326.0
Noncurrent assets ............................ 3,111.3 2,914.3
Current liabilities .......................... 1,048.0 897.5
Noncurrent liabilities ....................... 1,307.6 1,163.6
================================================================================
46
<PAGE>
6. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 1996 and 1995. Fair values were estimated
based on market prices, where available, or dealer quotes.
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Cash and cash equivalents .......... $1,352.4 $1,352.4 $1,847.4 $1,847.4
Short-term investments ............. 829.2 828.9 1,502.4 1,502.4
Long-term investments .............. 2,499.4 2,496.4 1,969.6 1,965.6
Purchased currency options ......... 85.1 143.7 122.1 110.8
Forward exchange contracts and
currency swaps ................... 134.7 134.7 80.3 80.3
Interest rate swaps ................ 26.3 31.3 14.4 27.2
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Loans payable and current
portion of long-term debt ........ $ 606.1 $ 609.7 $ 423.1 $ 425.4
Long-term debt ..................... 1,155.9 1,160.2 1,372.8 1,424.7
Written currency options ........... -- -- .2 .2
Forward exchange contracts
and currency swap ................ 9.2 9.2 6.1 6.1
================================================================================
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 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 $64.9 million and $6.3 million at December 31, 1996 and
$27.2 million and $38.5 million at December 31, 1995, 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 principally 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, 1996 and 1995, 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:
1996 1995
- --------------------------------------------------------------------------------
Purchased currency options ................... $1,952.6 $2,453.4
Written currency options ..................... -- 48.3
Forward sale contracts ....................... 1,660.9 1,469.9
Forward purchase contracts ................... 431.5 422.3
================================================================================
47
<PAGE>
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.
In 1995, the Company entered into a five-year combined interest rate and
currency swap contract with a notional amount of $296.7 million, and in 1996, a
two-year currency swap contract with a notional amount of $336.1 million, to
convert two different variable rate Dutch guilder investments to variable rate
U.S. dollar investments. The market values of these contracts are 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 $347.9 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.
At December 31, 1996, available-for-sale investments include debt and
equity securities carried at their fair values of $1.4 billion ($551.3 million
of which mature within one year) and $1.1 billion, respectively. Gross
unrealized gains and losses amounted to $10.1 million and $5.8 million for debt
securities and $181.1 million and $53.0 million for equity securities,
respectively, which are recorded, net of tax and minority interests, in Retained
earnings. Held-to-maturity investments are carried at amortized cost of $828.6
million ($277.9 million of which mature within one year) and have a fair value
of $825.3 million.
7. INVENTORIES
Inventories at December 31 consisted of:
1996 1995
- --------------------------------------------------------------------------------
Finished goods ................................. $1,237.3 $1,078.3
Raw materials and work in process .............. 841.1 716.2
Supplies ....................................... 70.4 78.0
- --------------------------------------------------------------------------------
Total (approximates current cost) .............. 2,148.8 1,872.5
Reduction to LIFO cost ......................... -- --
- --------------------------------------------------------------------------------
$2,148.8 $1,872.5
================================================================================
Inventories valued under the LIFO method comprised approximately 43% and
44% of inventories at December 31, 1996 and 1995, respectively.
8. LOANS PAYABLE AND LONG-TERM DEBT
Loans payable at December 31, 1996 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 6.2%
and 7.3% at December 31, 1996 and 1995, respectively.
Long-term debt at December 31 consisted of:
1996 1995
- --------------------------------------------------------------------------------
6.8% euronotes due 2005 ............................... $ 498.9 $ 498.8
5.3% euronotes due 1998 ............................... 251.2 251.8
6.3% debentures due 2026 .............................. 246.6 --
Zero coupon euronotes due 1997 ........................ -- 181.3
5.4% Swiss franc eurobonds due 1997 ................... -- 174.0
6.0% medium-term note due 1997 ........................ -- 99.9
Other ................................................. 159.2 167.0
- --------------------------------------------------------------------------------
$1,155.9 $1,372.8
================================================================================
At December 31, 1996, 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.
48
<PAGE>
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 200.0
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 9.0%.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 1997, $447.9 million; 1998, $262.0 million; 1999, $7.7 million;
2000, $9.6 million, and 2001, $60.6 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
challenging pricing and/or purchasing practices, one of which has been certified
as a Federal class action and a number of which have been certified as state
class actions. In January 1996, the Company and several other defendants 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. In April 1996, the court declined to approve
the settlement. Subsequently, the Company and several other defendants entered
into an amended settlement agreement, which provides for the same monetary
payment and addresses the court's concerns as expressed in its April 1996
opinion. In June 1996, the court granted approval of the amended settlement
agreement, to which objecting retail class members filed appeals in July 1996.
