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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-3305
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MERCK & CO., INC.
ONE MERCK DRIVE
WHITEHOUSE STATION, N. J. 08889-0100
(908) 423-1000
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<S> <C>
INCORPORATED IN NEW JERSEY I.R.S. EMPLOYER
IDENTIFICATION NO. 22-1109110
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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<S> <C>
COMMON STOCK NEW YORK AND PHILADELPHIA STOCK EXCHANGES
(NO PAR VALUE)
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Number of shares of Common Stock (no par value) outstanding as of February
27, 1998: 1,195,985,267.
Aggregate market value of Common Stock (no par value) held by non-affiliates
on December 31, 1997 based on closing price on February 27, 1998:
$152,194,000,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X. NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
DOCUMENTS INCORPORATED BY REFERENCE:
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<CAPTION>
DOCUMENT PART OF FORM 10-K
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Annual Report to stockholders for the fiscal Parts I and II
year
ended December 31, 1997
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 28, 1998
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PART I
ITEM 1. BUSINESS.
Merck & Co., Inc. (the "Company") is a global research-driven pharmaceutical
company that discovers, develops, manufactures and markets a broad range of
human and animal health products, directly and through its joint ventures, and
provides pharmaceutical benefit services through Merck-Medco Managed Care,
L.L.C. (formerly Medco Containment Services, Inc.) ("Merck-Medco"). The
Company's industry segment is the Human and Animal Health Products and
Services segment.
The following table shows the sales of various categories of the Company's
products and services:
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<CAPTION>
($ in millions) 1997 1996 1995
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<S> <C> <C> <C>
Elevated cholesterol........................ $ 4,672.3 $ 4,055.9 $ 3,211.1
Hypertension/heart failure.................. 3,918.2 3,512.4 3,021.3
Anti-ulcerants.............................. 1,329.6 1,143.6 1,019.8
Antibiotics................................. 774.9 822.3 848.3
Ophthalmologicals........................... 740.0 693.1 570.6
Vaccines/biologicals........................ 733.6 586.8 529.9
Human immunodeficiency virus ("HIV")........ 581.7 187.8 --
Osteoporosis................................ 532.1 281.8 45.2
Animal health/crop protection............... 550.0 1,044.1 1,041.9
Other Merck products........................ 364.2 342.9 675.8
Merck-Medco................................. 9,440.3 7,158.0 5,717.2
--------- --------- ---------
Total..................................... $23,636.9 $19,828.7 $16,681.1
========= ========= =========
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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, Cozaar
(losartan potassium), Hyzaar (losartan potassium and hydrochlorothiazide),
Prinivil (lisinopril) and Vaseretic (enalapril maleate and
hydrochlorothiazide); anti-ulcerants, of which Pepcid (famotidine) is the
largest-selling; 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 Recombivax HB (hepatitis B vaccine
[recombinant]), M-M-R II (measles, mumps and rubella virus vaccine live) and
Varivax (varicella virus vaccine live [Oka/Merck]), a live virus vaccine for
the prevention of chickenpox, are the largest-selling; human immunodeficiency
virus, which is comprised of Crixivan (indinavir sulfate), a protease inhibitor
for the treatment of human immunodeficiency viral infection in adults, which was
launched in the United States in 1996; and osteoporosis, which is comprised of
Fosamax (alendronate sodium), for treatment and prevention in postmenopausal
women.
Animal health products include medicinals used to control and alleviate
disease in livestock, small animals and poultry. Crop protection includes
products for the control of crop pests and fungal disease. In July 1997, the
Company sold its crop protection business to Novartis. In August 1997, the
Company and Rhone-Poulenc combined their animal health and poultry genetics
businesses to form Merial Limited ("Merial"). Amounts for 1997 reflect sales
for these businesses prior to the completion of these transactions.
Other Merck products include sales of other human pharmaceuticals,
continuing sales to divested businesses and, beginning in 1997, supply sales
to the Merial joint venture. Also included in this category are rebates and
discounts on Company pharmaceutical products.
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Merck-Medco primarily includes Merck-Medco sales of non-Merck products and
Merck-Medco pharmaceutical benefit services, principally managed prescription
drug programs and programs to help manage patient health.
In 1997, the U.S. Food and Drug Administration ("FDA") cleared Fosamax for two
new indications in postmenopausal women: prevention of fractures in those with
osteoporosis and prevention of osteoporosis in those at risk for the disease. In
October 1997, the FDA approved an expanded indication for Zocor to include the
lowering of triglycerides in patients with elevated cholesterol levels. In
November 1997, Cozaar received regulatory approval for a new heart failure
indication in Denmark and Finland, and approval of this indication is pending in
other foreign countries. On December 19, 1997, the FDA cleared Propecia
(finasteride) for marketing in the United States for treatment of male pattern
hair loss, for use in men only. In January 1998, Mexico became the first country
to grant marketing clearance to Maxalt (rizatriptan benzoate), a new oral anti-
migraine treatment. On February 25, 1998, the Netherlands became the first
European country to approve Maxalt, and other regulatory approvals are pending
worldwide, including in the United States where the Company filed a New Drug
Application ("NDA") with the FDA on June 30, 1997. On February 20, 1998, the FDA
cleared Singulair (montelukast sodium), a once-a-day oral leukotriene D4
receptor antagonist, for marketing in the United States for the prevention and
chronic treatment of asthma in adults and children aged six and above. On March
5, 1998, the FDA granted traditional approval for Crixivan in combination with
antiretroviral agents for the treatment of HIV infection (in 1996, the FDA
granted an accelerated approval for Crixivan for treatment of HIV Infection).
In 1997, the Company acquired Istituto Gentili S.p.A., a privately-held
Italian pharmaceutical company which owned the intellectual property rights for
alendronate, which is marketed in the United States by the Company as Fosamax.
Divestitures--In 1995, the Company completed the sale of its specialty
chemicals businesses, with the sales of Calgon Vestal Laboratories to Bristol-
Myers Squibb for $261.5 million and Kelco to Monsanto Company for $1.075
billion.
In October 1995, the Company sold Medco Behavioral Care Corporation ("MBC"),
a managed mental health care service business which was acquired as part of
Merck-Medco, to MBC management and Kohlberg Kravis Roberts & Co. for $340.0
million.
In July 1997, the Company sold its crop protection business to Novartis for
$910.0 million.
The decision to divest these 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 health
and pharmaceutical benefit services businesses.
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 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 the Company and Astra each own a 50%
share. The joint venture, formed in November 1994, develops and markets most
of Astra's new prescription medicines in the United States. Joint venture
sales consist primarily of Prilosec (omeprazole), 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 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
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Canada in 1996. The European extension currently markets and sells over-the-
counter pharmaceutical products in France, Germany, Italy, Spain and the
United Kingdom.
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 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.
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 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., introduced its first health management
program in 1997.
In April 1997, the Company and Chugai Pharmaceutical Co., Ltd. completed
arrangements relating to the formation of a joint venture, Chugai MSD Co.,
Ltd. ("Chugai MSD"), which was created for the development and marketing of
self-medication pharmaceutical products in Japan. Products currently marketed
by Chugai MSD include the Chugai Ichoyaku line of gastrointestinal products,
and Efeel, a famotidine product for stomach pain, nausea, heartburn and
indigestion, which is marketed in the United States, Canada and various
European markets by the Johnson & Johnson Merck Consumer Pharmaceuticals Co.
joint venture under the trademark Pepcid AC.
In August 1997, the Company and Rhone-Poulenc combined their respective
animal health and poultry genetics businesses to form Merial, a fully-
integrated, stand-alone joint venture, equally owned by the Company and Rhone-
Poulenc. Merial is the world's largest company dedicated to the discovery,
manufacture and marketing of veterinary pharmaceuticals and vaccines. The
Company contributed developmental research personnel, sales and marketing
activities, and animal health products, as well as its poultry genetics
business. Rhone-Poulenc contributed research and development, manufacturing,
sales and marketing activities, and animal health products, as well as its
poultry genetics 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
4
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the ability to market these innovations effectively. With its long-standing
emphasis on research and development, the Company is well prepared to compete
in the search for technological innovations. Additional resources to meet
competition include quality control, flexibility to meet exact customer
specifications, an efficient distribution system and a strong technical
information service. The Company is active in acquiring and marketing products
through joint ventures and licenses and has been expanding its sales and
marketing efforts to further address changing industry conditions. However,
the introduction of new products and processes by competitors may result in
price reductions and product replacements, even for products protected by
patents. For example, the number of compounds available to treat diseases
typically increases over time and has resulted in slowing the growth in sales
of certain of the Company's products.
In addition, particularly in the area of human pharmaceutical products,
legislation enacted in all states allows, encourages or, in a few instances,
in the absence of specific instructions from the prescribing physician,
mandates the use of "generic" products (those containing the same active
chemical as an innovator's product) rather than "brand-name" products.
Governmental and other pressures toward the dispensing of generic products
have significantly reduced the sales of certain of the Company's products no
longer protected by patents, such as Clinoril (sulindac) and Aldomet
(methyldopa), and slowed the growth of certain other products.
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 one percent on an annual basis and to limit
the net weighted average price changes for all human health products in the
United States to the projected general rate of inflation as measured by the
CPI, given stable markets and government policies that foster innovation.
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.
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.
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 regional, 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. In 1997, the Food and Drug Administration Modernization Act was passed
and was the culmination of a comprehensive legislative reform effort designed
to streamline regulatory procedures within the FDA and to improve the
regulation of drugs, medical devices, and food. The legislation was
principally designed to ensure the timely availability of safe and effective
drugs and biologics by expediting the premarket review process for new
products. A key provision of the legislation is the re-authorization of the
Prescription Drug User Fee Act of 1992, which permits the continued collection
of user fees from prescription drug manufacturers to augment FDA
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resources earmarked for the review of human drug applications. This helps
provide the resources necessary to ensure the prompt approval of safe and
effective new drugs.
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 reform bill has not been enacted at the federal level,
some states have passed reform legislation and further federal and state
developments are expected. Although the Company is positioned to respond to
evolving market forces, it cannot predict the outcome or effect of legislation
resulting from these reform efforts.
For many years, the pharmaceutical industry has been under federal and state
oversight with the new drug approval system, drug safety, advertising and
promotion, drug purchasing and reimbursement programs and formularies
variously under review. The Company believes that it will continue to be able
to bring new drugs to market in this regulatory environment. One type of
federal initiative to contain federal healthcare spending is the prospective
or "capitated" payment system, first implemented to reduce the rate of growth
in Medicare reimbursement to hospitals. Such a system establishes in advance a
flat rate for reimbursement for health care for those patients for whom the
payor is fiscally responsible. This type of payment system and other cost
containment systems are now widely used by public and private payors and have
caused hospitals, health maintenance organizations and other customers of the
Company to be more cost-conscious in their treatment decisions, including
decisions regarding the medicines to be made available to their patients.
Also, federal and state governments have pursued methods to directly reduce
the cost of drugs for which they pay. For example, federal legislation enacted
in 1990 requires the Company to pay a specified rebate for medicines
reimbursed by Medicaid. Federal legislation enacted in 1992 mandates the
payment of rebates similar to the Medicaid rebate for outpatient medicines
purchased by certain Public Health Service entities and "disproportionate
share" hospitals (hospitals meeting certain criteria). That same law mandates
minimum discounts of 24% off of a defined "non-federal average manufacturer
price" for the Veterans' Administration, Federal Supply Schedule and certain
other federal sector purchasers of medicines.
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 eight CDC contracts in 1997 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 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
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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
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,
Fosamax, Hyzaar, Mefoxin (cefoxitin sodium), Mevacor, Noroxin, PedvaxHIB
(Haemophilus b conjugate vaccine), Pepcid, Primaxin, Propecia, Proscar
(finasteride), Recombivax HB, Sinemet CR (carbidopa and levodopa), Timoptic-
XE, Trusopt, Vaseretic, Vasotec and Zocor. Prinivil is subject to a license to
a third party and is not marketed exclusively by the Company.
Several products will face expiration of product patents in the United
States and other countries commencing December 1999 through the year 2001,
including Mevacor (U.S.--2001), Pepcid (U.S.--2000), Prinivil/Prinzide (U.S.--
2001), Vasotec (U.S.--2000), and Vaseretic (U.S.--2001). In addition,
Prilosec, which is sold by the Company's Astra Merck joint venture, will face
expiration of a substance patent in 2001.
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
(diflunisal), Flexeril (cyclobenzaprine hydrochloride), HydroDiuril
(hydrochlorothiazide), Indocin (indomethacin), Ivomec (ivermectin), ivermectin-
containing products, Moduretic (amiloride HCl and hydrochlorothiazide), Sinemet
(carbidopa and levodopa), TBZ and Thibenzole (thiabendazole), Timoptic and
Timolide (timolol maleate and hydrochlorothiazide).
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
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challenge could result in an earlier effective approval date for the generic
version of the pioneer drug and a six-month period during which other generic
versions of the pioneer drug could not be marketed.
In Japan, a patent term restoration law enacted in 1988 provides, under
specific conditions, up to five years of additional patent life for
pharmaceuticals. In 1992, the Council of the European Communities published a
regulation which created supplementary protection certificates for medicinal
products. Thus, as of January 1993, certain medicinal products sold in the EU
became eligible for up to five years of market exclusivity after patent
expiration. However, this market exclusivity will expire throughout the EU 15
years after the first product approval in the EU. In February 1993, Canada
enacted Bill C91 which significantly modified Canadian patent law by
eliminating compulsory licensing of pharmaceutical products after December 20,
1991. Thus, patented pharmaceutical products will have market exclusivity for
the full 20-year patent life in Canada.
The North American Free Trade Agreement was passed in November 1993.
Pursuant to the agreement, Mexico improved its patent law to meet
international standards and to provide full patent protection to
pharmaceutical products. The General Agreement on Tariff and Trade ("GATT")
negotiations were concluded in December 1993 and the U.S. implementing
legislation was enacted in December 1994. The required changes in U.S. law
became effective in June 1995. The GATT implementing law changed the patent
term of new inventions to 20 years from the date of patent filing. Existing
patents were granted a patent term of the greater of 17 years from issue or 20
years from filing. Patents on several products of the Company obtained longer
life as a result.
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 1997 on patent and know-how licenses and other
rights amounted to $101.3 million. The Company also paid royalties amounting
to $226.9 million in 1997 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 7,540 people are employed in the Company's research
activities. Expenditures for the Company's research and development programs
were $1,683.7 million in 1997, $1,487.3 million in 1996 and $1,331.4 million
in 1995 and will be approximately $1.9 billion in 1998. 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 1988 through 1997 exceeded $11.0 billion with a compound annual growth
rate of 12%. Research and development costs incurred by the joint ventures in
which the Company participates, totaling $556.6 million in 1997, are not
included in the Company's consolidated research and development expenses.
The Company maintains a number of long-term exploratory and fundamental
research programs in biology and chemistry as well as research programs
directed toward product development. Projects related to human and
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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,
endoparasitic and ectoparasitic diseases, companion animal diseases and
production improvement.
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 or the biological Product License
Application to the FDA for the approval required. The development of certain
other products 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 Aggrastat (tirofiban hydrochloride), an intravenous platelet blocker
for the treatment of cardiovascular disorders, for which the Company filed an
NDA with the FDA on October 31, 1997; and Cosopt (dorzolamide hydrochloride
and timolol maleate), a combination of Timoptic-XE and Trusopt, for the
treatment of glaucoma. Other products in development include Vioxx, a new
product to treat arthritis pain and inflammation; an injectable antibiotic; an
antifungal agent; an oral compound with a novel mechanism of action
potentially useful for the treatment of depression and other neuropsychiatric
diseases; 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 1997, the Company had 53,800 employees worldwide, with 33,800
employed in the United States, including Puerto Rico. Approximately 30.5% 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. In 1997, the Company incurred
capital expenditures of approximately $41.8 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $470.0 million for the years 1998 through 2002. In addition, the
Company's operating and maintenance expenditures for environmental protection
facilities were approximately $89.4 million in 1997. Expenditures for this
purpose for the years 1998 through 2002 are forecasted to exceed $569.0 million.
The Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites. Expenditures for remediation and
environmental liabilities were $18.8 million in 1997, and are estimated at
$123.0 million for the years 1998 through 2002. These amounts do not consider
potential recoveries from insurers or other parties. 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.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995)
This report and other written reports and oral statements made from time to
time by the Company may contain so-called "forward-looking statements," all of
which are subject to risks and uncertainties. One can identify these forward-
looking statements by their use of words such as "expects," "plans," "will,"
9
<PAGE>
"estimates," "forecasts," "projects" and other words of similar meaning. One
can also identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address the
Company's growth strategy, financial results, product approvals and
development programs. One must carefully consider any such statement and
should understand that many factors could cause actual results to differ from
the Company's forward-looking statements. These factors include inaccurate
assumptions and a broad variety of other risks and uncertainties, including
some that are known and some that are not. No forward-looking statement can be
guaranteed and actual future results may vary materially. Although it is not
possible to predict or identify all such factors, they may include the
following:
. Generic competition as several products face expiration of product patents
in the United States and other countries commencing December 1999 through
the year 2001, including Mevacor (U.S. -2001), Pepcid (U.S. - 2000),
Prinivil/Prinzide (U.S. - 2001), Vasotec (U.S.- 2000) and Vaseretic (U.S. -
2001). In addition, Prilosec, which is sold by the Company's Astra Merck
joint venture will face expiration of a substance patent in 2001.
. Increased "brand" competition in therapeutic areas important to the
Company's long-term business performance.
. The difficulties and uncertainties inherent in new product development.
The outcome of the lengthy and complex process of new product development
is inherently uncertain. A candidate can fail at any stage of the process
and one or more late-stage product candidates could fail to receive
regulatory approval. New product candidates may appear promising in
development but fail to reach the market because of efficacy or safety
concerns, the inability to obtain necessary regulatory approvals, the
difficulty or excessive cost to manufacture and/or the infringement of
patents or intellectual property rights of others. Furthermore, the sales of
new products may prove to be disappointing and fail to reach anticipated
levels.
. Pricing pressures, both in the United States and abroad, including rules
and practices of managed care groups, judicial decisions and governmental
laws and regulations related to Medicare, Medicaid and healthcare reform,
pharmaceutical reimbursement and pricing in general.
. Changes in government laws and regulations and the enforcement thereof
affecting the Company's pharmaceutical, vaccine and/or pharmaceutical
benefits management businesses.
. Efficacy or safety concerns with respect to marketed products, whether or
not scientifically justified, leading to product recalls, withdrawals or
declining sales.
. Legal factors, including product liability claims, antitrust litigation,
environmental concerns and patent disputes with competitors, any of which
could preclude commercialization of products or negatively affect the
profitability of existing products.
. Lost market opportunity resulting from delays and uncertainties in the
approval process of the FDA and foreign regulatory authorities.
. Changes in tax laws including changes related to the taxation of foreign
earnings, as well as the impact of legislation capping and ultimately
repealing Section 936 of the Internal Revenue Code (relating to earnings
from the Company's Puerto Rican operations).
. Changes in accounting standards promulgated by the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board or
the Securities and Exchange Commission that are adverse to the Company.
. Economic factors over which the Company has no control, including changes
in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential
risks and uncertainties.
GEOGRAPHIC AREA INFORMATION
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales by subsidiaries outside the United States were 27%
of sales in 1997, and 30% and 32% of sales in 1996 and 1995, respectively.
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
10
<PAGE>
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 continues to offer
opportunities to businesses operating within the EU, particularly companies
such as the Company that maintain a strong research and manufacturing presence
within and marketing and sales organizations throughout Europe. The Company is
continually seeking to take advantage of these opportunities to improve the
efficiency and productivity of its EU operations.
In recent years, the Company has been expanding its operations in countries
located in Latin America, Eastern Europe and the Asia Pacific region where
changes in government policies and economic conditions are making it possible
for the Company to earn fair returns. Businesses in these developing areas,
while less stable, offer important opportunities for growth over time.
Financial information about geographic areas of the Company's business is
incorporated by reference to page 49 of the Company's 1997 Annual Report to
stockholders.
OTHER MATTERS
The Company has developed and begun implementing a plan to ensure that its
systems are compliant with the requirements to process transactions in the
year 2000. Management does not expect the cost of implementing this plan to be
material to the Company's financial position, results of operations, liquidity
or capital resources.
ITEM 2. PROPERTIES.
The Company's corporate headquarters is located in Whitehouse Station, New
Jersey. The Company's human health business is conducted through divisional or
subsidiary headquarters located in Montvale, New Jersey; Rahway, New Jersey;
and West Point, Pennsylvania. 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 nine
locations in the United States and Puerto Rico. 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 Asia.
Capital expenditures for 1997 were $1,448.8 million compared with $1,196.7
million for 1996. In the United States, these amounted to $1,062.8 million for
1997 and $937.8 million for 1996. Abroad, such expenditures amounted to $386.0
million for 1997 and $258.9 million for 1996.
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
11
<PAGE>
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. The court approved an
amended version of the settlement agreement which incorporated revisions,
unrelated to the monetary payment, to address concerns specified by the court.
Following the dismissal of appeals brought by objectors, the approval became
final in October 1997. 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.
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 taken an active role in identifying
and providing for these costs and such amounts 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
----------------
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1998)
RAYMOND V. GILMARTIN--Age 56
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 49
January, 1997--President, Human Health-The Americas--responsible for the
Company's prescription drug business in the United States, Canada and
Latin America 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-Europe
PAUL R. BELL--Age 52
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- Australia and New
Zealand
May, 1993--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 41
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
CAROLINE DORSA--Age 38
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
R. GORDON DOUGLAS JR.--Age 63
January, 1994--President, Merck Vaccines
April, 1991--President, Merck Vaccine Division
KENNETH C. FRAZIER--Age 43
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
13
<PAGE>
BERNARD J. KELLEY--Age 56
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 49
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
PER G. H. LOFBERG--Age 50
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 53
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
PETER E. NUGENT--Age 55
September, 1993--Vice President, Controller
July, 1989--Vice President, Corporate Taxes
EDWARD M. SCOLNICK--Age 57
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
BENNETT M. SHAPIRO--Age 58
September, 1990--Executive Vice President, Worldwide Basic Research, Merck
Research Laboratories
DEBORAH K. SMITH--Age 50
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.
14
<PAGE>
PER WOLD-OLSEN--Age 50
January, 1997--President, Human Health-Europe, Middle East & Africa--
responsible for the Company's prescription drug business in Europe, the
Middle East and Africa and worldwide coordination of marketing policies
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.
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
37 and 52 of the Company's 1997 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 on page 52 of
the Company's 1997 Annual Report to stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required for this item is incorporated by reference to pages
28 through 37 of the Company's 1997 Annual Report to stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required for this item is incorporated by reference to pages
35 (under the caption "Analysis of Liquidity and Capital Resources") and 36 of
the Company's 1997 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, 1997 and 1996, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period
ended December 31, 1997 and the report dated January 27, 1998 of Arthur
Andersen LLP, independent public accountants, are incorporated by reference to
pages 38 through 49 and page 50 of the Company's 1997 Annual Report to
stockholders.
(b) SUPPLEMENTARY DATA
Selected quarterly financial data for 1997 and 1996 are incorporated by
reference to the data contained in the Condensed Interim Financial Data table
on page 37 of the Company's 1997 Annual Report to stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
15
<PAGE>
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 28, 1998. Information on executive officers is
set forth in Part I of this document on pages 13 through 15. The required
information on compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to page 21 (under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance") of the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held April 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference to page
7 (under 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 28, 1998.
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 28, 1998.
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 28,
1998.
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 1997 Annual Report to stockholders, as noted on
page 16 of this document:
Consolidated statement of income for the years ended December 31,
1997, 1996 and 1995
Consolidated statement of retained earnings for the years ended
December 31, 1997, 1996 and 1995
Consolidated balance sheet as of December 31, 1997 and 1996
Consolidated statement of cash flows for the years ended December
31, 1997, 1996 and 1995
Notes to consolidated 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 five consolidated subsidiaries.
16
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <S> <C>
3(a) -- Restated Certificate of *
Incorporation of Merck
& Co., Inc. (May 6,
1992)
3(b) -- By-Laws of Merck & Co., Incorporated by reference
Inc. (as amended to Form 10-Q Quarterly
effective February 25, Report for the period
1997) ended March 31, 1997
10(a) -- Executive Incentive Plan ***
(as amended effective
February 27, 1996)
10(b) -- Base Salary Deferral Incorporated by reference
Plan (as adopted on to Form 10-K Annual
October 22, 1996, Report for the fiscal
effective January 1, year ended December 31,
1997) 1996
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 Filed with this document
Stock Option Plan (as
amended and restated
February 24, 1998)
10(g) -- 1996 Non-Employee Filed with this document
Directors Stock Option
Plan (as amended and
restated February 24,
1998)
10(h) -- Supplemental Retirement **
Plan (as amended
effective January 1,
1995)
10(i) -- Retirement Plan for the Incorporated by reference
Directors of Merck & to Form 10-Q Quarterly
Co., Inc. (amended and Report for the period
restated June 21, 1996) ended June 30, 1996
10(j) -- Plan for Deferred Incorporated by reference
Payment of Directors' to Form 10-Q Quarterly
Compensation (amended Report for the period
and restated June 21, ended June 30, 1996
1996)
10(k) -- 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(l) -- Employment Agreement Incorporated by reference
between Per G.H. to Form 10-K Annual
Lofberg and Merck-Medco Report of Medco
dated April 1, 1993 Containment Services,
Inc. for the fiscal year
ended June 30, 1993
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <S> <C>
10(m) -- Amendment dated July 27, 1993 ***
to Employment Agreement
between Per G.H. Lofberg and
Merck-Medco dated April 1,
1993
10(n) -- Letter Agreement dated May Incorporated by reference
24, 1996 with respect to the to Form 10-Q Quarterly
Employment Agreement between Report for the period
Per G.H. Lofberg and Merck- ended June 30, 1996
Medco dated April 1, 1993
and amended July 27, 1993
10(o) -- Employment Agreement between Incorporated by reference
Raymond V. Gilmartin and the to Form 10-Q Quarterly
Company dated June 9, 1994 Report for the period
ended June 30, 1994
12 -- Computation of Ratios of Filed with this document
Earnings to Fixed Charges
13 -- 1997 Annual Report to Filed with this document
stockholders (only those
portions incorporated by
reference in this document
are deemed "filed")
21 -- List of subsidiaries Filed with this document
24 -- Power of Attorney and Filed with this document
Certified Resolution of
Board of Directors
27(a) -- Financial Data Schedule Filed with this document
27(b) -- Restated Financial Data Filed with this document
Schedule
</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, 1997, no current
reports on Form 8-K were filed.
18
<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 20, 1998
RAYMOND V. GILMARTIN
By __________________________________
(Chairman of the Board, President
and
Chief Executive Officer)
/s/ CELIA A. COLBERT
By __________________________________
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 20, 1998
President and Chief
Executive Officer; Principal
Executive Officer; Director
Judy C. Lewent Senior Vice President and March 20, 1998
Chief Financial Officer;
Principal Financial Officer
Peter E. Nugent Vice President, Controller; March 20, 1998
Principal Accounting Officer
Derek Birkin Director March 20, 1998
Lawrence A. Bossidy Director March 20, 1998
William G. Bowen Director March 20, 1998
Johnnetta B. Cole Director March 20, 1998
Carolyne K. Davis Director March 20, 1998
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
Lloyd C. Elam Director March 20, 1998
William N. Kelley Director March 20, 1998
Edward M. Scolnick Director March 20, 1998
Samuel O. Thier Director March 20, 1998
</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.
/s/ CELIA A. COLBERT
By __________________________________
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, 33-64665, 333-23293 and
333-23295), on Form S-4 (No. 33-50667) and on Form S-3 (Nos. 33-39349, 33-
60322, 33-51785, 33-57421, 333-17045 and 333-36383). It should be noted that
we have not audited any financial statements of the Company subsequent to
December 31, 1997 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 1998
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <S> <C>
3(a) -- Restated Certificate of Incorporation *
of Merck & Co., Inc. (May 6, 1992)
3(b) -- By-Laws of Merck & Co., Inc. (as Incorporated by reference
amended effective February 25, 1997) to Form 10-Q Quarterly
Report for the period
ended March 31, 1997
10(a) -- Executive Incentive Plan (as amended ***
effective February 27, 1996)
10(b) -- Base Salary Deferral Plan (as adopted Incorporated by reference
on October 22, 1996, effective to Form 10-K Annual
January 1, 1997) Report for the fiscal
year ended December 31,
1996
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 Filed with this document
Plan (as amended and restated
February 24, 1998)
10(g) -- 1996 Non-Employee Directors Stock Filed with this document
Option Plan (as amended and restated
February 24, 1998)
10(h) -- Supplemental Retirement Plan (as **
amended effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference
Merck & Co., Inc. (amended and to Form 10-Q Quarterly
restated June 21, 1996) Report for the period
ended June 30, 1996
10(j) -- Plan for Deferred Payment of Incorporated by reference
Directors' Compensation (amended and to Form 10-Q Quarterly
restated June 21, 1996) Report for the period
ended June 30, 1996
10(k) -- 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(l) -- Employment Agreement between Per G.H. Incorporated by reference
Lofberg and Merck-Medco dated April to Form 10-K Annual
1, 1993 Report of Medco
Containment Services,
Inc. for the fiscal year
ended June 30, 1993
10(m) -- Amendment dated July 27, 1993 to ***
Employment Agreement between Per G.H.
Lofberg and Merck-Medco dated April
1, 1993
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <C> <S> <C>
10(n) -- Letter Agreement dated May 24, 1996 Incorporated by reference
with respect to the Employment to Form 10-Q Quarterly
Agreement between Per G.H. Lofberg Report for the period
and Merck-Medco dated April 1, 1993 ended June 30, 1996
and amended July 27, 1993
10(o) -- Employment Agreement between Raymond Incorporated by reference
V. Gilmartin and the Company dated to Form 10-Q Quarterly
June 9, 1994 Report for the period
ended June 30, 1994
12 -- Computation of Ratios of Earnings to Filed with this document
Fixed Charges
13 -- 1997 Annual Report to stockholders Filed with this document
(only 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 Filed with this document
Resolution of Board of Directors
27(a) -- Financial Data Schedule Filed with this document
27(b) -- Restated 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(f)
MERCK & CO., INC.
NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
(AMENDED AND RESTATED FEBRUARY 24, 1998)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Non-Employee Directors Stock Option Plan (the "Plan") is established to
attract, retain and compensate for service highly qualified individuals who
are not current or former employees of Merck & Co., Inc. (the "Company") as
members of the Board of Directors and to enable them to increase their
ownership in the Company's Common Stock. The Plan will be beneficial to the
Company and its stockholders since it will allow these directors to have a
greater personal financial stake in the Company through the ownership of
Company stock, in addition to underscoring their common interest with
stockholders in increasing the value of the Company stock longer term.
1. ELIGIBILITY
All members of the Company's Board of Directors who are not current or
former employees of the Company or any of its subsidiaries ("Non-Employee
Directors") are eligible to participate in this Plan.
2. OPTIONS
Only a nonqualified stock option ("NQSO") may be granted under this Plan.
3. SHARES AVAILABLE
(a) Number of Shares Available: There are hereby reserved for issuance under
this Plan 225,000 shares of Common Stock, no par value, which may be
authorized but unissued shares, treasury shares, or shares purchased on the
open market.
(b) Recapitalization Adjustment: In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the corporate structure
or shares of the Company, adjustments in the number and kind of shares
authorized by this Plan, in the number and kind of shares covered by, and in
the option price of, outstanding NQSOs under this Plan shall be made if, and
in the same manner as, such adjustments are made to NQSOs issued under the
Company's then current Incentive Stock Plan.
4. ANNUAL GRANT OF NONQUALIFIED STOCK OPTIONS
Each year on the first Friday following the Company's Annual Meeting of
Stockholders, each individual elected, reelected or continuing as a Non-
Employee Director shall automatically receive a NQSO covering 1,000 shares of
Common Stock. Notwithstanding the foregoing, if, on that first Friday, the
General Counsel of the Company determines, in his/her sole discretion, that
the Company is in possession of material, undisclosed information about the
Company, then the annual grant of NQSOs to Non-Employee Directors shall be
suspended until the second day after public dissemination of such information
and the price, exercisability date and option period shall then be determined
by reference to such later date. If Common Stock is not traded on the New York
Stock Exchange ("NYSE") on any date a grant would otherwise be awarded, then
the grant shall be made the next day thereafter on which Common Stock is so
traded.
5. OPTION PRICE
The price of the NQSO shall be either (1) the simple average of the high and
low prices at which the Common Stock traded on the date of the grant, as
quoted on the NYSE on that date, or (2) the price of the last sale of Common
Stock on that date as quoted by the NYSE, whichever is higher, and rounding
out such figure to the next higher multiple of 25 cents (unless the figure is
already a multiple of 25 cents).
