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As filed with the Securities and Exchange Commission on March 22, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________
FORM 10-K
(MARK ONE)
/X/ Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File No. 1-3305
_______________
MERCK & CO., INC.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
Incorporated in New Jersey I.R.S. Employer
Identification No. 22-1109110
Securities Registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ----------------------
Common Stock New York and Philadelphia Stock Exchanges
($0.01 par value)
Number of shares of Common Stock ($0.01 par value) outstanding as of
February 29, 2000: 2,316,574,409.
Aggregate market value of Common Stock ($0.01 par value) held by non-
affiliates on December 31, 1999 based on closing price on February 29, 2000:
$143,318,000,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] . No____________
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Documents Incorporated by Reference:
Document Part of Form 10-K
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Annual Report to stockholders for the fiscal year Parts I and II
ended December 31, 1999
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 25, 2000
================================================================================
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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. ("Merck-Medco"). The Company's operations are principally
managed on a products and services basis and are comprised of two reportable
segments: Merck Pharmaceutical and Merck-Medco. Merck Pharmaceutical products
consist of therapeutic agents, sold by prescription, for the treatment of human
disorders. Merck-Medco revenues are derived from the filling and management of
prescriptions and health management programs.
The following table shows the sales of various categories of the
Company's products and services:
<TABLE>
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ------------ ------------- -------------
<S> <C> <C> <C>
Elevated cholesterol.................... $ 5,093.2 $ 4,694.1 $ 4,672.3
Hypertension/heart failure.............. 4,563.8 4,213.5 3,855.0
Osteoporosis............................ 1,043.1 775.2 532.1
Anti-ulcerants.......................... 913.9 1,113.5 1,184.4
Vaccines/biologicals.................... 860.0 846.7 733.6
Antibiotics............................. 772.3 743.3 774.9
Ophthalmologicals....................... 670.0 630.7 639.1
Human immunodeficiency virus ("HIV").... 664.4 676.3 581.7
Anti-inflammatory/analgesics............ 578.5 98.0 116.0
Respiratory............................. 501.8 194.0 .4
Animal health/crop protection........... -- -- 550.0
Other Merck products.................... 1,820.6 1,311.2 557.1
Merck-Medco............................. 15,232.4 11,601.7 9,440.3
--------- --------- ---------
Total.............................. $32,714.0 $26,898.2 $23,636.9
========= ========= =========
</TABLE>
Human health products include therapeutic agents within the Merck
Pharmaceutical segment, sold by prescription for the treatment of human
disorders, as well as preventive agents (vaccines/biologicals). 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);
osteoporosis, which is comprised of Fosamax (alendronate sodium), for treatment
and prevention in postmenopausal women; anti-ulcerants, of which Pepcid
(famotidine) is the largest-selling; vaccines/biologicals, of which M-M-R II
(measles, mumps and rubella virus vaccine live), Varivax (varicella virus
vaccine live), a live virus vaccine for the prevention of chickenpox, and
Recombivax HB (hepatitis B vaccine [recombinant]) are 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), Trusopt (dorzolamide hydrochloride ophthalmic solution) and Cosopt
(dorzolamide hydrochloride and timolol maleate ophthalmic solution) are the
largest selling; HIV, which includes Crixivan (indinavir sulfate), a protease
inhibitor for the treatment of human immunodeficiency viral infection in adults;
anti-inflammatory/analgesics, of which Vioxx (rofecoxib), a specific inhibitor
of COX-2, is the largest-selling; and respiratory, which is comprised of
Singulair (montelukast sodium), a leukotriene receptor antagonist.
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 Proscar (finasteride), which
provides long-term disease management of symptomatic benign prostate
enlargement, Maxalt (rizatriptan benzoate), an anti-migraine treatment, Propecia
(finasteride), which treats male pattern hair loss and Aggrastat (tirofiban
hydrochloride), a platelet blocker, for treatment of acute coronary syndrome and
other human pharmaceuticals within the Merck
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Pharmaceutical segment, continuing sales to divested businesses, pharmaceutical
and animal health supply sales to the Company's joint ventures and supply sales
to AstraZeneca LP. Also included in this category are rebates and discounts on
Company pharmaceutical products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products and
Merck-Medco pharmaceutical benefit services, principally sales of prescription
drugs through managed prescription drug programs as well as services provided
through programs to help manage patient health.
In 1997, the Company acquired Istituto Gentili S.p.A., a privately-held
Italian pharmaceutical company that owned the intellectual property rights for
alendronate, which is marketed in the United States by the Company as Fosamax.
In November 1999, the Company acquired SIBIA Neurosciences, Inc., a
publicly-held California based biotechnology firm, which engages in the
discovery and development of novel small molecule therapeutics for the treatment
of neurodegenerative, neuropsychiatric and neurological disorders.