The Company has not engaged in any conspiracy and no admission of wrongdoing has
been made or is included in the amended 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 were 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 1996 and 1995, common stock increased by $225.0 and $74.7 million,
respectively, principally as a result of issuances of treasury stock for
exercises of stock options. In 1994, common stock increased by $91.3 million,
principally as a result of conversions of subordinated debentures assumed in
conjunction with the Medco acquisition into 2.6 million shares of Merck common
stock.
A summary of treasury stock transactions (shares in thousands) follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------------ -----------------------
Shares Cost Shares Cost Shares Cost
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1 .... 254,614.8 $5,747.4 235,341.6 $4,470.8 226,676.6 $3,948.0
Purchases ...... 38,384.2 2,493.3 33,377.2 1,570.9 18,975.0 704.5
Issued primarily
under stock
option plans (15,982.0) (426.0) (14,104.0) (294.3) (10,310.0) (181.7)
- ----------------------------------------------------------------------------------------------
Balance,
December 31 .. 277,017.0 $7,814.7 254,614.8 $5,747.4 235,341.6 $4,470.8
==============================================================================================
</TABLE>
At December 31, 1996, 1995 and 1994, 10 million shares of preferred stock,
without par value, were authorized; none were issued.
49
<PAGE>
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. Options generally vest in 5
years and expire in 10 years from the date of grant. The Company also has plans
that provide for the granting of performance-based stock awards.
A summary of information relative to the Company's stock option plans
follows:
Number Average(1)
of Shares Price
- --------------------------------------------------------------------------------
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
Granted ....................................... 13,018,617 65.28
Exercised ..................................... (15,835,665) 27.92
Forfeited ..................................... (2,494,936) 37.68
Equivalent Options Assumed .................... 100,275 103.25
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 .............. 86,209,297 $ 38.38
================================================================================
(1) Weighted average exercise price.
The number of shares and average price of options exercisable at December
31, 1996, 1995 and 1994 were 32,387,469 shares at $30.99, 29,272,456 shares at
$26.46 and 31,691,680 at $23.39, respectively. At December 31, 1996 and 1995,
70,493,629 shares and 15,842,665 shares, respectively, were available for future
grants under the terms of these plans.
Effective January 1, 1996, the Company adopted the provisions of Statement
No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement,
the Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for
performance-based awards, which was not significant. Had the fair value method
of accounting been applied to the Company's stock option plans, which requires
recognition of compensation cost ratably over the vesting period of the
underlying equity instruments, Net income would have been reduced by $46.6
million, or $.04 per share in 1996 and $20.0 million, or $.02 per share in 1995.
This pro forma impact only takes into account options granted since January 1,
1995 and is likely to increase in future years as additional options are granted
and amortized ratably over the vesting period. The average fair value of options
granted during 1996 and 1995 was $19.12 and $12.31, respectively. The fair value
was estimated using the Black-Scholes option-pricing model based on the weighted
average market price at grant date of $65.28 in 1996 and $43.38 in 1995 and the
following weighted average assumptions: risk-free interest rate of 5.9% for 1996
and 6.9% for 1995, expected life of 6.7 years for 1996 and 6.5 years for 1995,
volatility of 24% for 1996 and 1995, and dividend yield of 2.1% for 1996 and
2.8% for 1995.
Summarized information about stock options outstanding and exercisable at
December 31, 1996 is as follows:
Outstanding Exercisable
---------------------------- -------------------
Exercise
Price Number Average Average Number Average
Range of Shares Life(1) Price(2) of Shares Price(2)
- --------------------------------------------------------------
$2 to 20 6,602,873 4.37 $ 14.28 6,586,684 $ 14.30
$20 to 30 16,126,629 7.87 25.71 10,496,449 25.07
$30 to 40 26,508,457 6.95 33.76 3,689,072 36.32
$40 to 50 21,554,462 6.43 42.98 10,771,645 43.04
$50 to 75 15,340,101 8.43 63.26 767,994 52.69
Over $75 76,775 7.45 110.14 75,625 110.52
- --------------------------------------------------------------
86,209,297 32,387,469
==============================================================
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price.