6. OPTION PERIOD
A NQSO granted under this Plan shall become exercisable five years after
date of grant and shall expire ten years after date of grant ("Option
Period").
2
<PAGE>
7. PAYMENT
The NQSO price shall be paid in cash in U.S. dollars at the time the NQSO is
exercised.
8. CESSATION OF SERVICE
Upon cessation of service as a Non-Employee Director (for reasons other than
retirement or death), only those NQSOs immediately exercisable at the date of
cessation of service shall be exercisable by the grantee. Such NQSOs must be
exercised within 90 days of cessation of service (but in no event after the
expiration of the Option Period) or they shall be forfeited.
9. RETIREMENT
If a grantee ceases service as a Non-Employee Director and is at least age
65 with ten or more years of service or age 70 with five or more years of
service, then any of his/her outstanding NQSOs shall continue to become
exercisable. All outstanding NQSOs must be exercised by the earlier of (i)
sixty months following the date of such cessation of service or (ii) the
expiration of the Option Period, or such NQSOs shall be forfeited.
10. DEATH
Upon the death of a Non-Employee Director, only those NQSOs which were
exercisable on the date of death shall be exercisable by his/her legal
representatives or heirs. Such NQSOs must be exercised within 36 months from
date of death (but in no event after the expiration of the Option Period) or
they shall be forfeited.
11. ADMINISTRATION AND AMENDMENT OF THE PLAN
This Plan shall be administered by the Board of Directors of the Company.
This Plan may be terminated or amended by the Board of Directors as they deem
advisable. However, an amendment revising the price, date of exercisability,
option period of, or amount of shares under a NQSO shall not be made more
frequently than every six months unless necessary to comply with the Internal
Revenue Code of 1986, as amended, or with the Employee Retirement Income
Security Act of 1974, as amended. No amendment may revoke or alter in a manner
unfavorable to the grantees any NQSOs then outstanding, nor may the Board
amend this Plan without stockholder approval where the absence of such
approval would cause the Plan to fail to comply with Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Act"), or any other requirement of
applicable law or regulation. A NQSO may not be granted under this Plan after
December 31, 1995 but NQSOs granted prior to that date shall continue to
become exercisable and may be exercised according to their terms.
12. TRANSFERABILITY
Except as set forth in this section, the NQSOs granted under this Plan shall
not be exercisable during the grantee's lifetime by anyone other than the
grantee, the grantee's legal guardian or the grantee's legal representative,
and shall not be transferable other than by will or by the laws of descent and
distribution. NQSOs granted under this Plan shall be transferable during a
grantee's lifetime only in accordance with the following provisions:
The grantee may only transfer an NQSO while serving as a Non-Employee
Director of the Company or within one year of ceasing service as a Non-
Employee Director due to retirement as defined in Section 9.
The NQSO may be transferred only to the grantee's spouse, children
(including adopted children and stepchildren) and grandchildren
(collectively, "Family Members"), to one or more trusts for the benefit of
Family Members or, at the discretion of the Board of Directors, to one or
more partnerships where the grantee and his Family Members are the only
partners, in accordance with the rules set forth in this section. The
grantee shall not receive any payment or other consideration for such
transfer (except that if the transfer is to a partnership, the grantee
shall be permitted to receive an interest in the partnership in
consideration for the transfer).
3
<PAGE>
Any NQSO transferred in accordance with this section shall continue to be
subject to the same terms and conditions in the hands of the transferee as
were applicable to such NQSO prior to the transfer, except that the
grantee's right to transfer such NQSO in accordance with this section shall
not apply to the transferee. However, if the transferee is a natural
person, upon the transferee's death, the NQSO privileges may be exercised
by the legal representatives or beneficiaries of the transferee within the
exercise periods otherwise applicable to the NQSO.
Any purported transfer of an NQSO under this section shall not be
effective unless, prior to such transfer, the grantee has (1) met the
minimum stock ownership target then in place for Directors of the Company,
(2) notified the Company of the transferee's name and address, the number
of shares under the Option to be transferred, and the grant date and
exercise price of such shares, and (3) demonstrated, if requested by the
Board of Directors, that the proposed transferee qualifies as a permitted
transferee under the rules set forth in this section. In addition, the
transferee must sign an agreement that he or she is bound by the rules and
regulations of the Plans and by the same insider trading restrictions that
apply to the grantee. No transfer shall be effective unless the Company has
in effect a registration statement filed under the Securities Act of 1933
covering the securities to be acquired by the transferee upon exercise of
the NQSO, or the General Counsel of Merck & Co., Inc. has determined that
registration of such shares is not necessary.
13. COMPLIANCE WITH SEC REGULATIONS
It is the Company's intent that the Plan comply in all respects with Rule
16b-3 of the Act and any regulations promulgated thereunder. If any provision
of this Plan is later found not to be in compliance with the Rule, the
provision shall be deemed null and void. All grants and exercises of NQSOs
under this Plan shall be executed in accordance with the requirements of
Section 16 of the Act, as amended, and any regulations promulgated thereunder.
14. MISCELLANEOUS
Except as provided in this Plan, no Non-Employee Director shall have any
claim or right to be granted a NQSO under this Plan. Neither the Plan nor any
action thereunder shall be construed as giving any director any right to be
retained in the service of the Company.
15. EFFECTIVE DATE
This Plan shall be effective April 28, 1992 or such later date as
stockholder approval is obtained.
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 10(g)
MERCK & CO., INC.
1996 NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
(AMENDED AND RESTATED FEBRUARY 24, 1998)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The 1996 Non-Employee Directors Stock Option Plan (the "Plan") is
established to attract, retain and compensate for service as members of the
Board of Directors of Merck & Co., Inc. (the "Company") highly qualified
individuals who are not current or former employees of the Company and to
enable them to increase their ownership in the Company's Common Stock. The
Plan will be beneficial to the Company and its stockholders since it will
allow these directors to have a greater personal financial stake in the
Company through the ownership of Company stock, in addition to underscoring
their common interest with stockholders in increasing the value of the Company
stock longer term.
1. Eligibility
All members of the Company's Board of Directors who are not current or
former employees of the Company or any of its subsidiaries ("Non-Employee
Directors") are eligible to participate in this Plan.
2. Options
Only nonqualified stock options ("NQSOs") may be granted under this Plan.
3. Shares Available
a) Number of Shares Available: There is hereby reserved for issuance under
this Plan 225,000 shares of Merck Common Stock, no par value, which may be
authorized but unissued shares, treasury shares, or shares purchased on the
open market.
b) Recapitalization Adjustment: In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the corporate structure
or shares of the Company, adjustments in the number and kind of shares
authorized by this Plan, in the number and kind of shares covered by, and in
the option price of outstanding NQSOs under this Plan shall be made if, and in
the same manner as, such adjustments are made to NQSOs issued under the
Company's then current Incentive Stock Plan.
4. Annual Grant of Nonqualified Stock Options
Each year on the first Friday following the Company's Annual Meeting of
Stockholders, each individual elected, reelected or continuing as a Non-
Employee Director shall automatically receive NQSOs covering one thousand
(1,000) shares of Merck Common Stock. Notwithstanding the foregoing, if, on
that first Friday, the General Counsel of the Company determines, in her/his
sole discretion, that the Company is in possession of material, undisclosed
information about the Company, then the annual grant of NQSOs to Non-Employee
Directors shall be suspended until the second day after public dissemination
of such information and the price, exercisability date and option period shall
then be determined by reference to such later date. If Merck Common Stock is
not traded on the New York Stock Exchange on any date a grant would otherwise
be awarded, then the grant shall be made the next day thereafter that Merck
Common Stock is so traded.
5. Option Price
The price of the NQSO shall be the closing price on the date of the grant of
the Company's Common Stock as quoted on the composite tape of the New York
Stock Exchange.
6. Option Period
A NQSO granted under this Plan shall become exercisable five years after
date of grant and shall expire ten years after date of grant ("Option
Period").
2
<PAGE>
7. Payment
The NQSO price shall be paid in cash in U.S. dollars at the time the NQSO is
exercised.
8. Cessation of Service
Upon cessation of service as a Non-Employee Director (for reasons other than
retirement or death), only those NQSOs immediately exercisable at the date of
cessation of service shall be exercisable by the grantee. Such NQSOs must be
exercised within ninety days of cessation of service (but in no event after
the expiration of the Option Period) or they shall be forfeited.
9. Retirement
If a grantee ceases service as a Non-Employee Director and is at least age
65 with ten or more years of service or age 70 with five or more years of
service, then any of his/her outstanding NQSOs shall continue to become
exercisable. All outstanding NQSOs must be exercised by the earlier of (i)
sixty months following the date of such cessation of service or (ii) the
expiration of the Option Period, or such NQSOs shall be forfeited.
10. Death
Upon the death of a grantee, those NQSOs which had been held for at least
twelve months at date of death shall become immediately exercisable upon
death. The NQSOs which become exercisable upon the date of death and those
NQSOs which were exercisable on the date of death may be exercised by the
grantee's legal representatives or heirs by the earlier of (i) thirty-six
months from the date of death or (ii) the expiration of the Option Period; if
not exercised by the earlier of (i) or (ii), such NQSOs shall be forfeited.
11. Administration and Amendment of the Plan
This Plan shall be administered by the Board of Directors of Merck & Co.,
Inc. This Plan may be terminated or amended by the Board of Directors as it
deems advisable. However, an amendment revising the price, date of
exercisability, option period of, or amount of shares under a NQSO shall not
be made more frequently than every six months unless necessary to comply with
applicable laws or regulations. No amendment may revoke or alter in a manner
unfavorable to the grantees any NQSOs then outstanding, nor may the Board
amend this Plan without stockholder approval where the absence of such
approval would cause the Plan to fail to comply with Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Act"), or any other requirement of
applicable law or regulation. A NQSO may not be granted under this Plan after
December 31, 2000 but NQSOs granted prior to that date shall continue to
become exercisable and may be exercised according to their terms.
12. Transferability
Except as set forth in this section, the NQSOs granted under this Plan shall
not be exercisable during the grantee's lifetime by anyone other than the
grantee, the grantee's legal guardian or the grantee's legal representative,
and shall not be transferable other than by will or by the laws of descent and
distribution. NQSOs granted under this Plan shall be transferable during a
grantee's lifetime only in accordance with the following provisions:
The grantee may only transfer an NQSO while serving as a Non-Employee
Director of the Company or within one year of ceasing service as a Non-
Employee Director due to retirement as defined in Section 9.
The NQSO may be transferred only to the grantee's spouse, children
(including adopted children and stepchildren) and grandchildren
(collectively, "Family Members"), to one or more trusts for the benefit of
Family Members or, at the discretion of the Board of Directors, to one or
more partnerships where the grantee and his Family Members are the only
partners, in accordance with the rules set forth in this section. The
grantee shall not receive any payment or other consideration for such
transfer (except that if the transfer
3
<PAGE>
is to a partnership, the grantee shall be permitted to receive an interest
in the partnership in consideration for the transfer).
Any NQSO transferred in accordance with this section shall continue to be
subject to the same terms and conditions in the hands of the transferee as
were applicable to such NQSO prior to the transfer, except that the
grantee's right to transfer such NQSO in accordance with this section shall
not apply to the transferee. However, if the transferee is a natural
person, upon the transferee's death, the NQSO privileges may be exercised
by the legal representatives or beneficiaries of the transferee within the
exercise periods otherwise applicable to the NQSO.
Any purported transfer of an NQSO under this section shall not be
effective unless, prior to such transfer, the grantee has (1) met the
minimum stock ownership target then in place for Directors of the Company,
(2) notified the Company of the transferee's name and address, the number
of shares under the Option to be transferred, and the grant date and
exercise price of such shares, and (3) demonstrated, if requested by the
Board of Directors, that the proposed transferee qualifies as a permitted
transferee under the rules set forth in this section. In addition, the
transferee must sign an agreement that he or she is bound by the rules and
regulations of the Plans and by the same insider trading restrictions that
apply to the grantee. No transfer shall be effective unless the Company has
in effect a registration statement filed under the Securities Act of 1933
covering the securities to be acquired by the transferee upon exercise of
the NQSO, or the General Counsel of Merck & Co., Inc. has determined that
registration of such shares is not necessary.
13. Compliance with SEC Regulations
It is the Company's intent that the Plan comply in all respects with Rule
16b-3 of the Act, and any regulations promulgated thereunder. If any provision
of this Plan is later found not to be in compliance with the Rule, the
provision shall be deemed null and void. All grants and exercises of NQSOs
under this Plan shall be executed in accordance with the requirements of
Section 16 of the Act, as amended, and any regulations promulgated thereunder.
14. Miscellaneous
Except as provided in this Plan, no Non-Employee Director shall have any
claim or right to be granted a NQSO under this Plan. Neither the Plan nor any
action thereunder shall be construed as giving any director any right to be
retained in the service of the Company.
15. Effective Date
This Plan shall be effective April 23, 1996 or such later date as
stockholder approval is obtained.
4
<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
-----------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Before Taxes and
Cumulative Effect of
Accounting Changes...... $6,462.3 $5,540.8 $4,797.2 $4,415.2 $3,102.7 $3,563.6
Add:
One-third of rents..... 47.0 41.0 28.1 36.0 35.0 34.0
Interest expense, net.. 98.2 103.2 60.3 96.0 48.0 23.6
Preferred stock
dividends............. 49.6 70.0 2.1 -- -- --
-------- -------- -------- -------- -------- --------
Earnings............. $6,657.1 $5,755.0 $4,887.7 $4,547.2 $3,185.7 $3,621.2
======== ======== ======== ======== ======== ========
One-third of rents....... $ 47.0 $ 41.0 $ 28.1 $ 36.0 $ 35.0 $ 34.0
Interest expense......... 129.5 138.6 98.7 124.4 84.7 72.7
Preferred stock
dividends............... 49.6 70.0 2.1 -- -- --
-------- -------- -------- -------- -------- --------
Fixed Charges............ $ 226.1 $ 249.6 $ 128.9 $ 160.4 $ 119.7 $ 106.7
======== ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges........... 29 23 38 28 27 34
======== ======== ======== ======== ======== ========
</TABLE>
For purposes of computing these ratios, "earnings" consist of income before
taxes, cumulative effect of accounting changes, one-third of rents (deemed by
the Company to be representative of the interest factor inherent in rents),
interest expense, net of amounts capitalized, and dividends on preferred stock
of subsidiary companies. "Fixed charges" consist of one-third of rents,
interest expense as reported in the Company's consolidated financial
statements and dividends on preferred stock of subsidiary companies.
<PAGE>
================================================================================
Financial Review
================================================================================
Description of Merck's Business
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco).
<TABLE>
<CAPTION>
Sales
- --------------------------------------------------------------------------------
($ in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Elevated cholesterol .............. $ 4,672.3 $ 4,055.9 $ 3,211.1
Hypertension/heart failure ........ 3,918.2 3,512.4 3,021.3
Anti-ulcerants .................... 1,329.6 1,143.6 1,019.8
Antibiotics ....................... 774.9 822.3 848.3
Ophthalmologicals ................. 740.0 693.1 570.6
Vaccines/biologicals .............. 733.6 586.8 529.9
Human immunodeficiency
virus (HIV) ..................... 581.7 187.8 --
Osteoporosis ...................... 532.1 281.8 45.2
Animal health/crop
protection ..................... 550.0 1,044.1 1,041.9
Other Merck products .............. 364.2 342.9 675.8
Merck-Medco ....................... 9,440.3 7,158.0 5,717.2
- --------------------------------------------------------------------------------
$23,636.9 $19,828.7 $16,681.1
================================================================================
</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 and Mevacor;
hypertension/heart failure products which include Vasotec, the largest-selling
product among this group, Cozaar, Hyzaar, Prinivil and Vaseretic;
anti-ulcerants, of which Pepcid is the largest-selling; 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 Recombivax HB (hepatitis B vaccine recombinant), M-M-R II,
a pediatric vaccine for measles, mumps and rubella, and Varivax, a live virus
vaccine for the prevention of chickenpox, are the largest-selling; HIV,
comprised of Crixivan, a protease inhibitor for the treatment of human
immunodeficiency viral infection in adults, which was launched in the United
States in 1996; and osteoporosis, which includes Fosamax, for treatment and
prevention in postmenopausal women.