In May 1999, the U.S. Food and Drug Administration ("FDA") cleared Vioxx, a
once-daily, anti-inflammatory COX-2 specific inhibitor, for marketing in the
United States for relief of the signs and symptoms of osteoarthritis, management
of acute pain in adults and treatment of menstrual pain. Vioxx has now been
launched in 47 other countries in addition to the United States. In March
1999, the FDA approved a new use indication for Mevacor to reduce the risk of
first heart attack, unstable angina and coronary revascularization procedures in
people without symptoms of cardiovascular disease, with average to moderately
elevated levels of total and LDL cholesterol and below average HDL cholesterol.
In August 1999, the FDA approved an expanded indication for Zocor for the
increase of HDL cholesterol in persons with high LDL levels of cholesterol. In
March 2000, the FDA approved the use of Singulair 4 mg tablets to help control
asthma in children aged two to five.
Divestitures -- In July 1997, the Company sold its crop protection
business to Novartis for $910.0 million.
In July 1998, the Company sold its one-half interest in The Dupont Merck
Pharmaceutical Company, its joint venture with E.I. du Pont de Nemours and
Company ("DuPont"), to DuPont for $2.6 billion in cash.
In December 1999, the Company transferred all of its interest in Chugai MSD
Co., Ltd. to Chugai Pharmaceutical Co., Ltd.
These businesses were not significant to the Company's financial position,
liquidity or results of operations.
Joint Ventures -- 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. ("AMI"), in which the Company and Astra each
owned a 50% share. The joint venture, formed in November 1994, developed and
marketed most of Astra's new prescription medicines in the United States. Joint
venture sales consisted 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.
On July 1, 1998, the Company and Astra completed the restructuring of the
ownership and operations of the joint venture whereby the Company acquired
Astra's interest in AMI, renamed KBI Inc. ("KBI"), for consideration totaling
$3.1 billion. KBI's operating assets, excluding certain product rights, were
then combined with the assets of Astra's wholly owned subsidiary, Astra USA,
Inc., to form a new U.S. limited partnership named Astra Pharmaceuticals, L.P.
("the Partnership") in which the Company maintains a limited partner interest.
For a franchise fee payment of $230.0 million, the Partnership became the
exclusive distributor of the products for which KBI retained rights. The Company
earns certain Partnership returns as well as ongoing revenue based on sales of
current and future KBI products. The Partnership returns reflect the Company's
share of the Partnership's earnings in conformity with accounting principles
generally accepted in the United States
3
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(GAAP earnings) and include a preferential return, a priority return and certain
variable returns which are based, in part, upon sales of certain former Astra
USA, Inc. products. The preferential return represents the Company's share of
the undistributed Partnership GAAP earnings. For a payment of $443.0 million,
Astra purchased an option to buy the Company's interest in the KBI products in
2008, 2012 or 2016, excluding the Company's interest in the gastrointestinal
medicines Prilosec and esomeprazole.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB
(AstraZeneca). As a result of the merger, Astra was required to make two one-
time payments to the Company totaling approximately $1.8 billion for the
relinquishment of certain rights, including option rights to future Astra
products with no existing or pending U.S. patents at the time of the merger.
This merger also triggers a partial redemption of the Company's limited partner
interest in 2008. Furthermore, as a result of the merger, AstraZeneca's option
to buy the Company's interest in the KBI products is now exercisable only in
2010 and the Company has obtained the right to require AstraZeneca to purchase
such interest in 2008.
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 (famotidine), an over-the-counter form of the
Company's ulcer medication Pepcid. This 50% owned joint venture was expanded
into Europe in 1993, and Canada in 1996. The European extension currently
markets and sells over-the-counter pharmaceutical products in France, Germany,
Italy, Spain and the United Kingdom.
In 1991, the Company and DuPont entered into a joint venture to form a
worldwide pharmaceutical company for the research, marketing, manufacturing and
sale of pharmaceutical and imaging agent products. 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. As
discussed above under "Divestitures," in July 1998, the Company sold its one-
half interest in the joint venture to DuPont for $2.6 billion in cash.
Effective April 1992, the Company, through the Merck Vaccine Division, and
Connaught Laboratories, Inc. (now Aventis Pasteur), an affiliate of Aventis
A.G., 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 1994, the Company, through the Merck Vaccine Division, and Pasteur
Merieux Connaught (now Aventis Pasteur) 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 Aventis Pasteur contributed, among other things,
their European vaccine businesses for equal shares in the joint venture, known
as Pasteur Merieux MSD, S.N.C. (now Aventis Pasteur 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. This joint venture was dissolved by
the parties effective February 1999.
In August 1997, the Company and Rhone-Poulenc S.A. 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 S.A. 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 S.A. contributed research and development,
manufacturing, sales and marketing activities, and animal health products, as
well as its poultry genetics business. In December 1999, Rhone-Poulenc
4
<PAGE>
S.A.'s interest in Merial was acquired by Aventis S.A., a corporation formed by
the merger of Rhone-Poulenc S.A. and Hoechst A.G.