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 1996, total awards under the plans were $113.5 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 $294.9
million in 1996, $285.6 million in 1995 and $301.3 million in 1994. Expenses for
Company and subsidiary plans were $106.6 million in 1996, $109.0 million in 1995
and $140.1 million in 1994, comprised of the following components:
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost-benefits
earned during the year ................... $ 104.1 $ 98.7 $ 109.8
Interest cost on projected
benefit obligation ....................... 144.2 139.8 134.7
Net amortization and deferral .............. 107.1 185.9 (105.9)
Actual return on assets .................... (248.8) (315.4) 1.5
- --------------------------------------------------------------------------------
Net pension cost ........................... $ 106.6 $ 109.0 $ 140.1
================================================================================
50
<PAGE>
The net pension cost attributable to international plans and included above
was $51.8 million in 1996, $47.2 million in 1995 and $42.5 million in 1994.
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.
The plans' funded status at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ------------------
OVER UNDER Over Under
FUNDED FUNDED Funded Funded
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at market value ........ $1,838.4 $ 215.2 $1,726.2 $ 19.5
- ---------------------------------------------------------------------------------
Accumulated benefit obligation
Vested ........................... 1,171.0 257.6 1,197.5 62.3
Nonvested ........................ 196.5 54.6 250.5 27.8
- ---------------------------------------------------------------------------------
1,367.5 312.2 1,448.0 90.1
- ---------------------------------------------------------------------------------
Plan assets in excess of (less than)
accumulated benefit obligation ... 470.9 (97.0) 278.2 (70.6)
Projected compensation increases ... 302.8 176.9 466.4 132.6
- ---------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation ..... 168.1 (273.9) (188.2) (203.2)
Unamortized transitional net
(asset) obligation ............... (76.3) 2.9 (97.4) 8.9
Unrecognized net loss .............. 110.0 103.8 380.3 43.6
Unrecognized prior service cost .... 46.4 11.4 48.9 14.3
- ---------------------------------------------------------------------------------
Net pension asset (liability) ...... $ 248.2 $ (155.8) $ 143.6 $(136.4)
=================================================================================
</TABLE>
International plan assets at market value, included in the above table,
were $654.2 million in 1996 and $592.9 million in 1995. The accumulated benefit
obligation of international plans, included in this table, was $624.5 million in
1996 and $545.8 million in 1995.
The discount rate used in determining the projected benefit obligation and
costs was 7.5% at December 31, 1996, 7% at December 31, 1995 and 8.5% at
December 31, 1994. The rate of future compensation increases used in determining
the projected benefit obligation and costs was 4.5% at December 31, 1996 and
1995, and 5% at December 31, 1994. The expected long-term rate of return on plan
assets was 10% at December 31, 1996, 1995 and 1994.
In the aggregate, average international plan assumptions do not vary
significantly from U.S. assumptions.
14. OTHER POSTRETIREMENT 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 health-care
and life insurance benefits for active employees was $148.9 million in 1996,
$125.0 million in 1995 and $130.4 million in 1994. The cost of postretirement
benefits other than pensions was $9.4 million in 1996, $7.6 million in 1995 and
$42.1 million in 1994, comprised of the following components:
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost - benefits earned
during the year ............................. $ 25.2 $ 16.8 $ 31.7
Interest cost on accumulated
postretirement benefit obligation ........... 45.7 44.0 58.4
Net amortization and deferral ................. 13.2 54.1 (52.4)
Actual return on assets ....................... (74.7) (107.3) 4.4
- --------------------------------------------------------------------------------
Net postretirement benefit cost ............... $ 9.4 $ 7.6 $ 42.1
================================================================================
Net postretirement benefit cost in 1996 and 1995 includes the effects of
1995 changes in certain cost-sharing provisions and the Company's method of
providing certain benefits.
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:
1996 1995
- --------------------------------------------------------------------------------
Plan assets at market value .............................. $ 541.6 $ 473.8
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees ............................................... 368.2 392.4
Other fully eligible participants ...................... 46.1 45.3
Other active participants .............................. 249.4 231.0
- --------------------------------------------------------------------------------
663.7 668.7
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets ............................... (122.1) (194.9)
Unrecognized net gain .................................... (166.8) (98.4)
Unrecognized plan changes ................................ (141.2) (154.2)
- --------------------------------------------------------------------------------
Net postretirement benefit liability ..................... $(430.1) $(447.5)
================================================================================
The discount rate used in determining the accumulated postretirement
benefit obligation and cost was 7.5% at December 31, 1996, 7% at December 31,
1995 and 8.5% at December 31, 1994. The expected long-term rate of return on
plan assets was 10.0% in 1996, 1995 and 1994. The health-care cost trend rate
was
51
<PAGE>
8.5% at December 31, 1996. The rate will gradually decline to 5.0% over a 7-year
period. The effect of increasing the health-care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1996 by $75.4 million and the total service
and interest cost components of the 1996 net postretirement benefit cost by
$11.0 million.