Animal health products include medicinals used to control and alleviate
disease in livestock, small animals and poultry. Crop protection includes
products for the control of crop pests and fungal disease. In July 1997, the
Company sold its crop protection business to Novartis. In August 1997, Merck and
Rhone-Poulenc combined their animal health and poultry genetics businesses to
form Merial Limited (Merial). Amounts for 1997 reflect sales for these
businesses prior to the completion of these transactions.
Other Merck products include sales of other human pharmaceuticals,
continuing sales to divested businesses and, beginning in 1997, supply sales to
the Merial joint venture. Also included in this category are rebates and
discounts on Merck pharmaceutical products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products and
Merck-Medco pharmaceutical benefit services, principally managed prescription
drug programs and programs to manage health and drug utilization.
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.
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 and product
availability. In the United States, efforts on the part of private and federal
employers to slow the increase of health care costs, competitive pressures from
other manufacturers and the demand for price discounts from managed care groups
have limited the Company's ability to offset the effect of inflation on costs
and expenses through price. Outside of the United States, government-mandated
cost containment programs have required the Company to similarly limit selling
prices. Additionally, government actions, including increased patient
co-payments for prescription drugs, incentives for doctors to reduce
prescriptions and incentives to prescribe generics, have impacted our sales
growth rates.
- --------------------------------------------------------------------------------
28 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
It is anticipated that the worldwide trend for cost containment and competitive
pricing will continue for the balance of the 1990s and will result in continued
pricing pressures.
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 in the United States 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 payers;
and demonstrating to payers 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 under-taken include optimizing plant
utilization, implementing lowest-cost processes, improving technology transfer
between research and manufacturing, re-engineering core and administrative
processes and streamlining the organization.
To enhance its competitive position in the fast-growing area of managed
care, Merck acquired Medco Containment Services, Inc. in 1993 (renamed
Merck-Medco Managed Care). Merck-Medco provides pharmaceutical benefit services
in the United States to control prescription drug benefit costs. Merck-Medco
manages prescription drug programs through its mail order and retail pharmacy
networks, and offers a series of health management programs to manage health and
drug utilization, which improve drug therapy, promote better health outcomes and
lower the long-term cost of care associated with certain chronic diseases.
Merck-Medco sells its pharmaceutical benefit management services to
corporations, labor unions, insurance companies, Blue Cross/Blue Shield
organizations, government agencies, 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 most of Astra's new prescription medicines
in the United States. Joint venture sales were $2.3 billion for 1997, $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 nonprescription 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 $483.7 million for 1997,
$530.2 million for 1996, and $403.5 million for 1995, consisting primarily of
gastrointestinal products including Pepcid AC Acid Controller, a nonprescription
formulation of Pepcid, Merck's H2-receptor antagonist, and Mylanta. Pepcid AC
continues to lead the highly competitive 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
radio-pharmaceutical 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 and
international industry expertise. Joint venture sales were $1.3 billion for 1997
and 1996, and $1.2 billion for 1995, consisting primarily of cardiovascular,
radiopharmaceutical and central nervous system products. In September 1997, the
joint venture completed the sale of its generics and multisource business lines,
allowing it to focus resources on bringing several potential new pharmaceutical
products to market. Sales of the divested business lines included in joint
venture sales for 1997 were $65.1 million.
In 1994, Merck and Pasteur Merieux Connaught (Pasteur) established a 50%
owned joint venture to market vaccines and collaborate in the development of
combination vaccines, for distribution in Europe. Joint venture vaccine sales
were $581.3 million for 1997, $663.0 million for 1996 and $598.6 million for
1995.
In 1996, Merck agreed with Chugai Pharmaceutical Co., Ltd. to form a joint
venture to develop and market over-the-counter pharmaceuticals in Japan. The new
company, Chugai MSD Co., Ltd., began operations in April 1997 marketing
gastrointestinal products. Joint venture sales for 1997 were $18.8 million.
- --------------------------------------------------------------------------------
29 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
In August 1997, Merck and Rhone-Poulenc combined their animal health and
poultry genetics businesses to form Merial, a fully integrated, stand-alone
joint venture, equally owned by each party. Merial is the world's largest
company dedicated to the discovery, manufacture and marketing of veterinary
pharmaceuticals and vaccines. Merck contributed developmental research
personnel, sales and marketing activities, and animal health products, as well
as its poultry genetics business. Rhone-Poulenc contributed research and
development, manufacturing, sales and marketing activities, and animal health
products, as well as its poultry genetics business. This transaction is not
expected to have a material impact on comparability of net income. Merial sales
for 1997 were $746.3 million. Animal health sales reported in Merck's
consolidated sales were $448.3 million prior to August 1.
Foreign Operations
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales by subsidiaries outside the United States were 27%
of sales in 1997, and 30% and 32% of sales in 1996 and 1995, respectively.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Distribution of 1997 Foreign Sales
----------------------------------
<TABLE>
<CAPTION>
Splits
------
<S> <C>
Europe 56%
Asia/Pacific 27%
Other Foreign 17%
----
Total 100%
</TABLE>
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 continues to offer
opportunities to 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 take advantage of these
opportunities to improve the efficiency and productivity of its EU operations.
In recent years, Merck has been expanding its operations in countries
located in Latin America, Eastern Europe and Asia Pacific where changes in
government policies and economic conditions are making it possible for Merck to
earn fair returns. Businesses in these developing areas, while less stable,
offer important opportunities for growth over time.
Operating Results
Total sales for 1997 increased 19% from 1996. The effect of a strengthening U.S.
dollar against foreign currencies decreased 1997 sales growth by two percentage
points. Sales for 1997 were affected by the formation of the Merial joint
venture in August 1997 and divestiture of the crop protection business in July
1997. Adjusting for these effects, sales grew 22% in 1997 in total and 19% on a
volume basis. Total sales for 1996 increased 19% from 1995. Foreign exchange
reduced 1996 sales growth by one percentage point. Sales growth for 1996 was
affected by the divestitures of Medco Behavioral Care (MBC) and Kelco in 1995.
Adjusting for these effects, 1996 sales grew 21% in total and on a volume basis.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Components of Human Health Sales Growth
---------------------------------------
<TABLE>
<CAPTION>
Total Sales Sales Volume Net Pricing Foreign
Growth Growth Actions Exchange Rates
----------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
1993 6.8% 8.6% -0.1% -1.7%
1994 8.4% 7.9% -0.4% 0.9%
1995 13.0% 10.9% -0.5% 2.6%
1996 17.7% 19.2% 0.4% -1.9%
1997 15.0% 17.6% 0.3% -2.9%
</TABLE>
- --------------------------------------------------------------------------------
This chart illustrates the effects of price, volume and exchange on sales of
Merck human health products. Growth for 1995 and 1994 has been adjusted for the
effect of the Astra Merck joint venture formation. The human health business has
grown predominantly through sales volume over the last five years. Price had
essentially no effect on sales growth, while the effect of exchange has varied
over the same period.
In 1997, sales of Merck human health products grew 15%. Foreign exchange
rates had a three 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 17%, while foreign sales grew 13% including a six percentage point
unfavorable effect from exchange. The unit volume growth from sales of Merck
human health products was paced by established products, including Zocor,
Vasotec, Vaseretic, Prinivil, Pepcid, Recombivax HB and M-M-R II, newer
products, including Crixivan, Cozaar, Hyzaar, Fosamax, Trusopt, Varivax and
Vaqta, and the 1997 launch of Comvax in the United States.
- --------------------------------------------------------------------------------
30 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, continued
their outstanding performance, holding more than 40% of the worldwide "statin"
market. The cholesterol-lowering market continues to grow at a rate of more than
20% a year in major markets, driven primarily by growth of more than 30%
annually in the statin category, yet today, even in the key U.S. market, only
about one-third of potential patients are receiving treatment. In 1997, Zocor
again established a new Merck product sales record and maintains the leading
share of total prescriptions worldwide due to high physician awareness of the
results of the landmark Scandinavian Simvastatin Survival Study (4S). The 4S
study showed Zocor saves lives and prevents heart attacks in people with high
cholesterol and coronary heart disease. In October 1997, the U.S. Food and Drug
Administration (FDA) approved an expanded indication for Zocor to include the
lowering of triglycerides in patients with elevated cholesterol levels. Zocor is
available on more than 90% of managed care formularies in the United States,
reflecting its standing as the only therapy in the statin class indicated to
significantly reduce LDL cholesterol (the so-called bad cholesterol) and
triglycerides, and save lives in people with high cholesterol and coronary heart
disease.
Vasotec and Prinivil, Merck's angiotensin converting enzyme (ACE)
inhibitors for high blood pressure, heart failure and other cardiovascular
disorders, continue to be among the most widely prescribed medicines in their
class. Together, they hold about 40% of the U.S. ACE inhibitor market and are
widely available on managed care formularies. Sales volumes for Vasotec
continued to grow in 1997. Vasotec is the only ACE inhibitor indicated for the
treatment of high blood pressure, heart failure and asymptomatic left
ventricular dysfunction, and to reduce deaths due to symptomatic heart failure
regardless of the underlying cause. Vaseretic, a combination of Vasotec and
hydrochlorothiazide, prescribed for the treatment of high blood pressure,
continued solid volume 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 strong growth in 1997, despite growing competition. It is
the most widely used and fastest-growing acid suppressor in hospitals. The FDA
is currently reviewing the Company's application to allow prescription-strength
Pepcid for use in children.
Merck's established vaccines, Recombivax HB, for hepatitis B infection, and
M-M-R II, the most widely used combination vaccine for measles, mumps and
rubella, recorded strong growth in 1997. Contributing to the growth of
Recombivax HB was increased public awareness of hepatitis B and legislation in
some states requiring immunization for children entering school.
Crixivan, Merck's protease inhibitor for the treatment of HIV infection in
adults, remains the world's most widely prescribed protease inhibitor. Cleared
for marketing in more than 80 countries, it now holds about one-half of the U.S.
market. Crixivan can be taken in combination with other anti-HIV therapies, or
alone by adults with HIV infection when single therapy is warranted. Research
presented in September 1997 showed that most patients taking Crixivan in triple
therapy continued to have HIV levels suppressed below the level of detection for
almost two years. For Crixivan taken in triple therapy, preliminary results from
another study showed that a more convenient, twice-a-day regimen produced
reductions in viral load comparable to those seen when taken three times a day.
Other studies are being conducted to evaluate early- and late-stage disease
treatment, and in other patient populations, such as children.
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. Ongoing research has
reinforced and expanded the medical value of these products, which have been
adopted faster than any antihypertensive product launched this decade. Cozaar
has been approved in 74 countries and continues to set new records for rapid
adoption, based on its excellent tolerability and proven efficacy in treating
high blood pressure. A recent major study demonstrated that Cozaar reduced
mortality and prolonged life in heart failure patients. In November 1997, Cozaar
received regulatory approval for a new heart failure indication in Denmark and
Finland, and approval of this indication is pending in other foreign countries.
Fosamax, Merck's nonhormonal medicine for the treatment and prevention of
osteoporosis in postmenopausal women, continued to record significant growth in
1997. It is the only nonhormonal medicine proven to reduce fractures of the hip,
spine and wrist, and is among the most successful new products launched in Merck
history. Research continues to show the importance of Fosamax in treating and
preventing postmenopausal osteoporosis and fractures due to the bone-thinning
disease. Data from the 34-country Fosamax International Trial (FOSIT), released
in September 1997, showed that among women in a general community population,
Fosamax reduced nonspinal fractures by one-half after only one year. In 1997,
the FDA cleared Fosamax for two new indications in postmenopausal women:
prevention of fractures in those with osteoporosis (Fosamax 10 mg) and
prevention of osteoporosis in those at risk for the disease (Fosamax 5 mg),
doubling the number of American women who could benefit from its use. Since its
introduction in 1995, Fosamax has been prescribed for more than two million
women worldwide, yet this represents only a fraction of its potential
population.
Sales of Trusopt, the first carbonic anhydrase inhibitor made in a topical
(eyedrop) formulation, continued its strong growth in 1997. It continues to be
one of the most widely prescribed anti-glaucoma medicines in the world. Trusopt
is indicated for the treatment of elevated intraocular pressure in patients with
ocular hypertension or open-angle glaucoma, and has been proven effective in the
consistent lowering of intraocular pressure in most patients.
- --------------------------------------------------------------------------------
31 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
Varivax, a live-virus vaccine for protection against chickenpox in healthy
individuals age 12 months and older who have not had the disease, recorded
strong growth in 1997. It is the first and only chickenpox vaccine available in
the United States and is the most rapidly accepted Merck vaccine since the
Company first introduced its measles vaccine in 1963.
Vaqta, Merck's new vaccine for the prevention of hepatitis A in persons
age two years and older, which the FDA approved in April 1996, continued its
strong growth in 1997. Hepatitis A is a highly contagious virus, spread through
contaminated food or water, which attacks the liver and can cause victims to be
ill for several weeks. Market share for Vaqta continued to expand in 1997 due to
promotion by Merck's new vaccine sales force and contracts with the U.S.
Department of Defense and the Centers for Disease Control and Prevention.
In January 1997, Merck launched its newest vaccine, Comvax, a combination
of the antigenic components of two existing Merck vaccines, PedvaxHIB and
Recombivax HB. Comvax is the first combination product indicated for the
vaccination of infants, age two months and older, against both invasive
Haemophilus influenzae type b disease and hepatitis B virus. The combination
reduces the number of injections required to immunize children against the two
infections.
Proscar provides long-term disease management of symptomatic benign
prostate enlargement, a disease that affects more than 50% of men age 60 and
older. The result of the Proscar Long-Term Efficacy and Safety Study (PLESS),
the largest and longest study ever conducted in benign prostatic hyperplasia
involving more than 3,000 men, showed that in men with urinary symptoms and
enlarged prostates, Proscar reduced the risk of acute urinary retention by 57%
and the need for prostate surgery by 55%. It is the only medication proven to
prevent these consequences of prostate enlargement.
A group of longer-established products, including Noroxin, Mefoxin,
Moduretic and Aldomet, while still contributing to 1997 revenues, continued to
decline in unit volume due to generic and therapeutic competition.
In 1996, sales of Merck human health products grew 18%. Foreign exchange
rates had a two percentage point unfavorable effect on sales growth, while price
changes had essentially no effect. Domestic sales growth was 21%, while foreign
sales grew 14% including a four percentage point unfavorable effect from
exchange. The unit volume growth from sales of Merck human health products was
paced by Zocor, Vasotec, Vaseretic, Prinivil, Pepcid and Proscar, coupled with
the 1995 product introductions of Cozaar, Hyzaar, Fosamax, Trusopt and Varivax,
and the 1996 launches of Crixivan and Vaqta.
Sales of animal health products were lower in 1997 due to competition, a
weak cattle market and the contribution of this business to the Merial joint
venture formed with Rhone-Poulenc in August 1997. Sales of crop protection
products were also lower, due to the divestiture of this business in July 1997.
Merck-Medco sales contributed significantly to 1997 and 1996 sales growth.
Merck-Medco currently manages pharmaceutical benefits for more than 51 million
plan participants, up five percent over 1996. As a result, the number of
prescriptions managed by Merck-Medco grew to 291 million in 1997, up from 235
million prescriptions in 1996. This growth was fueled by major new accounts
gained in all market segments - employers, managed care organizations, Blue
Cross/Blue Shield plans and government clients.
<TABLE>
<CAPTION>
Costs, Expenses and Other
- --------------------------------------------------------------------------------
($ in millions) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Materials and
production ....... $11,790.3 +27% $ 9,319.2 +25% $ 7,456.3
Marketing and
administrative ... 4,299.2 +12% 3,841.3 +16% 3,297.8
Research and
development ...... 1,683.7 +13% 1,487.3 +12% 1,331.4
Equity income
from affiliates .. (727.9) +21% (600.7) +73% (346.3)
Gains on sales
of businesses .... (213.4) * -- * (682.9)
Other (income)
expense, net ..... 342.7 +42% 240.8 -71% 827.6
- --------------------------------------------------------------------------------
$17,174.6 +20% $14,287.9 +20% $11,883.9
================================================================================
</TABLE>
* Over 100%
In 1997, materials and production costs increased 27%. Adjusting for the
effects of the 1997 formation of the Merial joint venture and sale of the crop
protection business, materials and production costs increased 28%, compared to a
22% sales growth rate on the same basis. Adjusting for the aforementioned
effects, and excluding exchange and inflation, these costs increased 21%,
compared to a 19% unit sales volume gain in 1997. The higher growth rate in
these costs over the sales volume growth is primarily attributable to growth in
Merck-Medco's historically lower-margin business. This increase is partially
offset by cost controls and productivity improvements from the Company's goal to
reduce manufacturing costs. 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.