In October 1999, Merck-Medco formed a long-term strategic alliance with CVS
Corporation to collaborate on enhanced Internet, retail and specialty pharmacy
services for Merck-Medco's health plan members.
Competition -- The markets in which the Company's pharmaceutical business
is conducted are highly competitive and, in many cases, highly regulated. Such
competition involves an intensive search for technological innovations and the
ability to market these innovations effectively. With its long-standing emphasis
on research and development, the Company is well prepared to compete in the
search for technological innovations. Additional resources to meet competition
include quality control, flexibility to meet exact customer specifications, an
efficient distribution system and a strong technical information service. The
Company is active in acquiring and marketing products through joint ventures and
licenses and has been expanding its sales and marketing efforts to further
address changing industry conditions. However, the introduction of new products
and processes by competitors may result in price reductions and product
replacements, even for products protected by patents. For example, the number of
compounds available to treat diseases typically increases over time and has
resulted in slowing the growth in sales of certain of the Company's products.
In addition, particularly in the area of human pharmaceutical products,
legislation enacted in all states allows, encourages or, in a few instances, in
the absence of specific instructions from the prescribing physician, mandates
the use of "generic" products (those containing the same active chemical as an
innovator's product) rather than "brand-name" products. Governmental and other
pressures toward the dispensing of generic products have significantly reduced
the sales of certain of the Company's products no longer protected by patents,
such as Moduretic (amiloride HCl and hydrochlorothiazide), Clinoril (sulindac)
and Aldomet (methyldopa), and slowed the growth of certain other products.
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 that help plan sponsors provide high-quality,
affordable prescription drug care and health management services to health plan
members. Merck-Medco dispenses prescription drugs from its national network of
mail service pharmacies, manages prescriptions dispensed through a national
network of participating retail pharmacies and implements health management
programs to help its clients provide better care for patients with high-cost,
high-risk conditions.
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. 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.
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.
5
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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 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. Such legislative initiatives include prescription drug benefit proposals
for Medicare participants introduced in Congress. 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
well 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 and the pharmacy benefits
management business have 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 conduct its operations, including
the introduction of new drugs to the 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 payer is fiscally responsible. This type of payment system and other
cost containment systems are now widely used by public and private payers 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. The
Company continues to work with private and federal employers to slow increases
in healthcare costs. Further, the Company's efforts to demonstrate that its
medicines can help save costs in other areas, and pricing flexibility across its
product portfolio, have encouraged the use of the Company's medicines and have
helped offset the effects of increasing cost pressures.
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 CDC contracts in 1999 for the supply of six 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.
In addition, countries within the EU, recognizing the economic importance
of the research-based pharmaceutical industry and the value of innovative
medicines, are working with industry and the European Commission on proposals
for market deregulation.
The Company is subject to the jurisdiction of various regulatory agencies
and is, therefore, subject to potential administrative actions. Such actions may
include seizures of products and other civil and criminal
6
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sanctions. Under certain circumstances, the Company on its own may deem it
advisable to initiate product recalls. 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 pharmacists. These regulations are issued by an administrative
body in each state (typically, a pharmacy board), which is empowered to impose
sanctions for noncompliance. 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. Patents are in effect for the following
major products in the United States: Aggrastat, Cosopt, Chibroxin
(norfloxacin), Cozaar, Crixivan, Fosamax, Hyzaar, Maxalt, Mevacor, PedvaxHIB
(Haemophilus b conjugate vaccine), Pepcid, Primaxin, Prinivil, Prinzide,
- ------------
Propecia, Proscar, Recombivax HB, Sinemet CR (carbidopa and levodopa),
Singulair, Timoptic-XE, Trusopt, Vaseretic, Vioxx, Zocor and Prilosec (which was
developed jointly by the Company and Astra and is supplied exclusively to
AstraZeneca LP). The lisinopril products (which include Prinivil) and Sinemet
CR are subject to agreements with third parties and are not marketed exclusively
by the Company.
Several products face expiration of product patents in the United
States and other countries in the near term, including Pepcid (U.S. - 2000),
Vasotec (U.S. - 2000), Mevacor (U.S. - 2001), Prinivil/Prinzide (U.S. - 2001)
and Vaseretic (U.S. - 2001). In addition, Prilosec will face expiration of a
product patent in 2001. In the aggregate, domestic sales of these products
represent 22% of the Company's aggregate human health sales for 1999. The
Company expects a significant decline in these sales in the years 2000 through
2002 upon the loss of market exclusivity. With the exception of Prilosec, for
which the Company has U.S. rights only, a decline is also expected in the
Company's European sales for these products in the years 2000 through 2005 upon
the loss of market exclusivity in European countries throughout this period.
European sales of these products represent 5% of the Company's human health
sales for 1999.