15. OTHER (INCOME) EXPENSE, NET
1996 1995 1994
- -------------------------------------------------------------------------------
Interest income ............................ $(205.4) $(191.0) $(153.9)
Interest expense ........................... 138.6 98.7 124.4
Exchange (gains) losses .................... (27.8) (7.8) 26.2
Minority interests ......................... 144.2 91.9 93.4
Amortization of goodwill and
other intangibles ........................ 196.2 192.0 193.9
Other, net ................................. (5.0) 643.8 (51.2)
- -------------------------------------------------------------------------------
$ 240.8 $ 827.6 $ 232.8
===============================================================================
Minority interests include third parties' share of exchange gains and
losses arising from translation of the financial statements into U.S. dollars.
The increase in minority interests in 1996 primarily reflects dividends on the
PECs, which were issued in December 1995. (See Note 10.)
In 1995, other, net, includes $675.5 million of nonrecurring charges
consisting of $278.5 million for losses on sales of assets, $175.0 million for
restructuring actions, $161.2 million for endowment of The Merck Company
Foundation and $60.8 million for settlement of claims. The restructuring actions
involve manufacturing facility consolidation, rationalization and work-force
reduction in Europe and the United States.
Interest paid was $117.4 million in 1996, $85.5 million in 1995 and $144.0
million in 1994.
16. TAXES ON INCOME
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
1996 Tax Rate
----------------------
AMOUNT 1996 1995 1994
- -------------------------------------------------------------------------------
U.S. statutory rate applied
to pretax income ..................... $1,939.3 35.0% 35.0% 35.0%
Differential arising from:
Foreign operations ................... (180.8) (3.2) (.9) (1.1)
Tax exemption for Puerto Rico
operations ......................... (107.5) (1.9) (1.8) (3.8)
Equity income from affiliates ........ (103.2) (1.9) (1.5) (.2)
State taxes .......................... 7.2 .1 1.5 2.2
Other, including
minority interests ................. 104.5 1.9 (1.8) --
- -------------------------------------------------------------------------------
$1,659.5 30.0% 30.5% 32.1%
===============================================================================
Domestic companies contributed approximately 73% in 1996, 76% in 1995 and
73% in 1994 to consolidated pretax income.
Taxes on income consisted of:
1996 1995 1994
- -------------------------------------------------------------------------------
Current provision
Federal ..................................... $1,106.2 $1,043.4 $1,003.1
Foreign ..................................... 410.3 455.1 359.0
State ....................................... (14.6) 149.4 152.6
- -------------------------------------------------------------------------------
1,501.9 1,647.9 1,514.7
- -------------------------------------------------------------------------------
Deferred provision
Federal ..................................... 136.9 (64.3) (166.6)
Foreign ..................................... (15.4) (95.9) 72.2
State ....................................... 36.1 (25.7) (2.1)
- -------------------------------------------------------------------------------
157.6 (185.9) (96.5)
- -------------------------------------------------------------------------------
$1,659.5 $1,462.0 $1,418.2
===============================================================================
Deferred income taxes at December 31 consisted of:
1996 1995
---------------------- --------------------
ASSETS LIABILITIES Assets Liabilities
- --------------------------------------------------------------------------------
Other intangibles ................ $ -- $1,208.5 $ -- $1,243.1
Accelerated depreciation ......... -- 521.2 -- 524.9
Inventory related ................ 511.6 208.2 463.6 180.3
Other postretirement benefits .... 187.7 -- 183.4 --
Equity investments ............... -- 163.0 -- 153.4
Restructuring charge ............. 151.3 -- 155.3 --
Environmental related ............ 84.0 -- 81.7 --
Compensation related ............. 81.8 -- 70.5 --
Equivalent Medco
options assumed ................ 62.7 -- 92.4 --
Pension benefits ................. 9.4 97.9 28.3 65.2
Leasing activity ................. -- 27.0 -- 40.7
Provision for joint venture
obligation ..................... -- -- 174.4 --
Other ............................ 712.8 462.7 663.5 428.7
- --------------------------------------------------------------------------------
1,801.3 2,688.5 1,913.1 2,636.3
Valuation allowance .............. (4.5) -- (15.0) --
- --------------------------------------------------------------------------------
$1,796.8 $2,688.5 $1,898.1 $2,636.3
================================================================================
At December 31, 1996 and 1995, current deferred tax assets of $568.6 million
and $722.8 million, respectively, were included in Prepaid expenses and taxes
and current deferred tax liabilities of $112.2 million and $98.0 million,
respectively, were included in Income taxes payable. In addition, at December
31, 1996 and 1995, noncurrent deferred tax assets of $52.2 million and $26.3
million, respectively, were included in Other assets and noncurrent deferred tax
liabilities of $1.4 billion and $1.4 billion, respectively, were included in
Deferred income taxes and noncurrent liabilities. Income taxes paid in 1996,
1995 and 1994 were $1.1 billion, $2.0 billion and $857.8 million, respectively.