Marketing and administrative expenses increased 12% in 1997. Adjusting for
the effects of the 1997 formation of the Merial joint venture and sale of the
crop protection business, marketing and administrative expenses increased 15%.
Adjusting for the aforementioned effects, and excluding exchange and inflation,
these expenses increased 16%. The increase in marketing and administrative
expenses in 1997 primarily reflects the commitment of resources to support 1995
and 1996 product launches, pre-launch spending for anticipated 1998 launches,
the expansion of sales forces in the United States and Europe, and investments
in health management programs and information technology initiatives by
- --------------------------------------------------------------------------------
32 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
Merck-Medco, which are setting new standards for prescription drug care and the
management of major diseases. 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%, primarily due to the commitment of resources to support 1995 and
1996 product launches, spending to support Merck-Medco's health management
programs and investments in information technology. Marketing and administrative
expenses as a percentage of sales were 18% in 1997, 19% in 1996 and 20% in 1995.
The improvement in these ratios reflects the lower marketing and administrative
costs relative to sales of Merck-Medco, continuing cost controls and
productivity improvements.
Research and development expenses increased 13% in 1997. Adjusting for the
effects of the 1997 formation of the Merial joint venture and sale of the crop
protection business, these expenses increased 15%. Adjusting for the
aforementioned effects, and excluding exchange and inflation, these expenses
increased 13%. Research and development expenses increased 12% in 1996.
Excluding the effects of exchange and inflation, these expenses increased 9%.
Not included in consolidated research and development expenses are costs
incurred by the Company's joint ventures, which totaled $556.6 million in 1997,
$440.7 million in 1996 and $376.9 million in 1995.
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 1988 to 1997, the
compounded annual growth rate in research and development was 12%. Research and
development expenses for 1998 are estimated to be almost $1.9 billion.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
R&D Expenditures
----------------
($ in millions)
<TABLE>
<CAPTION>
Year Total R&D Expenditures
- ---- ----------------------
<S> <C>
1988 $ 669
1989 $ 751
1990 $ 854
1991 $ 988
1992 $ 1,112
1993 $ 1,173
1994 $ 1,231
1995 $ 1,331
1996 $ 1,487
1997 $ 1,684
</TABLE>
- --------------------------------------------------------------------------------
This chart excludes research and development costs incurred by the Company's
joint ventures, which were $556.6 million in 1997.
Equity income from affiliates reflects an improving trend resulting from
the formation of the Merial joint venture with Rhone-Poulenc and favorable
performance of our joint ventures with Astra and DuPont.
In the third quarter of 1997, the Company recorded a gain of $213.4 million
on the sale of its crop protection business. (See Note 3 to the consolidated
financial statements for further information.) This gain was substantially
offset by $207.3 million of nonrecurring charges included in Other (income)
expense, net. These charges consist of $127.3 million for loss on sale of
assets, $50.0 million for endowment of The Merck Company Foundation and $30.0
million for environmental costs.
In 1995, the Company recorded gains of $682.9 million on the sales of
Calgon Vestal Laboratories and Kelco. (See Note 3 to the consolidated 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 1997, other expense, net, increased primarily due to $207.3 million of
nonrecurring charges, which substantially offset the gain on the sale of the
crop protection business, and lower exchange gains resulting from translation of
the Company's balance sheet. This increase was partially offset by realized
gains on security sales, higher interest income, lower interest expense and
lower income allocable to minority interests. In 1996, other expense, net,
decreased primarily due to $675.5 million of nonrecurring charges recorded in
1995, which substantially offset the gains on the sales of Calgon Vestal
Laboratories and Kelco. Also contributing to the year-to-year improvement were
higher interest income and favorable exchange resulting from the translation of
the Company's balance sheet. This effect was partially offset by higher interest
expense and higher income allocable to minority interests. (See Note 15 to the
consolidated financial statements for further information.)
<TABLE>
<CAPTION>
Earnings
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 1997 Change 1996 Change 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income ......... $4,614.1 +19% $3,881.3 +16% $3,335.2
As a % of sales .. 19.5% 19.6% 20.0%
As a % of average
total assets ... 18.4% 16.1% 14.6%
Earnings per
common share ..... $3.83 +20% $3.20 +19% $2.70
================================================================================
</TABLE>
Net income was up 19% in 1997 and 16% in 1996. Net income as a percentage
of sales was 19.5% in 1997, compared to 19.6% in 1996 and 20.0% in 1995. The
decline in the ratio
- --------------------------------------------------------------------------------
33 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
from 1995 to 1997 is principally due to the higher growth rate in Medco's
historically lower-margin business and the commitment of resources to the
Company's recent and anticipated product launches, offset, in part, by the
growth in Merck's human health business and manufacturing, marketing, and
general and administrative productivity improvements. Foreign currency exchange
had a two percentage point unfavorable effect as compared to essentially no
effect in 1996. The Company's effective income tax rate in 1997 was 28.6%,
compared to 30.0% in 1996 and 30.5% in 1995. The lower effective tax rate in
1997 and 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, the
European vaccine joint venture with Pasteur and, in 1997, the international
operations of the Merial joint venture. Prior to the formation of these joint
ventures, 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 18.4% in 1997,
16.1% in 1996 and 14.6% in 1995, with the improvements attributed to the
continued growth in operations and the Company's asset management efforts.
Earnings per common share grew 20% in 1997, compared to 19% in 1996. In 1997 and
1996, earnings per common share increased at a faster rate than net income as a
result of treasury stock purchases.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Distribution Of 1997 Sales And Equity Income
--------------------------------------------
<TABLE>
<CAPTION>
Splits
------
<S> <C>
Raw Materials and Production Costs 48%
Operating Expenses 26%
Taxes and Net Interest 7%
Dividends 9%
Retained Earnings 10%
----
Total 100%
====
</TABLE>
Environmental and Other Matters
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. In 1997, the Company incurred
capital expenditures of approximately $41.8 million for environmental protection
facilities. Capital expenditures for this purpose are forecasted to exceed
$470.0 million for the years 1998 through 2002. In addition, the Company's
operating and maintenance expenditures for pollution control were approximately
$89.4 million in 1997. Expenditures for this purpose for the years 1998 through
2002 are forecasted to exceed $569.0 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. 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. Expenditures for remediation and
environmental liabilities were $18.8 million in 1997, and are estimated at
$123.0 million for the years 1998 through 2002. These amounts do not consider
potential recoveries from insurers or other parties.
In 1994, the Company, along with other pharmaceutical manufacturers and
pharmaceutical benefits managers (PBMs), received a notice from the Federal
Trade Commission (FTC) that it intended to investigate agreements, alliances,
activities and acquisitions involving pharmaceutical manufacturers and PBMs. In
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 the FTC 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.
The Company has developed and begun implementing a plan to ensure that its
systems are compliant with the requirements to process transactions in the Year
2000. Management does not expect the cost of implementing this plan to be
material to the Company's financial position, results of operations, liquidity
or capital resources.
Capital Expenditures
Capital expenditures were $1.4 billion in 1997 and $1.2 billion in 1996.
Expenditures in the United States were $1.1 billion in 1997 and $.9 billion in
1996. Expenditures during 1997 included $669.9 million for production
facilities, $223.9 million for research and development facilities, $41.8
million for environmental projects, and $513.2 million for administrative,
safety and general site projects. Not included above are capital expenditures
incurred by the Company's joint ventures, which totaled $187.7 million in 1997,
including $54.4 million for research and development facilities. Capital
expenditures approved but not yet spent at December 31, 1997 were $1.6 billion.
Capital expenditures for 1998 are estimated to be $2.0 billion.
- --------------------------------------------------------------------------------
34 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
Depreciation was $602.4 million in 1997 and $521.7 million in 1996, of
which $437.3 million and $369.0 million, respectively, applied to locations in
the United States.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Capital Expenditures
--------------------
($ in millions)
<TABLE>
<CAPTION>
Year Total Capital Expenditures
- ---- --------------------------
<S> <C>
1988 $ 373
1989 $ 433
1990 $ 671
1991 $ 1,042
1992 $ 1,067
1993 $ 1,013
1994 $ 1,009
1995 $ 1,005
1996 $ 1,197
1997 $ 1,449
</TABLE>
- --------------------------------------------------------------------------------
This chart excludes capital expenditures incurred by the Company's joint
ventures, which were $187.7 million in 1997.
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 1997, pretax cash
flows from operations were $7.6 billion, reflecting the continued growth of the
Company's earnings. This cash was used to fund capital expenditures of $1.4
billion, to pay Company dividends of $2.0 billion and to partially fund the
purchase of treasury shares. At December 31, 1997, the total of worldwide cash
and investments was $4.8 billion, including $2.3 billion in cash, cash
equivalents and short-term investments, and $2.5 billion of long-term
investments. The above totals include $.9 billion in cash and investments held
by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership
interest.
<TABLE>
<CAPTION>
Selected Data
- --------------------------------------------------------------------------------
($ in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital .................... $2,644.4 $2,897.4 $3,870.2
Total debt to total liabilities
and equity ....................... 8.7% 7.3% 7.5%
Cash provided by operations
to total debt .................... 2.8:1 3.1:1 1.6:1
================================================================================
</TABLE>
Working capital levels are more than adequate to meet the operating
requirements of the Company. 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 1995 to 1997, 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.
In February 1997, the Board of Directors approved purchases of up to $5.0
billion of Merck shares. From 1995 to 1997, the Company purchased $6.6 billion
of treasury shares under the programs authorized in 1994, 1995 and 1997. The
1994 program was completed in 1996, and the 1995 program was completed in 1997.
Through December 31, 1997, $1.7 billion of shares had been purchased under the
1997 program. For the period 1988 to 1997, the Company has purchased 190.0
million shares at a total cost of $9.7 billion.
In 1997, Merck filed a $1.5 billion shelf registration with the Securities
and Exchange Commission for the issuance of debt securities, increasing
available capacity under such filings to $1.7 billion at December 31, 1997. In
addition, the Company established a $1.5 billion Euro Medium Term Note program.
Proceeds from the sale of these securities are to be used for general corporate
purposes. In February 1998, the Company issued $500.0 million of 30-year senior
notes under the shelf, bearing a coupon of 6.4% payable semiannually. The
remaining capacity under the shelf is $1.2 billion. The remaining capacity under
the Euro Medium Term Note program is $1.5 billion.
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.
- --------------------------------------------------------------------------------
35 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
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. For 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. A sensitivity analysis to
changes in the value of the U.S. dollar on foreign currency denominated
derivatives and monetary assets and liabilities indicates that if the U.S.
dollar uniformly weakened by 10% against all currency exposures of the Company,
Income before taxes would decline by $10.9 million. The balance sheet hedging
program has significantly reduced the volatility of U.S. dollar cash flows
derived from foreign currency denominated net monetary assets. The cash flows
generated from these forward contracts are reported as arising from operating
activities in the Consolidated Statement of Cash Flows.
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
predetermined 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. While a weaker U.S. dollar would
result in a net benefit to the Company, the market value of existing hedges
would decline by $67.0 million from a uniform 10% weakening of the U.S. dollar.
Over the last three years, the program has reduced the volatility of cash flows
and mitigated the loss in value of cash flows during 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.
A sensitivity analysis to measure potential losses in the market value of the
Company's investments, debt and related swaps from a change in interest rates
indicates that a one percentage point increase in interest rates would increase
the net aggregate market value of these instruments by $60.0 million. A one
percentage point decrease in interest rates would decrease the net aggregate
market value of these instruments by $71.0 million.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which requires presentation in the
Consolidated Statement of Income of both basic and diluted earnings per share.
The Company adopted this Statement in the fourth quarter of 1997. Earnings per
common share (basic) as calculated in accordance with this Statement does not
differ from earnings per share reported in prior periods and Earnings per common
share assuming dilution is not materially different.
- --------------------------------------------------------------------------------
36 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting comprehensive income and its
components, and Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information, which establishes revised reporting and disclosure
requirements for operating segments. The Company will adopt Statement Nos. 130
and 131 in the first quarter of 1998 and year-end 1998, respectively. These
Statements increase disclosure only and will have no effect on the Company's
financial position or results of operations.
Cautionary Factors That May Affect Future Results
This annual report and other written reports and oral statements made from time
to time by Merck may contain so-called "forward-looking statements," all of
which are subject to risks and uncertainties. One can identify these
forward-looking statements by their use of words such as "expects," "plans,"
"will," "estimates," "forecasts," "projects" and other words of similar meaning.
One can also identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address Merck's
growth strategy, financial results, product approvals and development programs.
One must carefully consider any such statement and should understand that many
factors could cause actual results to differ from the Company's forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual future results
may vary materially.
The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Company's filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's
annual report on Form 10-K for the year ended December 31, 1997, which will be
filed in March 1998, the Company discusses in more detail various important
factors that could cause actual results to differ from expected or historic
results. The Company notes these factors for investors as permitted by the
Private Securities Litigation Reform Act of 1995. Prior to the filing of the
Form 10-K, reference should be made to Exhibit 99 in the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1997. One should
understand that it is not possible to predict or identify all such factors.
Consequently, the reader should not consider any such list to be a complete
statement of all potential risks or uncertainties.
Condensed Interim Financial Data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales ....................... $6,232.0 $5,927.7 $5,909.2 $5,567.9
Materials and production
costs ..................... 3,068.7 2,991.0 2,944.3 2,786.3
Marketing/administrative
expenses .................. 1,146.0 1,048.4 1,044.2 1,060.6
Research/development
expenses .................. 493.9 424.7 396.4 368.7
Equity income from
affiliates ................ (191.6) (262.6) (122.8) (151.0)
Other expense, net .......... 43.2 31.3 14.8 39.9
Income before taxes ......... 1,671.8 1,694.9 1,632.3 1,463.4
Net income .................. 1,242.3 1,197.2 1,154.4 1,020.3
Earnings per common
share ..................... $1.04 $.99 $.96 $.84
Earnings per common
share assuming dilution ... $1.01 $.97 $.93 $.82
- --------------------------------------------------------------------------------
<CAPTION>
1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Earnings per common
share assuming dilution ... $.84 $.81 $.78 $.69
================================================================================
</TABLE>
In the chart above, amounts for the third and fourth quarters of 1997 were
affected by the formation of the animal health joint venture and the sale of the
crop protection business.