In January 1999, the Company filed a supplemental new drug application
with the FDA for Vasotec, in accordance with the provisions of the FDA
Modernization Act of 1997 (the "Modernization Act") (See also page 8). In
February 2000, pursuant to the Modernization Act, the FDA granted an additional
six months of market exclusivity in the United States to Vasotec for all its
uses, based upon pediatric studies performed by the Company.
In the period 1994 through 1999, product patent protection in the
United States expired for the following human and animal pharmaceutical
products: Ivomec (ivermectin), certain ivermectin-containing animal health
products, Mefoxin (cefoxitin sodium), Timoptic and Timolide (timolol maleate and
hydrochlorothiazide).
While the expiration of a product patent normally results in the loss
of market 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 novel compositions and formulations; and (iv) in the United States,
market exclusivity that may be available under federal law. 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
7
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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 Modernization Act which was passed in 1997, includes a Pediatric
Exclusivity Provision that may provide an additional six months of market
exclusivity in the United States for indications of new or currently marketed
drugs, if certain agreed upon pediatric studies are completed by the applicant.
The Company is considering seeking exclusivity based on pediatric studies for
certain of the Company's products.
Additions to market exclusivity are sought in the United States and
other countries through all relevant laws, including laws increasing patent
life. Some of the benefits of increases in patent life have been partially
offset by a general increase in the number of, incentives for and use of generic
products. Additionally, improvements in intellectual property laws are sought in
the United States and other countries through reform of patent and other
relevant laws and implementation of international treaties.
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 1999 on patent and know-how licenses and
other rights amounted to $133.5 million. The Company also paid royalties
amounting to $282.8 million in 1999 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 8,900 people are employed in the Company's
research activities. Expenditures for the Company's research and development
programs were $2,068.3 million in 1999, $1,821.1 million in 1998 and $1,683.7
million in 1997 and will be approximately $2.4 billion in 2000. 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 1990 through 1999 exceeded $13.0 billion with a compound annual
growth rate of 11%.
The Company maintains a number of long-term exploratory and
fundamental research programs in biology and chemistry as well as research
programs directed toward product development. Projects related to human and
animal health are being carried on in various fields such as bacterial and viral
infections, cardiovascular functions, cancer, diabetes, pain and 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 New Drug Application, New
Animal Drug Application or the biological Product License Application to the FDA
for the required approval. 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 an injectable antibiotic; an antifungal agent; an oral compound
potentially useful for treatment of chemotherapy-induced emesis; an oral
compound potentially useful for the treatment of depression and other
neuropsychiatric diseases; a second COX-2 specific inhibitor potentially useful
for the treatment of osteoarthritis, rheumatoid arthritis and pain; 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. Cozaar and
Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company,
Wilmington, DE.
8
<PAGE>
Employees
At the end of 1999, the Company and Merck-Medco had 62,300 employees
worldwide, with 38,500 employed in the United States, including Puerto Rico.
Approximately 30% of the Company's and Merck-Medco'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 1999, the Company
incurred capital expenditures of approximately $101.7 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $600.0 million for the years 2000 through 2004. In addition, the
Company's operating and maintenance expenditures for environmental protection
facilities were approximately $74.2 million in 1999. Expenditures for this
purpose for the years 2000 through 2004 are forecasted to exceed $428.0 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 $28.2 million in 1999, and are estimated at
$232.0 million for the years 2000 through 2004. 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 in management's
opinion, the liabilities for all environmental matters which are probable and
reasonably estimable have been accrued. Although it is not possible to predict
with certainty the outcome of these environmental matters, or the ultimate costs
of remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of those provided 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," "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 in the near term, including Pepcid
(U.S. -2000), Vasotec (U.S. - 2000), Mevacor (U.S. - 2001),
Prinivil/Prinzide (U.S. -2001) and Vaseretic (U.S. - 2001). In addition,
Prilosec, which is supplied exclusively to AstraZeneca LP, will face
expiration of a product 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.
9
<PAGE>
. 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 and
governmental investigations, 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 and Segment Information
The Company's operations outside the United States are conducted
primarily through subsidiaries. Sales of the Company's human health products by
subsidiaries outside the United States were 40% of the Company's human health
sales in 1999, and 43% and 46% in 1998 and 1997, respectively. The 1999 and
1998 percentages were affected by increased domestic supply sales to AstraZeneca
LP, as a result of the restructuring of AMI.
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.
Within the EU, there has been an evolution toward a single market in
pharmaceuticals, for which Economic and Monetary Union ("EMU"), including the
adoption of the euro as a single currency, marks an important step. The Company
has recognized the strategic significance of this development and has adopted
the euro for use in EMU markets. In this way, the Company is demonstrating its
support for the European Community's industrial policy. 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, the Middle East, Africa, Eastern Europe and
Asia Pacific where changes in government policies and economic conditions are
making it possible for the Company to earn fair returns. Business in these
developing areas, while sometimes less stable, offers important opportunities
for growth over time.