The increase in 1995
52
<PAGE>
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, 1996, foreign earnings of $5.4 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
1996 1995 1994
- -------------------------------------------------------------------------------
Customer Sales
North America .............................. $14,321.7 $11,704.3 $10,561.6
Europe ..................................... 3,322.4 2,894.3 2,552.6
Asia Pacific ............................... 1,767.0 1,753.2 1,586.7
Other Foreign .............................. 417.6 329.3 268.9
Affiliate Sales
North America .............................. 1,723.2 1,640.3 1,390.2
Europe ..................................... 909.8 798.8 611.3
Asia Pacific ............................... 50.4 59.1 44.8
Other Foreign .............................. 2.7 1.5 .6
Eliminations ............................... (2,686.1) (2,499.7) (2,046.9)
- -------------------------------------------------------------------------------
$19,828.7 $16,681.1 $14,969.8
===============================================================================
Income Before Taxes
North America .............................. $3,691.7 $3,442.1 $3,182.7
Europe ..................................... 1,043.0 925.2 1,021.4
Asia Pacific ............................... 352.9 323.4 277.3
Other Foreign .............................. (2.3) (17.4) 1.9
Eliminations ............................... (95.9) (259.4) (102.7)
- -------------------------------------------------------------------------------
4,989.4 4,413.9 4,380.6
Non-operating income ....................... 551.4 383.3 34.6
- -------------------------------------------------------------------------------
$5,540.8 $4,797.2 $4,415.2
===============================================================================
Assets
North America .............................. $15,662.0 $14,563.3 $14,538.9
Europe ..................................... 2,322.4 2,202.4 2,158.2
Asia Pacific ............................... 1,499.5 1,542.3 1,310.3
Other Foreign .............................. 306.1 196.9 151.6
Cash and Investments ....................... 4,681.0 5,319.4 3,686.6
Other Corporate Assets ..................... 1,444.3 1,513.3 1,147.9
Eliminations ............................... (1,622.2) (1,505.8) (1,136.9)
- -------------------------------------------------------------------------------
$24,293.1 $23,831.8 $21,856.6
===============================================================================
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 and adopts strategies responsive to changing economic and political
conditions.
53
<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, 1996, 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, 1996 and
1995, and the related consolidated statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York ARTHUR ANDERSEN LLP
January 28, 1997
54
<PAGE>
- --------------------------------------------------------------------------------
AUDIT COMMITTEE'S REPORT
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors is comprised of five 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., and Samuel O. Thier, M.D. The Committee held three meetings during 1996.
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 1996.
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
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA(1)
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
($ in millions except
per share amounts) ............ 1996 1995 1994 1993 1992(2) 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Results for Year:
Sales ......................... $19,828.7 $16,681.1 $14,969.8 $10,498.2 $ 9,662.5 $8,602.7 $7,671.5
Materials and
production costs ............ 9,319.2 7,456.3 5,962.7 2,497.6 2,096.1 1,934.9 1,778.1
Marketing/administrative
expenses .................... 3,841.3 3,297.8 3,177.5 2,913.9 2,963.3 2,570.3 2,388.0
Research/development
expenses .................... 1,487.3 1,331.4 1,230.6 1,172.8 1,111.6 987.8 854.0
Equity (income) loss
from affiliates ............. (600.7) (346.3) (56.6) 26.1 (25.8) 21.1 22.4
Gains on sales of specialty
chemical businesses ......... -- (682.9) -- -- -- -- --
Restructuring charge .......... -- -- -- 775.0 -- -- --
Gain on joint venture formation -- -- (492.0) -- -- -- --
Provision for joint venture
obligation .................. -- -- 499.6 -- -- -- --
Other (income) expense, net ... 240.8 827.6 232.8 10.1 (46.3) (78.1) (69.8)