Dividends Paid per Common Share
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 ................. $1.69 $ .45 $ .42 $ .42 $ .40
1996 ................. 1.42 .40 .34 .34 .34
================================================================================
</TABLE>
Common Stock Market Prices
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High ................. $107 7/8 $108 3/16 $104 13/16 $99 7/8
Low .................. 85 90 3/4 80 3/8 78
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
High ................. $ 84 1/4 $ 70 7/8 $ 66 1/8 $71 3/8
Low .................. 69 1/8 58 1/4 56 1/2 60 1/2
================================================================================
</TABLE>
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
- --------------------------------------------------------------------------------
37 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
================================================================================
Consolidated Statement of Income
================================================================================
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions except per share amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ...................................... $ 23,636.9 $ 19,828.7 $ 16,681.1
- -------------------------------------------------------------------------------------
Costs, Expenses and Other
Materials and production ................... 11,790.3 9,319.2 7,456.3
Marketing and administrative ............... 4,299.2 3,841.3 3,297.8
Research and development ................... 1,683.7 1,487.3 1,331.4
Equity income from affiliates .............. (727.9) (600.7) (346.3)
Gains on sales of businesses ............... (213.4) -- (682.9)
Other (income) expense, net ................ 342.7 240.8 827.6
- -------------------------------------------------------------------------------------
17,174.6 14,287.9 11,883.9
- -------------------------------------------------------------------------------------
Income Before Taxes ........................ 6,462.3 5,540.8 4,797.2
Taxes on Income ............................ 1,848.2 1,659.5 1,462.0
- -------------------------------------------------------------------------------------
Net Income ................................. $ 4,614.1 $ 3,881.3 $ 3,335.2
=====================================================================================
Earnings per Common Share .................. $ 3.83 $ 3.20 $ 2.70
=====================================================================================
Earnings per Common Share Assuming Dilution $ 3.74 $ 3.12 $ 2.64
=====================================================================================
</TABLE>
================================================================================
Consolidated Statement of Retained Earnings
================================================================================
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 ...................... $14,817.7 $12,740.6 $10,942.0
- -------------------------------------------------------------------------------------
Net Income ............................... 4,614.1 3,881.3 3,335.2
Common Stock Dividends Declared .......... (2,094.8) (1,793.4) (1,578.0)
Net Unrealized (Loss) Gain on Investments (17.6) (10.8) 41.4
- -------------------------------------------------------------------------------------
Balance, December 31 .................... $17,319.4 $14,817.7 $12,740.6
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
38 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
================================================================================
Consolidated Balance Sheet
================================================================================
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31
($ in millions) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ---------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ..................................... $ 1,125.1 $ 1,352.4
Short-term investments ........................................ 1,184.2 829.2
Accounts receivable ........................................... 2,876.7 2,655.9
Inventories ................................................... 2,145.1 2,148.8
Prepaid expenses and taxes .................................... 881.9 740.3
- ---------------------------------------------------------------------------------------
Total current assets .......................................... 8,213.0 7,726.6
- ---------------------------------------------------------------------------------------
Investments ................................................... 2,533.4 2,499.4
- ---------------------------------------------------------------------------------------
Property, Plant and Equipment (at cost)
Land .......................................................... 216.4 206.9
Buildings ..................................................... 3,257.8 2,949.8
Machinery, equipment and office furnishings ................... 5,388.6 4,765.0
Construction in progress ...................................... 1,169.8 804.7
- ---------------------------------------------------------------------------------------
10,032.6 8,726.4
Less allowance for depreciation ............................... 3,423.2 2,799.7
- ---------------------------------------------------------------------------------------
6,609.4 5,926.7
- ---------------------------------------------------------------------------------------
Goodwill and Other Intangibles (net of accumulated amortization
of $815.8 million in 1997 and $606.5 million in 1996) ......... 6,780.5 6,736.6
- ---------------------------------------------------------------------------------------
Other Assets .................................................. 1,675.6 1,403.8
- ---------------------------------------------------------------------------------------
$25,811.9 $24,293.1
=======================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities ...................... $ 3,268.9 $ 2,937.8
Loans payable and current portion of long-term debt ........... 902.5 606.1
Income taxes payable .......................................... 859.6 802.6
Dividends payable ............................................. 537.6 482.7
- ---------------------------------------------------------------------------------------
Total current liabilities ..................................... 5,568.6 4,829.2
- ---------------------------------------------------------------------------------------
Long-Term Debt ................................................ 1,346.5 1,155.9
- ---------------------------------------------------------------------------------------
Deferred Income Taxes and Noncurrent Liabilities .............. 5,098.9 4,027.3
- ---------------------------------------------------------------------------------------
Minority Interests ............................................ 1,184.4 2,310.2
- ---------------------------------------------------------------------------------------
Stockholders' Equity
Common stock
Authorized - 2,700,000,000 shares
Issued - 1,483,925,990 shares - 1997
- 1,483,619,311 shares - 1996 ........................ 5,254.0 4,967.5
Retained earnings ............................................. 17,319.4 14,817.7
- ---------------------------------------------------------------------------------------
22,573.4 19,785.2
Less treasury stock, at cost
290,277,526 shares - 1997
277,016,963 shares - 1996 ................................... 9,959.9 7,814.7
- ---------------------------------------------------------------------------------------
Total stockholders' equity .................................... 12,613.5 11,970.5
- ---------------------------------------------------------------------------------------
$25,811.9 $24,293.1
=======================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
- --------------------------------------------------------------------------------
39 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
================================================================================
Consolidated Statement of Cash Flows
================================================================================
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before taxes ................................................ $ 6,462.3 $ 5,540.8 $ 4,797.2
Adjustments to reconcile income before taxes to cash
provided from operations before taxes:
Gains on sales of businesses .................................... (213.4) -- (682.9)
Depreciation and amortization ................................... 837.1 730.9 667.2
Other ........................................................... 528.4 175.1 630.1
Net changes in assets and liabilities:
Accounts receivable .......................................... (271.7) (224.7) (244.1)
Inventories .................................................. (53.5) (267.6) (271.8)
Accounts payable and accrued liabilities ..................... 321.8 414.2 383.1
Noncurrent liabilities ....................................... 20.4 143.0 (262.0)
Other ........................................................ (19.9) 10.4 (43.0)
- ----------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities Before Taxes ................. 7,611.5 6,522.1 4,973.8
Income Taxes Paid .................................................. (1,294.9) (1,094.4) (2,029.6)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities .......................... 6,316.6 5,427.7 2,944.2
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures ............................................... (1,448.8) (1,196.7) (1,005.5)
Purchase of securities, subsidiaries and other investments ......... (22,986.7) (15,719.1) (13,772.3)
Proceeds from sale of securities, subsidiaries and other investments 22,075.4 15,079.2 12,430.1
Proceeds from sales of businesses, net of cash transferred ......... 910.0 -- 1,321.1
Other .............................................................. (152.6) (142.7) (295.7)
- ----------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities .............................. (1,602.7) (1,979.3) (1,322.3)
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in short-term borrowings ................................ 431.3 (7.1) 40.5
Proceeds from issuance of debt ..................................... 653.1 327.5 549.5
Payments on debt ................................................... (590.0) (341.7) (108.2)
Proceeds from issuance of preferred stock of subsidiaries .......... -- -- 1,019.6
Redemption of preferred stock of subsidiary ........................ (1,000.0) -- --
Purchase of treasury stock ......................................... (2,572.8) (2,493.3) (1,570.9)
Dividends paid to stockholders ..................................... (2,039.9) (1,728.9) (1,539.8)
Proceeds from exercise of stock options ............................ 413.3 442.2 264.0
Other .............................................................. (153.9) (36.0) (56.1)
- ----------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities .............................. (4,858.9) (3,837.3) (1,401.4)
- ----------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ....... (82.3) (106.1) 22.9
- ----------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents ............... (227.3) (495.0) 243.4
Cash and Cash Equivalents at Beginning of Year ..................... 1,352.4 1,847.4 1,604.0
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year ........................... $ 1,125.1 $ 1,352.4 $ 1,847.4
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
- --------------------------------------------------------------------------------
40 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
================================================================================
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1. Nature of Operations
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco). Human health
products include therapeutic and preventive agents, generally sold by
prescription, for the treatment of human disorders. Pharmaceutical benefit
services primarily include managed prescription drug programs and programs to
manage health and drug utilization.
Merck sells its human health products and provides pharmaceutical benefit
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.
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.
Goodwill and Other Intangibles - Goodwill of $3.6 billion in 1997 and $3.8
billion in 1996 (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 $2.8 billion
in 1997 and $2.9 billion in 1996 (net of accumulated amortization) that arose in
connection with the acquisition of Medco Containment Services, Inc. (renamed
Merck-Medco Managed Care). 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 reviews goodwill and other
intangibles to assess recoverability from future operations using undiscounted
cash flows. Impairments are recognized in operating results to the extent that
carrying value exceeds fair value.
Stock-Based Compensation - Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share impacts are provided as if the fair value method had been
applied.
Use of Estimates - The consolidated 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.
3. Divestitures
In July 1997, the Company sold its crop protection business for $910.0 million
to Novartis, resulting in a pretax gain of $213.4 million, after taking into
account deferred income related to long-term contractual commitments entered
into in connection with the sale of the business. This business was not
significant to the Company's financial position or results of operations. This
gain was substantially offset by $207.3 million of nonrecurring charges included
in Other (income) expense, net. (See Note 15.)
The Company completed the sale of its specialty chemical businesses in
1995. Calgon Vestal Laboratories was sold to Bristol-Myers Squibb for $261.5
million, and Kelco was sold to Monsanto for $1.075 billion. These divestitures
resulted in pretax gains of $682.9 million. 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.)
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 joint venture business carried on by Astra Merck Inc., in
which Merck and Astra each own a 50% share. This joint venture, formed in 1994,
develops and markets most of Astra's new prescription medicines in the United
States. Joint venture sales were $2.3 billion for 1997, $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.
- --------------------------------------------------------------------------------
41 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of nonprescription medicines for U.S. consumers. This 50%
owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales
of product marketed by the joint venture were $483.7 million for 1997, $530.2
million for 1996 and $403.5 million for 1995, consisting primarily of
gastrointestinal products including Pepcid AC Acid Controller, a nonprescription
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. Merck contributed cash and European marketing rights to several of its
prescription medicines, and is providing research and development and
international industry expertise. Joint venture sales were $1.3 billion for 1997
and 1996, and $1.2 billion for 1995, consisting primarily of cardiovascular,
radiopharmaceutical and central nervous system products. In September 1997, the
joint venture completed the sale of its generics and multisource business lines,
allowing it to focus resources on bringing several potential new pharmaceutical
products to market. Sales of the divested business lines included in joint
venture sales for 1997 were $65.1 million.
In 1994, Merck and Pasteur Merieux Connaught (Pasteur) established an
equally owned joint venture to market vaccines and collaborate in the
development of combination vaccines, for distribution in Europe. Joint venture
vaccine sales were $581.3 million for 1997, $663.0 million for 1996 and $598.6
million for 1995.
In 1996, Merck agreed with Chugai Pharmaceutical Co., Ltd. to form a joint
venture to develop and market over-the-counter pharmaceuticals in Japan. The new
company, Chugai MSD Co., Ltd., began operations in April 1997 marketing
gastrointestinal products. Joint venture sales for 1997 were $18.8 million.
In August 1997, Merck and Rhone-Poulenc combined their animal health and
poultry genetics businesses to form Merial Limited (Merial), a fully integrated,
stand-alone joint venture, equally owned by each party. Merial is the world's
largest company dedicated to the discovery, manufacture and marketing of
veterinary pharmaceuticals and vaccines. Merck contributed developmental
research personnel, sales and marketing activities, and animal health products,
as well as its poultry genetics business. Rhone-Poulenc contributed research
and development, manufacturing, sales and marketing activities, and animal
health products, as well as its poultry genetics business. The transaction is
not expected to have a material impact on comparability of net income. Merial
sales for 1997 were $746.3 million. Animal health sales reported in Merck's
consolidated sales were $448.3 million prior to August 1.
Summarized below are net sales by therapeutic class for these joint
ventures for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gastrointestinals
Ethical ......................... $2,241.7 $1,712.1 $1,223.4
OTC ............................. 405.1 420.5 307.2
- --------------------------------------------------------------------------------
2,646.8 2,132.6 1,530.6
- --------------------------------------------------------------------------------
Cardiovasculars ................... 717.6 623.9 521.9
Human vaccines .................... 581.3 663.0 598.6
Radiopharmaceuticals .............. 295.9 325.4 304.0
Central nervous system ............ 281.0 267.7 247.5
Animal health ..................... 746.3 -- --
Other ............................. 224.8 276.9 289.2
- --------------------------------------------------------------------------------
$5,493.7 $4,289.5 $3,491.8
================================================================================
</TABLE>
5. Affiliates Accounted for Using the Equity Method
Investments in affiliates accounted for using the equity method are included in
Other assets and were $693.7 million at December 31, 1997 and $779.7 million at
December 31, 1996. Dividends and distributions received from these affiliates
were $791.0 million in 1997, $476.2 million in 1996 and $296.1 million in 1995.
Summarized information for these affiliates is as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ................................ $5,655.8 $4,441.4 $3,632.9
Materials and production costs ....... 1,349.3 959.4 873.4
Other expense, net ................... 1,852.9 1,725.2 1,493.8
Income before taxes .................. 2,453.6 1,756.8 1,265.7
================================================================================
December 31 1997 1996
- ------------------------------------------------------------------
Current assets $2,475.9 $1,613.8
Noncurrent assets .................... 2,824.0 3,111.3
Current liabilities .................. 1,920.1 1,048.0
Noncurrent liabilities ............... 699.8 1,307.6
==================================================================
</TABLE>
6. Financial Instruments
Foreign Currency Risk Management
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 partially hedges forecasted revenues denominated in foreign
currencies with purchased currency options. When the dollar strengthens against
foreign currencies, the decline in the value of 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 foreign currency cash flows is reduced only by the
recognition of the premium paid to acquire the options
- --------------------------------------------------------------------------------
42 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
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 continually 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 $95.4 million and $5.9 million at December 31, 1997 and
$64.9 million and $6.3 million at December 31, 1996, 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 values of forward
exchange contracts are reported in Accounts receivable, Other assets, Accounts
payable and accrued liabilities or Deferred income taxes and noncurrent
liabilities.
At December 31, 1997 and 1996, 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:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased currency options ................... $1,462.7 $1,952.6
Forward sale contracts ....................... 1,500.9 1,660.9
Forward purchase contracts ................... 412.1 431.5
================================================================================
</TABLE>
Interest Rate Risk Management
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 $313.6 million at December 31,
1997 and $302.1 million at December 31, 1996, in 1996, a two-year interest rate
and currency swap contract with a notional amount of $336.1 million and, in
1997, a seven-year interest rate and currency swap contract with a notional
amount of $334.2 million. In 1997, the $336.1 million swap contract was
terminated in conjunction with the sale of the related asset with an immaterial
impact on net income. The outstanding swaps 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 or Deferred income taxes
and noncurrent liabilities with unrealized gains and losses recorded, net of
tax, in Stockholders' equity.
At December 31, 1997, the Company had one variable maturity interest rate
swap contract outstanding with a notional amount of $85.0 million to convert
7.25% U.S. dollar callable debt issued in 1997 to variable rate U.S. dollar
debt. This swap contract was terminated in February 1998 in conjunction with the
retirement of the callable debt.
At December 31, 1996, the Company had two interest rate swap contracts
outstanding with a combined notional amount of $347.9 million to convert fixed
rates on debt issues ($200.0 million in zero coupon euronotes and 200.0 million
in Swiss franc eurobonds) to floating rates slightly below commercial paper
rates. These swap contracts matured in 1997 in conjunction with the maturity of
the related debt.
- --------------------------------------------------------------------------------
43 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 1997 and 1996. Fair values were estimated
based on market prices, where available, or dealer quotes.
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .......... $1,125.1 $1,125.1 $1,352.4 $1,352.4
Short-term investments ............. 1,184.2 1,184.2 829.2 828.9
Long-term investments .............. 2,533.4 2,531.8 2,499.4 2,496.4
Purchased currency options ......... 54.6 144.1 85.1 143.7
Forward exchange contracts
and currency swaps ............... 197.0 197.0 134.7 134.7
Interest rate swaps ................ .1 .3 26.3 31.3
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Loans payable and current
portion of long-term debt ........ $ 902.5 $ 900.5 $ 606.1 $ 609.7
Long-term debt ..................... 1,346.5 1,387.0 1,155.9 1,160.2
Forward exchange contracts
and currency swap ................ 22.0 22.0 9.2 9.2
================================================================================
</TABLE>
A summary of the carrying values and fair values of the Company's
investments at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
Debt securities .................. $1,947.2 $1,947.2 $1,414.7 $1,414.7
Equity securities ................ 887.6 887.6 1,085.3 1,085.3
Held-to-maturity securities ........ 882.8 881.2 828.6 825.3
================================================================================
</TABLE>
A summary of gross unrealized gains and losses on the Company's investments
at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Gross Unrealized Gross Unrealized
---------------- ----------------
Gains Losses Gains Losses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
Debt securities .................. $ 11.1 $ (2.8) $ 10.1 $ (5.8)
Equity securities ................ 111.3 (91.9) 181.1 (53.0)
Held-to-maturity securities ........ 2.9 (4.5) .7 (4.0)
================================================================================
</TABLE>
Gross unrealized gains and losses with respect to available-for-sale
investments are recorded, net of tax and minority interests, in Retained
earnings.
At December 31, 1997, available-for-sale debt securities and
held-to-maturity securities maturing within one year totaled $1.0 billion and
$.2 billion, respectively. Substantially all remaining debt securities mature
within five years.
Concentrations of Credit Risk
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 creditworthiness 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.
7. Inventories
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods ................................. $1,230.6 $1,237.3
Raw materials and work in process .............. 849.7 841.1
Supplies ....................................... 64.8 70.4
- --------------------------------------------------------------------------------
Total (approximates current cost) .............. 2,145.1 2,148.8
Reduction to LIFO cost ......................... -- --
- --------------------------------------------------------------------------------
$2,145.1 $2,148.8
================================================================================
</TABLE>
Inventories valued under the LIFO method comprised approximately 42% and
43% of inventories at December 31, 1997 and 1996, respectively.
8. Loans Payable and Long-Term Debt
Loans payable at December 31, 1997 consisted primarily of commercial paper
borrowings of $439.6 million and the current portion of long-term debt of $345.8
million. The remainder was principally borrowings by foreign subsidiaries. Loans
payable at December 31, 1996 consisted primarily of the current portion of
long-term debt. The weighted average interest rate for these borrowings was 6.4%
and 6.2% at December 31, 1997 and 1996, respectively.