Financial information about geographic areas and operating segments of
the Company's business is incorporated by reference to page 54 (beginning with
the caption "Segment Reporting") and 55 of the Company's 1999 Annual Report to
stockholders.
10
<PAGE>
Other Matters
The Company initiated a program in 1996 to assess the risks of Year
2000 noncompliance, remediate all non-compliant systems, assess the readiness of
key third parties and develop contingency plans. The critical aspects of the
Year 2000 readiness program were completed in the third quarter of 1999. The
Company has not experienced any significant business disruptions related to the
transition to the Year 2000; however, the Company will continue to actively
monitor its systems and third party suppliers throughout most of the first
quarter. Contingency plans are in place to prevent the failure of critical
systems from having a material effect on the Company and address the risk of
third party noncompliance. Total costs to address the Year 2000 issue were not
material to the Company's financial position, results of operations or cash
flows.
Item 2. Properties.
The Company's corporate headquarters is located in Whitehouse Station,
New Jersey. The Company's pharmaceutical business is conducted through
divisional headquarters located in 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 provide services throughout the
country. 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.
Merck-Medco operates its primary businesses through its headquarters located in
Franklin Lakes, New Jersey, and through owned or leased facilities in various
locations throughout the United States.
Capital expenditures for 1999 were $2,560.5 million compared with
$1,973.4 million for 1998. In the United States, these amounted to $1,954.7
million for 1999 and $1,413.6 million for 1998. Abroad, such expenditures
amounted to $605.8 million for 1999 and $559.8 million for 1998.
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. In 1996, the Company and
several other defendants finalized an agreement to settle the federal class
action alleging conspiracy, which represents the single largest group of retail
pharmacy claims, pursuant to which the Company paid $51.8 million. Since that
time, the Company has entered into other settlements on satisfactory terms. The
Company has not engaged in any conspiracy and no admission of wrongdoing was
made nor was included in the final agreements. 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 materially 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
11
<PAGE>
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 materially 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 August 1998, the Company and Merck-Medco reached an
agreement with the FTC that resolves the investigation as to the Company and
Merck-Medco. The agreement formalizes the policies and practices the Company
and Merck-Medco voluntarily adopted over four years ago governing the operation
of their businesses. The agreement will not affect how the Company and Merck-
Medco currently compete in the marketplace, serve their customers or conduct
business with third parties. Accordingly, the Company does not believe that the
agreement will have a materially adverse effect on the Company's financial
position, liquidity or results of operations.
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 the
FTC in this investigation, and believes that it is currently operating in all
material respects in accordance with applicable standards. Accordingly, although
the Company cannot predict the outcome of this investigation, it does not
believe it will have a materially 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 materially 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 15, 2000)
RAYMOND V. GILMARTIN -- Age 59
June, 1994 -- Chairman of the Board (since November, 1994), President and
Chief Executive Officer
DAVID W. ANSTICE -- Age 51
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
PAUL R. BELL -- Age 54
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, Merck Sharp & Dohme Australia and New Zealand
RICHARD T. CLARK -- Age 54
January, 2000 -- President, Merck-Medco Managed Care, L.L.C., a wholly-owned
subsidiary of the Company
June, 1997 -- Executive Vice President/Chief Operating Officer, Merck-Medco
Managed Care, L.L.C.
April, 1997 -- Senior Vice President, Quality Commercial Affairs, Merck
Manufacturing Division (MMD)
May, 1996 -- Senior Vice President, North American Operations, MMD
October, 1994 -- Vice President, North American Operations, MMD
CELIA A. COLBERT -- Age 43
January, 1997 -- Vice President, Secretary and Assistant General Counsel
November, 1993 -- Secretary (since September, 1993) and Assistant General
Counsel
LINDA M. DISTLERATH -- Age 46
January, 1999 -- Vice President, Public Affairs -- responsible for public
affairs and The Merck Company Foundation (a not-for-profit charitable
organization affiliated with the Company)
October, 1997 -- Executive Director, Public Policy and Merck Research
Laboratories (MRL) Public Affairs
April, 1995 -- Executive Director, MRL Public Affairs
October, 1990 -- Senior Director, Science & Technology Policy -- responsible
for public policy strategies in support of the Company's research and
development programs
13
<PAGE>
CAROLINE DORSA -- Age 40
September, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions and for providing financial support
for the Asia Pacific Division
February, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions
January, 1997 -- Vice President and Treasurer
January, 1994 -- Treasurer
KENNETH C. FRAZIER -- Age 45
December, 1999 -- Senior Vice President and General Counsel -- responsible
for legal and public affairs functions and The Merck Company Foundation (a
not-for-profit charitable organization affiliated with the Company)
January, 1999 -- Vice President and Deputy General Counsel
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
RICHARD C. HENRIQUES JR. -- Age 44
February, 1999 -- Vice President, Controller -- responsible for the
Corporate Controller's Group and providing financial support for U.S. Human
Health, Canada and Latin America (The Americas)
January, 1998 -- Vice President & Controller, The Americas
January, 1997 -- Controller, The Americas
January, 1994 -- Controller, North America Pharmaceutical Care
BERNARD J. KELLEY -- Age 58
December, 1993 -- President, Merck Manufacturing Division
JUDY C. LEWENT -- Age 51
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 (since
January, 1993) -- responsible for financial and public affairs functions,
The Merck Company Foundation (a not-for-profit charitable organization
affiliated with the Company) (since December, 1993), internal auditing and
the Company's joint venture relationships
14
<PAGE>
PER G. H. LOFBERG -- Age 52
January, 2000 -- Chairman, Merck-Medco Managed Care, L.L.C., a wholly-owned
subsidiary of the Company
December, 1995 -- President, Merck-Medco Managed Care, L.L.C.