Income before taxes ........... 5,540.8 4,797.2 4,415.2 3,102.7 3,563.6 3,166.7 2,698.8
Taxes on income ............... 1,659.5 1,462.0 1,418.2 936.5 1,117.0 1,045.0 917.6
Net income .................... 3,881.3 3,335.2 2,997.0 2,166.2 2,446.6 2,121.7 1,781.2
Earnings per common share ..... $3.20 $2.70 $2.38 $1.87 $2.12 $1.83 $1.52
Dividends declared ............ 1,793.4 1,578.0 1,463.1 1,239.0 1,106.9 920.3 788.1
Dividends paid per common share $1.42 $1.24 $1.14 $1.03 $.92 $.77 $.64
Capital expenditures .......... 1,196.7 1,005.5 1,009.3 1,012.7 1,066.6 1,041.5 670.8
Depreciation .................. 521.7 463.3 475.6 348.4 290.3 242.7 231.4
- ---------------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital ............... $ 2,897.4 $ 3,870.2 $ 2,291.4 $ 541.6 $ 1,241.1 $ 1,496.5 $ 939.2
Property, plant and
equipment (net) ............. 5,926.7 5,269.1 5,296.3 4,894.6 4,271.1 3,504.5 2,721.7
Total assets .................. 24,293.1 23,831.8 21,856.6 19,927.5 11,086.0 9,498.5 8,029.8
Long-term debt ................ 1,155.9 1,372.8 1,145.9 1,120.8 495.7 493.7 124.1
Stockholders' equity .......... 11,970.5 11,735.7 11,139.0 10,021.7 5,002.9 4,916.2 3,834.4
- ---------------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ....................... 19.6% 20.0% 20.0% 20.6% 25.3% 24.7% 23.2%
Average total assets ........ 16.1% 14.6% 14.3% 14.0% 24.1% 24.2% 24.1%
- ---------------------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding (millions) ...... 1,213.6 1,236.1 1,257.2 1,156.5 1,153.5 1,159.9 1,172.1
Number of stockholders ........ 247,300 243,000 244,700 231,300 161,200 91,100 82,300
Number of employees ........... 49,100 45,200 47,500 47,100(3) 38,400 37,700 36,900
===========================================================================================================================
<CAPTION>
($ in millions except
per share amounts) ............ 1989 1988 1987 1986
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Results for Year:
Sales ......................... $6,550.5 $5,939.5 $5,061.3 $4,128.9
Materials and
production costs ............ 1,550.3 1,526.1 1,444.3 1,338.0
Marketing/administrative
expenses .................... 2,013.4 1,880.3 1,684.6 1,270.0
Research/development
expenses .................... 750.5 668.8 565.7 479.8
Equity (income) loss
from affiliates ............. 11.5 (2.5) (2.5) (.1)
Gains on sales of specialty
chemical businesses ......... -- -- -- --
Restructuring charge .......... -- -- -- --
Gain on joint venture formation -- -- -- --
Provision for joint venture
obligation .................. -- -- -- --
Other (income) expense, net ... (58.2) (4.2) (36.0) (32.1)
Income before taxes ........... 2,283.0 1,871.0 1,405.2 1,073.3
Taxes on income ............... 787.6 664.2 498.8 397.6
Net income .................... 1,495.4 1,206.8 906.4 675.7
Earnings per common share ..... $1.26 $1.02 $.74 $.54
Dividends declared ............ 681.5 546.3 365.2 278.5
Dividends paid per common share $.55 $.43 $.27 $.21
Capital expenditures .......... 433.0 372.7 253.7 210.6
Depreciation .................. 206.4 189.0 188.5 167.2
- ----------------------------------------------------------------------------------
Year-End Position:
Working capital ............... $1,502.5 $1,480.3 $ 798.3 $1,094.3
Property, plant and
equipment (net) ............. 2,292.5 2,070.7 1,948.0 1,906.2
Total assets .................. 6,756.7 6,127.5 5,680.0 5,105.2
Long-term debt ................ 117.8 142.8 167.4 167.5
Stockholders' equity .......... 3,520.6 2,855.8 2,116.7 2,541.2
- ----------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ....................... 22.8% 20.3% 17.9% 16.4%
Average total assets ........ 23.2% 20.4% 16.8% 13.5%
- ----------------------------------------------------------------------------------
Year-end Statistics:
Average common shares
outstanding (millions) ...... 1,188.3 1,186.9 1,221.2 1,253.9
Number of stockholders ........ 75,600 68,500 56,900 48,300
Number of employees ........... 34,400 32,000 31,100 30,700
==================================================================================
</TABLE>
(1) Amounts after 1992 include the impact of Medco from the date of
acquisition on November 18, 1993.
(2) Results of operations for 1992 exclude the cumulative effect of accounting
changes.
(3) Increase in 1993 is due to the inclusion of 10,300 Medco employees.