Long-term debt at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
5.8% notes due 2037 ........................ $ 500.0 $ --
6.8% euronotes due 2005 .................... 499.0 498.9
6.3% debentures due 2026 ................... 246.7 246.6
5.3% euronotes due 1998 .................... -- 251.2
Other ...................................... 100.8 159.2
- --------------------------------------------------------------------------------
$1,346.5 $1,155.9
================================================================================
</TABLE>
The notes due 2037 are subject to repayment at par at the option of the
holders beginning May 1999.
Other consists primarily of pollution control, industrial revenue financing
and foreign borrowings at varying rates up to 9.0%.
- --------------------------------------------------------------------------------
44 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
The aggregate maturities of long-term debt for each of the next five years
are as follows: 1998, $345.8 million; 1999, $6.8 million; 2000, $8.4 million;
2001, $8.9 million; and 2002, $6.7 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. The court approved an amended version of the
settlement agreement, which incorporated revisions, unrelated to the monetary
payment, to address concerns specified by the court. Following the dismissal of
appeals brought by objectors, the approval became final in October 1997. 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. The PECs were redeemed by the Company at par in September
1997. The PECs were included in Minority interests in the consolidated financial
statements prior to their redemption.
11. Stockholders' Equity
In 1997, 1996 and 1995, common stock increased by $286.5 million, $225.0 million
and $74.7 million, respectively, principally as a result of issuances of
treasury stock for exercises of stock options.
A summary of treasury stock transactions (shares in thousands) follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- -----------------------
Shares Cost Shares Cost Shares Cost
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
Jan. 1 ..... 277,017.0 $ 7,814.7 254,614.8 $5,747.4 235,341.6 $ 4,470.8
Purchases .... 27,443.6 2,572.8 38,384.2 2,493.3 33,377.2 1,570.9
Issuances(1).. (14,183.1) (427.6) (15,982.0) (426.0) (14,104.0) (294.3)
- -------------------------------------------------------------------------------------------
Balance,
Dec. 31 .... 290,277.5 $ 9,959.9 277,017.0 $ 7,814.7 254,614.8 $ 5,747.4
===========================================================================================
</TABLE>
(1) Issued primarily under stock option plans.
At December 31, 1997, 1996 and 1995, 10 million shares of preferred stock,
without par value, were authorized; none were issued.
12. Stock Option 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:
<TABLE>
<CAPTION>
Number Average(1)
of Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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
Granted ....................................... 15,938,930 97.48
Exercised ..................................... (13,997,358) 29.53
Forfeited ..................................... (2,695,275) 48.59
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 .............. 85,455,594 $ 50.54
================================================================================
</TABLE>
(1) Weighted average exercise price.
- --------------------------------------------------------------------------------
45 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
The number of shares and average price of options exercisable at December
31, 1997, 1996 and 1995 were 23,635,641 shares at $32.97, 32,387,469 shares at
$30.99 and 29,272,456 shares at $26.46, respectively. At December 31, 1997 and
1996, 57,180,159 shares and 70,493,629 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 $102.5
million, or $.09 per share in 1997, $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 1997, 1996 and
1995 was $31.63, $19.12 and $12.31, respectively. This fair value was estimated
using the Black-Scholes option-pricing model based on the weighted average
market price at grant date of $97.48 in 1997, $65.28 in 1996 and $43.38 in 1995
and the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield ....................... 1.7% 2.1% 2.8%
Risk-free interest rate .............. 6.4% 5.9% 6.9%
Volatility ........................... 24% 24% 24%
Expected life (years) ................ 6.6 6.7 6.5
================================================================================
</TABLE>
Summarized information about stock options outstanding and exercisable at
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------- -------------------------
Exercise
Price Number Average Average Number Average
Range of Shares Life(1) Price(2) of Shares Price(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3 to 20 3,004,985 4.22 $ 13.72 3,004,985 $ 13.72
$20 to 30 10,849,489 7.12 26.26 8,338,306 25.64
$30 to 40 24,491,602 6.01 33.69 3,446,905 36.07
$40 to 50 17,275,425 5.79 42.92 7,146,914 43.20
$50 to 75 14,208,722 7.56 63.55 1,672,179 52.68
$75 to 100 13,738,429 9.12 96.64 3,500 87.21
Over $100 1,886,942 9.51 103.34 22,852 124.53
- --------------------------------------------------------------------------------
85,455,594 23,635,641
================================================================================
</TABLE>
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price.
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 $290.5 million in
1997, $294.9 million in 1996 and $285.6 million in 1995. Expenses for Company
and subsidiary plans were $84.5 million in 1997, $106.6 million in 1996 and
$109.0 million in 1995, comprised of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year ....................... $105.9 $104.1 $ 98.7
Interest cost on projected
benefit obligation .................... 149.4 144.2 139.8
Net amortization and deferral ........... 152.2 107.1 185.9
Actual return on assets ................. (323.0) (248.8) (315.4)
- --------------------------------------------------------------------------------
Net pension cost ........................ $ 84.5 $106.6 $109.0
================================================================================
</TABLE>
The net pension cost attributable to international plans and included above
was $49.9 million in 1997, $51.8 million in 1996 and $47.2 million in 1995.
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, and short-term and
other investments.
The plans' funded status at December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- ---------------------
Over- Under- Over- Under-
funded funded funded funded
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at market value ...... $2,152.2 $ 197.3 $1,838.4 $ 215.2
- --------------------------------------------------------------------------------
Accumulated benefit
obligation
Vested ....................... 1,271.8 276.5 1,171.0 257.6
Nonvested .................... 232.8 76.5 196.5 54.6
- --------------------------------------------------------------------------------
1,504.6 353.0 1,367.5 312.2
- --------------------------------------------------------------------------------
Plan assets in excess of
(less than) accumulated
benefit obligation ............. 647.6 (155.7) 470.9 (97.0)
Projected compensation
increases ...................... 353.6 177.5 302.8 176.9
- --------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation ............. 294.0 (333.2) 168.1 (273.9)
Unamortized transitional
net (asset) obligation ......... (58.0) 2.8 (76.3) 2.9
Unrecognized net loss ............ 87.2 105.9 110.0 103.8
Unrecognized prior
service cost ................... 51.6 9.3 46.4 11.4
- --------------------------------------------------------------------------------
Net pension asset (liability) .... $ 374.8 $ (215.2) $ 248.2 $ (155.8)
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
46 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
International plan assets at market value, included in the above table,
were $676.4 million in 1997 and $654.2 million in 1996. The accumulated benefit
obligation of international plans, included in this table, was $665.4 million in
1997 and $624.5 million in 1996.
Assumptions used for the Company's pension plans at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate ................................. 7.0% 7.5% 7.0%
Rate of future compensation increases ......... 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets ................................. 10.0% 10.0% 10.0%
================================================================================
</TABLE>
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 $163.8 million in 1997,
$148.9 million in 1996 and $125.0 million in 1995. The cost of postretirement
benefits other than pensions was $1.4 million in 1997, $9.4 million in 1996 and
$7.6 million in 1995, comprised of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year ........................ $ 24.7 $ 25.2 $ 16.8
Interest cost on accumulated
postretirement benefit obligation ...... 48.2 45.7 44.0
Net amortization and deferral ............ 32.8 13.2 54.1
Actual return on assets .................. (104.3) (74.7) (107.3)
- --------------------------------------------------------------------------------
Net postretirement benefit cost .......... $ 1.4 $ 9.4 $ 7.6
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at market value .......................... $647.4 $541.6
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees ........................................... 367.0 368.2
Other fully eligible participants .................. 51.0 46.1
Other active participants .......................... 316.9 249.4
- --------------------------------------------------------------------------------
734.9 663.7
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets ........................... (87.5) (122.1)
Unrecognized net gain ................................ (171.8) (166.8)
Unrecognized plan changes ............................ (128.3) (141.2)
- --------------------------------------------------------------------------------
Net postretirement benefit liability ................. $(387.6) $(430.1)
================================================================================
</TABLE>
Assumptions used for the Company's other postretirement benefit plans at
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate ................................. 7.0% 7.5% 7.0%
Expected long-term rate of return on
plan assets ................................. 10.0% 10.0% 10.0%
================================================================================
</TABLE>
The health care cost trend rate was 8.0% at December 31, 1997. The rate
will gradually decline to 5.0% over a 6-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, 1997
by $100.5 million and the total service and interest cost components of the 1997
net postretirement benefit cost by $8.1 million.
15. Other (Income) Expense, Net
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income ...................... $(221.4) $(205.4) $(191.0)
Interest expense ..................... 129.5 138.6 98.7
Exchange gains ....................... (18.0) (27.8) (7.8)
Minority interests ................... 131.8 144.2 91.9
Amortization of goodwill
and other intangibles .............. 197.2 196.2 192.0
Other, net ........................... 123.6 (5.0) 643.8
- --------------------------------------------------------------------------------
$342.7 $240.8 $827.6
================================================================================
</TABLE>
Minority interests include third parties' share of exchange gains and
losses arising from translation of the financial statements into U.S. dollars.
Minority interests reflect dividends on the PECs, which were issued in December
1995 and redeemed in September 1997. (See Note 10.)
In 1997, other, net, includes $207.3 million of nonrecurring charges
consisting of $127.3 million for loss on sale of assets, $50.0 million for
endowment of The Merck Company Foundation and $30.0 million for environmental
costs.
- --------------------------------------------------------------------------------
47 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
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 $130.5 million in 1997, $117.4 million in 1996 and $85.5
million in 1995.
16. Taxes on Income
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
<TABLE>
<CAPTION>
1997 Tax Rate
-----------------------
Amount 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. statutory rate applied
to pretax income .................. $2,261.8 35.0% 35.0% 35.0%
Differential arising from:
Equity income from affiliates ..... (155.0) (2.4) (1.9) (1.5)
Tax exemption for
Puerto Rico operations .......... (122.7) (1.9) (1.9) (1.8)
Foreign operations ................ (89.4) (1.4) (3.2) (.9)
State taxes ....................... 64.7 1.0 .1 1.5
Other, including
minority interests .............. (111.2) (1.7) 1.9 (1.8)
- --------------------------------------------------------------------------------
$1,848.2 28.6% 30.0% 30.5%
================================================================================
</TABLE>
The differential arising from equity income from affiliates represents the
favorable impact of accounting for joint venture taxes as a reduction of equity
income, offset in part by significantly higher effective tax rates within the
joint ventures.
Domestic companies contributed approximately 71% in 1997, 73% in 1996 and
76% in 1995 to consolidated pretax income.
Taxes on income consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision
Federal ...................... $1,322.2 $1,106.2 $1,043.4
Foreign ...................... 476.8 410.3 455.1
State ........................ 90.5 (14.6) 149.4
- --------------------------------------------------------------------------------
1,889.5 1,501.9 1,647.9
- --------------------------------------------------------------------------------
Deferred provision
Federal ...................... (48.1) 136.9 (64.3)
Foreign ...................... (6.4) (15.4) (95.9)
State ........................ 13.2 36.1 (25.7)
- --------------------------------------------------------------------------------
(41.3) 157.6 (185.9)
- --------------------------------------------------------------------------------
$1,848.2 $1,659.5 $1,462.0
================================================================================
</TABLE>
Deferred income taxes at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other intangibles ............ $ -- $1,173.4 $ -- $1,208.5
Accelerated depreciation ..... -- 591.2 -- 521.2
Inventory related ............ 629.0 235.4 511.6 208.2
Other postretirement
benefits ................... 161.0 -- 187.7 --
Equity investments ........... -- 173.1 -- 163.0
Restructuring charge ......... 123.1 -- 151.3 --
Environmental related ........ 87.0 -- 84.0 --
Compensation related ......... 91.3 -- 81.8 --
Equivalent Merck-Medco
options assumed ............ 40.8 -- 62.7 --
Pension benefits ............. 11.7 144.3 9.4 97.9
Leasing activity ............. -- 17.6 -- 27.0
Other ........................ 858.2 480.7 712.8 462.7
- --------------------------------------------------------------------------------
2,002.1 2,815.7 1,801.3 2,688.5
Valuation allowance .......... (4.4) -- (4.5) --
- --------------------------------------------------------------------------------
$1,997.7 $2,815.7 $1,796.8 $2,688.5
================================================================================
</TABLE>
At December 31, 1997 and 1996, current deferred tax assets of $704.4
million and $568.6 million, respectively, were included in Prepaid expenses and
taxes and current deferred tax liabilities of $164.8 million and $112.2 million,
respectively, were included in Income taxes payable. In addition, at December
31, 1997 and 1996, noncurrent deferred tax assets of $111.3 million and $52.2
million, respectively, were included in Other assets and noncurrent deferred tax
liabilities of $1.5 billion and $1.4 billion, respectively, were included in
Deferred income taxes and noncurrent liabilities. Income taxes paid in 1997,
1996 and 1995 were $1.3 billion, $1.1 billion and $2.0 billion, respectively.
The 1995 amount 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.
- --------------------------------------------------------------------------------
48 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
At December 31, 1997, foreign earnings of $6.6 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, which
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. Earnings per Share
In the fourth quarter of 1997, the Company adopted Statement No. 128, Earnings
per Share, which requires presentation in the Consolidated Statement of Income
of both basic and diluted earnings per share. Earnings per common share (basic)
as calculated in accordance with this Statement does not differ from earnings
per share reported in prior periods and Earnings per common share assuming
dilution is not materially different.
The net income effect of dilutive securities was not significant. A
reconciliation of weighted average common shares outstanding to weighted average
common shares outstanding assuming dilution follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding ....... 1,204.5 1,213.6 1,236.1
Common shares issuable(1) ............... 30.2 31.2 27.6
- --------------------------------------------------------------------------------
Average common shares
outstanding assuming dilution ......... 1,234.7 1,244.8 1,263.7
================================================================================
</TABLE>
(1) Issuable primarily under stock option plans.
Stock options outstanding at December 31, 1997 to purchase 14.5 million
shares of common stock were not included in the computation of Earnings per
common share assuming dilution because the options' exercise prices were greater
than the average market price of the common shares.
18. Geographic Segment Reporting
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer Sales
North America .................. $17,762.9 $14,321.7 $11,704.3
Europe ......................... 3,605.0 3,322.4 2,894.3
Asia Pacific ................... 1,756.6 1,767.0 1,753.2
Other Foreign .................. 512.4 417.6 329.3
Affiliate Sales
North America .................. 2,233.5 1,723.2 1,640.3
Europe ......................... 1,057.0 909.8 798.8
Asia Pacific ................... 52.4 50.4 59.1
Other Foreign .................. 4.2 2.7 1.5
Eliminations ................... (3,347.1) (2,686.1) (2,499.7)
- --------------------------------------------------------------------------------
$23,636.9 $19,828.7 $16,681.1
================================================================================
Income Before Taxes
North America .................. $ 4,486.3 $ 3,691.7 $ 3,442.1
Europe ......................... 1,132.2 1,043.0 925.2
Asia Pacific ................... 327.2 352.9 323.4
Other Foreign .................. 10.4 (2.3) (17.4)
Eliminations ................... (224.6) (95.9) (259.4)
- --------------------------------------------------------------------------------
5,731.5 4,989.4 4,413.9
Non-operating Income ........... 730.8 551.4 383.3
- --------------------------------------------------------------------------------
$ 6,462.3 $ 5,540.8 $ 4,797.2
================================================================================
Assets
North America .................. $16,996.2 $15,662.0 $14,563.3
Europe ......................... 3,310.7 2,322.4 2,202.4
Asia Pacific ................... 1,511.4 1,499.5 1,542.3
Other Foreign .................. 312.8 306.1 196.9
Cash and Investments ........... 4,842.7 4,681.0 5,319.4
Other Corporate Assets ......... 1,560.5 1,444.3 1,513.3
Eliminations ................... (2,722.4) (1,622.2) (1,505.8)
- --------------------------------------------------------------------------------
$25,811.9 $24,293.1 $23,831.8
================================================================================
</TABLE>
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.
- --------------------------------------------------------------------------------
49 Merck & Co., Inc. 1997 Annual Report Financial Section
<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, 1997, 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 sheet of Merck & Co., Inc.