January, 1994 -- President, Merck-Medco Managed Care Division
ADEL MAHMOUD -- Age 58
May, 1999 -- President, Merck Vaccines
November, 1998 -- Executive Vice President, Merck Vaccines
Prior to November, 1998, Dr. Mahmoud was the John H. Hord Professor and
Chairman, Department of Medicine and Physician-in-Chief, Case Western
Reserve University and University Hospitals of Cleveland (1987-1998)
ROGER M. PERLMUTTER -- Age 47
July, 1999 -- Executive Vice President, Worldwide Basic Research and
Preclinical Development, Merck Research Laboratories (MRL)
February, 1999 -- Executive Vice President, MRL
February, 1997 -- Senior Vice President, MRL
Prior to February, 1997, Dr. Perlmutter was Professor and Chairman,
Department of Immunology, University of Washington (1989-1997) and
Investigator, the Howard Hughes Medical Institute (1991-1997)
EDWARD M. SCOLNICK -- Age 59
December, 1999 -- Executive Vice President, Science and Technology and
President, Merck Research Laboratories (MRL) -- responsible for worldwide
research function, computer resources and corporate licensing
September, 1994 -- Executive Vice President (since January, 1993), Science
and Technology and President, MRL (since May, 1985) -- responsible for
worldwide research function and activities of Merck Manufacturing Division
(since December, 1993), computer resources (since January, 1993) and
corporate licensing
PER WOLD-OLSEN -- Age 52
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
15
<PAGE>
WENDY L. YARNO -- Age 45
December, 1999 -- Senior Vice President, Human Resources
June, 1999 -- Vice President, Human Resources
January, 1999 -- Vice President, Worldwide Human Health Marketing
November, 1997 to January, 1999, Ms. Yarno was Vice President, Women's
Health Care, Johnson & Johnson, Ortho-McNeil Pharmaceutical (manufacturer
of pharmaceuticals)
January, 1995 to November, 1997 -- Vice President, Hypertension and Heart
Failure Therapeutic Business Group, U.S. Human Health
All officers listed above serve at the pleasure of the Board of
Directors. None of these officers was elected pursuant to any arrangement or
understanding between the officer and the Board, other than Mr. Gilmartin, whose
employment agreement with the Company expired on October 31, 1999
(and is included as an exhibit to this Form 10-K). Mr. Gilmartin continues to
serve in his capacity as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company. 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 41 and 58 of the Company's 1999 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 58
of the Company's 1999 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 31 through 41 of the Company's 1999 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 39 (under the caption "Analysis of Liquidity and Capital Resources") to 41
of the Company's 1999 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, 1999 and 1998, and the related consolidated statements of
income, retained earnings, comprehensive income and cash flows for each of the
three years in the period ended December 31, 1999 and the report dated January
26, 2000 of Arthur Andersen LLP, independent public accountants, are
incorporated by reference to pages 42 through 55 and page 56 of the Company's
1999 Annual Report to stockholders.
(b) Supplementary Data
Selected quarterly financial data for 1999 and 1998 are incorporated by
reference to the data contained in the Condensed Interim Financial Data table on
page 41 of the Company's 1999 Annual Report to stockholders.
16
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The required information on directors and nominees is incorporated by
reference to pages 2 (beginning with the caption "Election of Directors") to 6
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held April 25, 2000. Information on executive officers is set forth in Part I
of this document on pages 13 to 16. The required information on compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to page 29 (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 25, 2000.
Item 11. Executive Compensation.