55
<PAGE>
EXHIBIT 21
MERCK & CO., INC. SUBSIDIARIES
as of 12/31/96
Each of the subsidiaries set forth below does business under the name
stated. 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.
Country or State
Name of Incorporation
---- -----------------
Chibret A/S Denmark
Hangzhou MSD Pharmaceutical Company Limited/1/ China
International Indemnity Ltd. Bermuda
Johnson & Johnson - Merck Consumer
Pharmaceuticals Company/1/ New Jersey
Laboratorios Prosalud S.A. Peru
MCM Vaccine Co./1/ Pennsylvania
Merck-Medco Managed Care, Inc. Delaware
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 Pennsylvania
Medco Containment Services, Inc. Political Action
Committee Corp. New Jersey
Medco Holdings Corp. Delaware
Medical Marketing Group, Inc. Delaware
Medical Marketing, Inc. Delaware
MMGI Corp. New Jersey
Medco MM Corp. New Jersey
MW Holdings, Inc. Delaware
NJRE Corp. New Jersey
NRx Federal Corp. Delaware
NRx Services, Inc. New York
National Administrative Services, Inc. Delaware
National Pharmacies, Inc. New Jersey
National Rx Services No. 2, Inc. Florida
National Rx Services No. 2, Inc. Ohio
<PAGE>
Country or State
Name of Incorporation
---- -----------------
National Rx Services No. 3, Inc. of Ohio Ohio
National Rx Services, Inc. California
National Rx Services, Inc. Florida
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
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
New York Paid Independent Practice
Association No. 9, Inc. New York
Paid Direct, Inc. Delaware
Paid Prescriptions, Inc. Nevada
Replacement Distribution Center, Inc. Ohio
SysteMed, Inc. Delaware
American Medical Outcomes Repository, Inc. Delaware
Systemed Pharmacy, Inc. Delaware
Systemed Pharmacy, Inc. Ohio
Merck and Company, Incorporated Delaware
Merck Capital Investment, Inc. Delaware
Merck Capital Resources, Inc. Delaware
MSD Technology, L.P./1/ Bermuda
Merck Finance Co., Inc. Delaware
Merck de Puerto Rico, Inc. Delaware
Merck Enterprises Canada, Ltd. Canada
Merck Foreign Sales Corporation Ltd. Bermuda
Merck Holdings, Inc. Delaware
Astra Merck, Inc./1/ Delaware
Chugai MSD Co., Ltd./1/ Japan
Frosst Laboratories, Inc. Delaware
Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal
2
<PAGE>
Country or State
Name of Incorporation
---- -----------------
Hubbard Farms, Inc. Delaware
Hubbard France, S.A.R.L. France
Merck Resource Management, 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 Ltda. Brazil
Merck Sharp & Dohme Farmaceutica e
Veterinaria Ltda. Brazil
Prodome Quimica e Farmaceutica Ltda./1/ 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. Netherlands
Merck Sharp & Dohme - Lebanon S.A.L. Lebanon
Merck Sharp & Dohme L.L.C. Russian
Federation
Merck Sharp & Dohme (Middle East) Limited Cyprus
Merck Sharp & Dohme of Pakistan Limited Pakistan
Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware
Merck Ventures, Inc. Delaware
MH II Corp. Delaware
Merck Sharp & Dohme Overseas Finance Luxembourg
Merck Frosst Canada, Inc. Canada
Merck Sharp & Dohme (Australia) Pty. Limited Australia
AMRAD Corporation Limited/1/ Australia
AMRAD Pharmaceuticals Ptd. Ltd./1/ Australia
Merck Sharp & Dohme B.V. Netherlands
Abello Farmacia, S.L./1/ Spain
Financiere MSD S.A.S. France
Chibret Pharmazeutische GmbH Germany
Laboratoires Jean-Paul Martin S.A.S./1/ France
Laboratoires Merck Sharp &
Dohme Chibret SNC France
Pasteur Merieux MSD S.N.C./1/ France
Pasteur Merieux MSD A/S Denmark
Pasteur Merieux MSD GmbH Germany
Pasteur Merieux MSD Ltd. (UK) Great Britain
Pasteur Merieux MSD Ltd. (Ireland) Ireland
Pasteur Merieux MSD N.V. Belgium
Pasteur Merieux MSD S.A. Spain
Pasteur Merieux MSD S.p.A. Italy
Pasteur Vaccins S.A. France
Pasteur Merieux MSD Gestion S.A./1/ France
3
<PAGE>
Country or State
Name of Incorporation
---- -----------------
Hubbard Nederland B.V. Netherlands
Hubbard Belgium International N.V. Belgium
Hubbard Deutschland GmbH Germany
Hubbard Italia SRL Italy
Hubbard Poultry U.K. Limited Great Britain
Logos Pharmaceuticals (Proprietary) Limited South Africa