(a New Jersey corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York ARTHUR ANDERSEN LLP
January 27, 1998
- --------------------------------------------------------------------------------
50 Merck & Co., Inc. 1997 Annual Report Financial Section
<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.; Sir Derek Birkin; William N. Kelley, M.D.; and Samuel
O. Thier, M.D. The Committee held three meetings during 1997.
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; William G. Bowen, Ph.D.; Johnnetta B. Cole, Ph.D.; and Lloyd C. Elam,
M.D. The Committee held four meetings during 1997.
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
- --------------------------------------------------------------------------------
51 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
================================================================================
Selected Financial Data (1)
================================================================================
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
($ in millions except per share amounts) 1997 1996 1995 1994 1993 1992(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results for Year:
Sales ......................................... $23,636.9 $19,828.7 $16,681.1 $14,969.8 $10,498.2 $9,662.5
Materials and production costs ................ 11,790.3 9,319.2 7,456.3 5,962.7 2,497.6 2,096.1
Marketing/administrative expenses ............. 4,299.2 3,841.3 3,297.8 3,177.5 2,913.9 2,963.3
Research/development expenses ................. 1,683.7 1,487.3 1,331.4 1,230.6 1,172.8 1,111.6
Equity (income) loss from affiliates .......... (727.9) (600.7) (346.3) (56.6) 26.1 (25.8)
Gains on sales of businesses .................. (213.4) -- (682.9) -- -- --
Restructuring charge .......................... -- -- -- -- 775.0 --
Gain on joint venture formation ............... -- -- -- (492.0) -- --
Provision for joint venture obligation ........ -- -- -- 499.6 -- --
Other (income) expense, net ................... 342.7 240.8 827.6 232.8 10.1 (46.3)
Income before taxes ........................... 6,462.3 5,540.8 4,797.2 4,415.2 3,102.7 3,563.6
Taxes on income ............................... 1,848.2 1,659.5 1,462.0 1,418.2 936.5 1,117.0
Net income .................................... 4,614.1 3,881.3 3,335.2 2,997.0 2,166.2 2,446.6
Earnings per common share(3) .................. $3.83 $3.20 $2.70 $2.38 $1.87 $2.12
Earnings per common share
assuming dilution(3) ........................ $3.74 $3.12 $2.64 $2.34 $1.86 $2.10
Dividends declared ............................ 2,094.8 1,793.4 1,578.0 1,463.1 1,239.0 1,106.9
Dividends paid per common share ............... $1.69 $1.42 $1.24 $1.14 $1.03 $.92
Capital expenditures .......................... 1,448.8 1,196.7 1,005.5 1,009.3 1,012.7 1,066.6
Depreciation .................................. 602.4 521.7 463.3 475.6 348.4 290.3
- ------------------------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital ............................... $2,644.4 $2,897.4 $3,870.2 $2,291.4 $541.6 $1,241.1
Property, plant and equipment (net) ........... 6,609.4 5,926.7 5,269.1 5,296.3 4,894.6 4,271.1
Total assets .................................. 25,811.9 24,293.1 23,831.8 21,856.6 19,927.5 11,086.0
Long-term debt ................................ 1,346.5 1,155.9 1,372.8 1,145.9 1,120.8 495.7
Stockholders' equity .......................... 12,613.5 11,970.5 11,735.7 11,139.0 10,021.7 5,002.9
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ....................................... 19.5% 19.6% 20.0% 20.0% 20.6% 25.3%
Average total assets ........................ 18.4% 16.1% 14.6% 14.3% 14.0% 24.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding (millions) ...................... 1,204.5 1,213.6 1,236.1 1,257.2 1,156.5 1,153.5
Number of stockholders of record .............. 263,900 247,300 243,000 244,700 231,300 161,200
Number of employees ........................... 53,800 49,100 45,200 47,500 47,100(4) 38,400
==================================================================================================================================
<CAPTION>
($ in millions except per share amounts) 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for Year:
Sales ................................ $8,602.7 $7,671.5 $6,550.5 $5,939.5 $5,061.3
Materials and production costs ....... 1,934.9 1,778.1 1,550.3 1,526.1 1,444.3
Marketing/administrative expenses .... 2,570.3 2,388.0 2,013.4 1,880.3 1,684.6
Research/development expenses ........ 987.8 854.0 750.5 668.8 565.7
Equity (income) loss from affiliates . 21.1 22.4 11.5 (2.5) (2.5)
Gains on sales of businesses ......... -- -- -- -- --
Restructuring charge ................. -- -- -- -- --
Gain on joint venture formation ...... -- -- -- -- --
Provision for joint venture obligation -- -- -- -- --
Other (income) expense, net .......... (78.1) (69.8) (58.2) (4.2) (36.0)
Income before taxes .................. 3,166.7 2,698.8 2,283.0 1,871.0 1,405.2
Taxes on income ...................... 1,045.0 917.6 787.6 664.2 498.8
Net income ........................... 2,121.7 1,781.2 1,495.4 1,206.8 906.4
Earnings per common share(3) ......... $1.83 $1.52 $1.26 $1.02 $.74
Earnings per common share
assuming dilution(3) ............... $1.81 $1.51 $1.25 $1.01 $.73
Dividends declared ................... 920.3 788.1 681.5 546.3 365.2
Dividends paid per common share ...... $.77 $.64 $.55 $.43 $.27
Capital expenditures ................. 1,041.5 670.8 433.0 372.7 253.7
Depreciation ......................... 242.7 231.4 206.4 189.0 188.5
- --------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital ...................... $1,496.5 $939.2 $1,502.5 $1,480.3 $798.3
Property, plant and equipment (net) .. 3,504.5 2,721.7 2,292.5 2,070.7 1,948.0
Total assets ......................... 9,498.5 8,029.8 6,756.7 6,127.5 5,680.0
Long-term debt ....................... 493.7 124.1 117.8 142.8 167.4
Stockholders' equity ................. 4,916.2 3,834.4 3,520.6 2,855.8 2,116.7
- --------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales .............................. 24.7% 23.2% 22.8% 20.3% 17.9%
Average total assets ............... 24.2% 24.1% 23.2% 20.4% 16.8%
- --------------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding (millions) ............. 1,159.9 1,172.1 1,188.3 1,186.9 1,221.2
Number of stockholders of record ..... 91,100 82,300 75,600 68,500 56,900
Number of employees .................. 37,700 36,900 34,400 32,000 31,100
=====================================================================================================================
</TABLE>
(1) Amounts after 1992 include the impact of the Medco acquisition on November
18, 1993.
(2) Results of operations for 1992 exclude the cumulative effect of accounting
changes.
(3) In 1997, the Company adopted Statement No. 128, Earnings per Share. (See
Note 17 to the consolidated financial statements for further information.)
(4) Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees.
- --------------------------------------------------------------------------------
52 Merck & Co., Inc. 1997 Annual Report Financial Section
<PAGE>
EXHIBIT 21
MERCK & CO., INC. SUBSIDIARIES
AS OF 12/31/97
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.
<TABLE>
<CAPTION>
COUNTRY OR STATE
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
Chibret A/S Denmark
Hangzhou MSD Pharmaceutical Company Limited/1/ China
International Indemnity Ltd. Bermuda
Istituto Gentili S.p.A. Italy/Delaware
Johnson & Johnson--Merck Consumer Pharmaceuticals
Company/1/ New Jersey
Laboratorios Prosalud S.A. Peru
MCM Vaccine Co./1/ Pennsylvania
Merck and Company, Incorporated Delaware
Merck SH Inc. 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
Merck-Medco Holdings II Corp. Delaware
Cloverleaf International Holdings S.A. Luxembourg
Coordinated Patient Care Scandinavia AS Norway
Medidoc AB Sweden
Coordination Medicale et Pharmaceutique, S.A. France
Merck Frosst Canada, Inc. Canada
Merck Sharp & Dohme (Australia) Pty. Limited Australia
AMRAD Pharmaceuticals Pty. 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 Gestion S.A./1/ 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRY OR STATE
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
Pasteur Merieux MSD N.V. Belgium
Pasteur Merieux MSD S.A. Spain
Pasteur Merieux MSD S.p.A. Italy
Pasteur Vaccins S.A. France
Laboratorios Chibret, S.A. Spain
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
Charles E. Frosst (U.K.) Limited Great Britain
Merck Sharp & Dohme Limited Great Britain
Johnson & Johnson MSD Consumer Pharmaceuticals/1/ Great Britian
Merck Sharp & Dohme Finance Europe Great Britain
Thomas Morson & Son Limited Great Britain
Merck Sharp & Dohme IDEA, Inc. Switzerland
Merck Sharp & Dohme (Sweden) A.B. Sweden
Merck Sharp & Dohme (Israel--1996) Company Ltd. Israel
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, Limitada Portugal
MSD Finance, B.V. Netherlands
MSD Overseas Manufacturing Co. Bermuda
Blue Jay Investments C.V. Netherlands
Merck Sharp & Dohme (Singapore) Ltd. Bermuda
MSD Ireland (Investment) Ltd. Bermuda
MSD Overseas Manufacturing Co. (Ireland) Ireland
Crosswinds B.V. Netherlands
Merck Sharp & Dohme (Ireland) Ltd. Bermuda
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
Merck Sharp & Dohme de Venezuela, C.A. Venezuela
Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
COUNTRY OR STATE
NAME OF INCORPORATION
- ---- ------------------
<S> <C>
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/Delaware
Merck Sharp Dohme Ilaclari Limited Sirketi 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 Sharp & Dohme S.A.R.L. Morocco
Merck Ventures, Inc. Delaware
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-Medco Managed Care, L.L.C. Delaware
CM Delaware Corporation Delaware
DM-MG, L.L.C. Delaware
MCCO Corp. New Jersey
MCCO, L.L.C. 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 MM Corp. New Jersey
Merck-Medco Managed Care of California, Inc. California
Merck-Medco Rx Services of Florida No. 2, L.C. Florida
Merck-Medco Rx Services of Florida, L.C. Florida
Merck-Medco Rx Services of Massachusetts, L.L.C. Massachusetts
Merck-Medco Rx Services of Nevada, Inc. Nevada
Merck-Medco Rx Services of New Jersey, L.L.C. New Jersey
Merck-Medco Rx Services of New York, L.L.C. New York
Merck-Medco Rx Services of Ohio, Ltd. Ohio
Merck-Medco Rx Services of Ohio No. 2, Ltd. Ohio
Merck-Medco Rx Services of Oklahoma, L.L.C. Oklahoma
Merck-Medco Rx Services of Pennsylvania, L.L.C. Pennsylvania
Merck-Medco Rx Services of Pennsylvania No. 2, L.L.C. Pennsylvania
Merck-Medco Rx Services of Texas, L.L.C. Texas
Merck-Medco Rx Services of Virginia, L.L.C. Virginia
Merck-Medco Rx Services of Washington, Inc. Washington
Mergerco Delaware No. 7, L.L.C. Delaware
Mergerco Delaware No. 10, L.L.C. Delaware
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COUNTRY OR STATE
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
MW Holdings, L.L.C. Delaware
NJRE, L.L.C. New Jersey
NRx Federal Corp. Delaware
National Rx Services, Inc. California
National Rx Services, Inc. of Missouri Missouri
National Rx Services No. 3, Inc. of Ohio Ohio
New York PAID Independent Practice Association, L.L.C. New York
Paid Direct, Inc. Delaware
PAID Prescriptions, L.L.C. Nevada
Replacement Distribution Center, Inc. Ohio
Systemed, L.L.C. Delaware
American Medical Outcomes Repository, Inc. Delaware
Systemed Pharmacy of Iowa, L.L.C. Delaware
Systemed Pharmacy of Ohio, Ltd. Ohio
Merck Resource Management, 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
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
Merial Limited/LLC/1/ Great Britain/Delaware
British United Turkeys Limited/1/ Great Britain
Turkey Research & Development Limited/1/ Great Britain
MI (FDL) Holdings, Inc. 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
The O'Hare Group, Inc./1/ Delaware
</TABLE>
- --------
/1/ own less than 100%
4
<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, l997 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 24th
day of February, l998.
Merck & Co., Inc.
/s/ Raymond V. Gilmartin
By___________________________________
RAYMOND V. GILMARTIN
(CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER)
/s/ Raymond V. Gilmartin Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
RAYMOND V. GILMARTIN Executive Officer; Director)
/s/ Judy C. Lewent Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
JUDY C. LEWENT Financial Officer)
/s/ Peter E. Nugent Vice President, Controller
- ------------------------------------- (Principal Accounting Officer)
PETER E. NUGENT
DIRECTORS
/s/ Derek Birkin /s/ Lloyd C. Elam
- ------------------------------------- -------------------------------------
DEREK BIRKIN LLOYD C. ELAM
/s/ Lawrence A. Bossidy /s/ 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
/s/ Carolyne K. Davis
- -------------------------------------
CAROLYNE K. DAVIS
<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 24, l998, 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. 8--1998
RESOLVED, that the proposed form of Form l0-K Annual Report of the
Company for the fiscal year ended December 3l, l997 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 20th day of March, l998.
[Corporate Seal] /s/ Nancy V. Allen
------------------------------------------
Nancy V. Van Allen
Assistant Secretary
2
<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, 1997 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,125
<SECURITIES> 1,184
<RECEIVABLES> 2,877
<ALLOWANCES> 0<F1>
<INVENTORY> 2,145
<CURRENT-ASSETS> 8,213
<PP&E> 10,033
<DEPRECIATION> (3,423)
<TOTAL-ASSETS> 25,812
<CURRENT-LIABILITIES> 5,569
<BONDS> 1,347
0
0
<COMMON> 5,254
<OTHER-SE> 7,360
<TOTAL-LIABILITY-AND-EQUITY> 25,812
<SALES> 23,637
<TOTAL-REVENUES> 23,637
<CGS> 11,790
<TOTAL-COSTS> 11,790
<OTHER-EXPENSES> 1,684
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 6,462
<INCOME-TAX> 1,848
<INCOME-CONTINUING> 4,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,614
<EPS-PRIMARY> 3.83
<EPS-DILUTED> 3.74
<FN>
<F1>NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE INCLUDING COLUMNS FOR THE THREE REPORTING
PERIODS ENDED SEPTEMBER 30, 1996, JUNE 30, 1997 AND SEPTEMBER 30, 1997; AND FOR
THE TWO FISCAL YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000,000
<CAPTION>
<PERIOD-TYPE> 12-MOS 9-MOS 12-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1994 SEP-30-1996 DEC-31-1996 JUN-30-1997 SEP-30-1997
<S> <C> <C> <C> <C> <C>
<CASH> 1,604 1,344 1,352 1,587 1,282
<SECURITIES> 666 1,008 829 1,129 885
<RECEIVABLES> 2,351 2,723 2,656 2,697 2,996
<ALLOWANCES> 0<F1> 0<F1> 0<F1> 0<F1> 0<F1>
<INVENTORY> 1,661 1,921 2,149 2,171 2,227
<CURRENT-ASSETS> 6,922 7,781 7,727 8,419 8,210
<PP&E> 7,673 8,414 8,726 9,270 9,485
<DEPRECIATION> (2,377) (2,747) 2,800 (3,134) (3,189)
<TOTAL-ASSETS> 21,857 23,982 24,293 25,628 25,898
<CURRENT-LIABILITIES> 5,449 5,004 4,829 4,603 5,335
<BONDS> 1,146 1,328 1,156 1,727 1,690
0 0 0 0 0
0 0 0 0 0
<COMMON> 4,668 4,884 4,968 5,116 5,199
<OTHER-SE> 6,471 6,552 7,003 7,706 7,635
<TOTAL-LIABILITY-AND-EQUITY> 21,857 23,982 24,293 25,628 25,898
<SALES> 14,970 14,423 19,829 11,477 17,405
<TOTAL-REVENUES> 14,970 14,423 19,829 11,477 17,405
<CGS> 5,963 6,845 9,319 5,731 8,722
<TOTAL-COSTS> 5,963 6,845 9,319 5,731 8,722
<OTHER-EXPENSES> 1,231 1,064 1,487 765 1,190
<LOSS-PROVISION> 0<F1> 0<F1> 0<F1> 0<F1> 0<F1>
<INTEREST-EXPENSE> 124 104 139 56 90
<INCOME-PRETAX> 4,415 4,071 5,541 3,096 4,791
<INCOME-TAX> 1,418 1,233 1,660 921 1,419
<INCOME-CONTINUING> 2,997 2,838 3,881 2,175 3,372
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,997 2,838 3,881 2,175 3,372
<EPS-PRIMARY> 2.38 2.33 3.20 1.80 2.79
<EPS-DILUTED> 2.34 2.27 3.12 1.75 2.72
<FN>
<F1>NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