The information required for this item is incorporated by reference to
page 8 (under the caption "Compensation of Directors"), and 10 (beginning with
the caption "Compensation and Benefits Committee Report on Executive
Compensation") through 19 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held April 25, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference to
pages 9 (under the caption "Security Ownership of Directors and Executive
Officers") to 10 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 25, 2000.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
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 1999 Annual Report to stockholders, as
noted on page 16 of this document:
Consolidated statement of income for the years ended December
31, 1999, 1998 and 1997
Consolidated statement of retained earnings for the years ended
December 31, 1999, 1998 and 1997
Consolidated statement of comprehensive income for the years
ended December 31, 1999, 1998 and 1997
Consolidated balance sheet as of December 31, 1999 and 1998
Consolidated statement of cash flows for the years ended December
31, 1999, 1998 and 1997
Notes to consolidated financial statements
17
<PAGE>
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 four consolidated subsidiaries.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of ***
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (May 6, 1992) Form 10-K Annual Report
for the fiscal year ended
December 31, 1992
3(b) -- Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation of Merck & Co., Inc. Form 10-K Annual Report for
(as amended January 14, 1999, effective the fiscal year ended
February 16, 1999) December 31, 1998
3(c) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) 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 on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1987 Incentive Stock Plan (as amended Incorporated by reference to
effective May 6, 1992) Form 10-K Annual Report
for the fiscal year ended
December 31, 1992
10(d) -- 1991 Incentive Stock Plan (as amended *
effective February 23, 1994)
10(e) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly
Report for the period
ended June 30, 1999
10(h) -- Supplemental Retirement Plan (as amended *
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to
Compensation (restated as of Form 10-Q Quarterly Report
June 1, 1999) for the period ended June 30,
1999
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 to
Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of
1993 Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
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 24, 1996 with Incorporated by reference to
respect to the Employment Agreement Form 10-Q Quarterly Report
between Per G.H. Lofberg and Merck-Medco for the period ended June 30, 1996
dated April 1, 1993 and amended July 27,
1993
10(o) -- Employment Agreement between Incorporated by reference to
Raymond V. Gilmartin and the Company Form 10-Q Quarterly Report
dated June 9, 1994 for the period ended June 30, 1994
10(p) -- Amended and Restated License and Option ***
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(q) -- KBI Shares Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(r) -- KBI-E Asset Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(s) -- KBI Supply Agreement dated as of ***
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(t) -- Second Amended and Restated Manufacturing ***
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(u) -- Limited Partnership Agreement dated as of ***
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(v) -- Distribution Agreement dated as of July 1, 1998 ***
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(w) -- Agreement to Incorporate Defined Terms dated ***
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
10(x) -- Stock Purchase Agreement between Incorporated by reference to
Raymond V. Gilmartin and the Company Form 10-Q Quarterly Report
dated June 16, 1999 for the period ended June 30, 1999
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 1999 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
23 -- Consent of Independent Public Accountants Contained on page 23 of
this Report
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
27 -- Financial Data Schedule Filed with this document
</TABLE>
______________
* Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1994
** Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1995
*** Incorporated by reference to Form 10-Q Quarterly Report for the period
ended June 30, 1998
**** 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.
20
<PAGE>
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, 1999, one Current
Report was filed on Form 8-K under Item 5 -- Other Events regarding the
Company's business briefing to analysts. This report was dated December 9, 1999
and filed December 16, 1999.
21
<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 22, 2000
By RAYMOND V. GILMARTIN
(Chairman of the Board,
President and Chief Executive Officer)
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
RAYMOND V. GILMARTIN Chairman of the Board, March 22, 2000
President and Chief Executive
Officer; Principal Executive
Officer; Director
JUDY C. LEWENT Senior Vice President and Chief March 22, 2000
Financial Officer; Principal
Financial Officer
RICHARD C. HENRIQUES JR. Vice President, Controller; March 22, 2000
Principal Accounting Officer
H. BREWSTER ATWATER JR. Director March 22, 2000
DEREK BIRKIN Director March 22, 2000
LAWRENCE A. BOSSIDY Director March 22, 2000
WILLIAM G. BOWEN Director March 22, 2000
CAROLYNE K. DAVIS Director March 22, 2000
LLOYD C. ELAM Director March 22, 2000
CHARLES E. EXLEY JR. Director March 22, 2000
WILLIAM B. HARRISON JR. Director March 22, 2000
WILLIAM N. KELLEY Director March 22, 2000
EDWARD M. SCOLNICK Director March 22, 2000
ANNE M. TATLOCK Director March 22, 2000
SAMUEL O. THIER Director March 22, 2000
DENNIS WEATHERSTONE Director March 22, 2000
</TABLE>
Celia A. Colbert, by signing her name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the persons named,
filed with the Securities and Exchange Commission as an exhibit to this
document, on behalf of such persons, all in the capacities and on the date
stated, such persons including a majority of the directors of the Company.