Merck Sharp & Dohme GmbH Austria
Merck Sharp & Dohme (Italia) S.p.A. Italy
Abiogen Farma S.p.A. Italy
Istituto Di Richerche Di
Biologia Molecolare S.p.A./1/ Italy
MSD (Proprietary) Limited South Africa
MSD Sharp & Dohme GmbH Germany
Dieckmann Arzneimittel GmbH Germany
Woelm Pharma GmbH & Co./1/ Germany
MSD Chibropharm GmbH Germany
MSD Unterstutzungskasse GmbH Germany
Varipharm Arzneimittel GmbH Germany
Merck Sharp & Dohme Chibret A.G. Switzerland
Merck Sharp & Dohme (Holdings) Limited Great Britain
British United Turkeys Limited Great Britain
Centra Healthcare/1/ 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
The MSD Foundation Limited 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. Netherlands
MSD Ireland (Investment) Ltd. Bermuda
Merck Sharp & Dohme, Limitada Portugal
MSD Finance, B.V. Netherlands
Neopharmed S.p.A. Italy
Ruskin Limited Bermuda
MSD (Norge) A/S Norway
Suomen MSD Oy Finland
Kiinteisto Oy Irmelinpesa/1/ Finland
Kiinteisto Oy Viistotie 11 Finland
4
<PAGE>
Country or State
Name of Incorporation
---- -----------------
MSD Chimie S.A. France
MSD Lakemedel (Scandinavia) Aktiebolog 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 (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./1/ Delaware
MSD International Holdings, Inc. Delaware
Banyu Pharmaceutical Company, Ltd./1/ Japan
Banyu-A.S.C. Co., Ltd. Japan
Nippon Merck-Banyu Co., Ltd. Japan
MSD (Japan) Co., Ltd. Japan
The Du Pont Merck Pharmaceutical Company/1/ Delaware
____________
/1/own less than 100%
5
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned does hereby appoint CELIA A. COLBERT, MARY M.
McDONALD and KENNETH C. FRAZIER 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, l996 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
25th day of February, l997.
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
- ----------------------------
Raymond V. Gilmartin and Chief Executive Officer
(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
- ----------------------------
Peter E. Nugent (Principal Accounting Officer)
DIRECTORS
/s/ H. Brewster Atwater, Jr. /s/ Lloyd C. Elam
- -------------------------------- --------------------------------
H. Brewster Atwater, Jr. Lloyd C. Elam
/s/ Derek Birkin /s/ Charles E. Exley, Jr.
- -------------------------------- --------------------------------
Derek Birkin Charles E. Exley, Jr.
/s/ Lawrence A. Bossidy /s/ William N. Kelley
- -------------------------------- --------------------------------
Lawrence A. Bossidy William N. Kelley
/s/ William G. Bowen /s/ Edward M. Scolnick
- -------------------------------- --------------------------------
William G. Bowen Edward M. Scolnick
/s/ Johnnetta B. Cole /s/ Samuel O. Thier
- -------------------------------- --------------------------------
Johnnetta B. Cole Samuel O. Thier
<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 New York City,
New York, on February 25, l997, 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. 4 - 1997
-------------------------------
RESOLVED, that the proposed form of Form l0-K Annual Report of the
Company for the fiscal year ended December 3l, l996 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 Kenneth C. Frazier
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 17th day of March, l997.
[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, 1996 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,352
<SECURITIES> 829
<RECEIVABLES> 2,656
<ALLOWANCES> 0<F1>
<INVENTORY> 2,149
<CURRENT-ASSETS> 7,727
<PP&E> 8,726
<DEPRECIATION> 2,800
<TOTAL-ASSETS> 24,293
<CURRENT-LIABILITIES> 4,829
<BONDS> 1,156
0
0
<COMMON> 4,968
<OTHER-SE> 7,003
<TOTAL-LIABILITY-AND-EQUITY> 24,293
<SALES> 19,829
<TOTAL-REVENUES> 19,829
<CGS> 9,319
<TOTAL-COSTS> 9,319
<OTHER-EXPENSES> 1,487
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 5,541
<INCOME-TAX> 1,660
<INCOME-CONTINUING> 3,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,881
<EPS-PRIMARY> 3.20
<EPS-DILUTED> 3.13
<FN>
1. NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