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
22
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 10-K of our report dated January 26, 2000 included in
the Company's Annual Report to stockholders for the fiscal year ended December
31, 1999, 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, 333-23295, 333-91769, 333-30526 and 333-31762), on Form S-4
(No. 33-50667) and on Form S-3 (Nos. 33-39349, 33-60322, 33-51785, 33-57421,
333-17045, 333-36383 and 333-77569). It should be noted that we have not audited
any financial statements of the Company subsequent to December 31, 1999 or
performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
New York, New York
March 22, 2000
23
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of ***
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (May 6, 1992) Form 10-K Annual Report
for the fiscal year ended
December 31, 1992
3(b) -- Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation of Merck & Co., Inc. Form 10-K Annual Report for
(as amended January 14, 1999, effective the fiscal year ended
February 16, 1999) December 31, 1998
3(c) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) 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 on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1987 Incentive Stock Plan (as amended Incorporated by reference to
effective May 6, 1992) Form 10-K Annual Report
for the fiscal year ended
December 31, 1992
10(d) -- 1991 Incentive Stock Plan (as amended *
effective February 23, 1994)
10(e) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly
Report for the period
ended June 30, 1999
10(h) -- Supplemental Retirement Plan (as amended *
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended June 30,
1996
10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to
Compensation (restated as of Form 10-Q Quarterly Report
June 1, 1999) for the period ended June 30,
1999
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 to
Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of
1993 Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
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 24, 1996 with Incorporated by reference to
respect to the Employment Agreement Form 10-Q Quarterly Report
between Per G.H. Lofberg and Merck-Medco for the period ended June 30, 1996
dated April 1, 1993 and amended July 27,
1993
10(o) -- Employment Agreement between Incorporated by reference to
Raymond V. Gilmartin and the Company Form 10-Q Quarterly Report
dated June 9, 1994 for the period ended June 30, 1994
10(p) -- Amended and Restated License and Option ***
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(q) -- KBI Shares Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(r) -- KBI-E Asset Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(s) -- KBI Supply Agreement dated as of ***
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(t) -- Second Amended and Restated Manufacturing ***
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(u) -- Limited Partnership Agreement dated as of ***
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(v) -- Distribution Agreement dated as of July 1, 1998 ***
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(w) -- Agreement to Incorporate Defined Terms dated ***
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
10(x) -- Stock Purchase Agreement between Incorporated by reference to
Raymond V. Gilmartin and the Company Form 10-Q Quarterly Report
dated June 16, 1999 for the period ended June 30, 1999
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 1999 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
23 -- Consent of Independent Public Accountants Contained on page 23 of
this Report
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
27 -- Financial Data Schedule Filed with this document
</TABLE>
_________________
* Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1994
** Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1995
*** Incorporated by reference to Form 10-Q Quarterly Report for the period
ended June 30, 1998
**** 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.
<PAGE>
Exhibit 12
MERCK & CO., INC. AND SUBSIDIARIES
Computation Of Ratios Of Earnings To Fixed Charges
--------------------------------------------------
(In millions except ratio data)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Before Taxes $8,619.5 $8,133.1 $6,462.3 $5,540.8 $4,797.2 $4,415.2
Add:
One-third of rents 66.7 56.0 47.0 41.0 28.1 36.0
Interest expense, net 236.4 150.6 98.2 103.2 60.3 96.0
Preferred stock dividends 120.7 62.1 49.6 70.0 2.1 -
-------- -------- -------- -------- -------- --------
Earnings $9,043.3 $8,401.8 $6,657.1 $5,755.0 $4,887.7 $4,547.2
======== ======== ======== ======== ======== ========
One-third of rents $ 66.7 $ 56.0 $ 47.0 $ 41.0 $ 28.1 $ 36.0
Interest expense 316.9 205.6 129.5 138.6 98.7 124.4
Preferred stock dividends 120.7 62.1 49.6 70.0 2.1 -
-------- -------- -------- -------- -------- --------
Fixed Charges $ 504.3 $ 323.7 $ 226.1 $ 249.6 $ 128.9 $ 160.4
======== ======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges 18 26 29 23 38 28
======== ======== ======== ======== ======== ========
</TABLE>
For purposes of computing these ratios, "earnings" consist of income before
taxes, 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>
EXHIBIT 13
- --------------------------------------------------------------------------------
Financial Section
- --------------------------------------------------------------------------------
Contents
Financial Review
Description of Merck's Business.................... 31
Competition and the Health Care Environment........ 31
Business Strategies................................ 32
Joint Ventures..................................... 32
Foreign Operations................................. 34
Operating Results.................................. 35
Environmental and Other Matters.................... 38
Capital Expenditures............................... 39
Analysis of Liquidity and Capital Resources........ 39
Recently Issued Accounting Standards............... 41
Cautionary Factors That May Affect Future Results.. 41
Condensed Interim Financial Data................... 41
Dividends Paid per Common Share.................... 41
Common Stock Market Prices......................... 41
Consolidated Statement of Income.......................... 42
Consolidated Statement of Retained Earnings............... 42
Consolidated Statement of Comprehensive Income............ 42
Consolidated Balance Sheet................................ 43
Consolidated Statement of Cash Flows...................... 44
Notes to Consolidated Financial Statements................ 45
Management's Report....................................... 56
Report of Independent Public Accountants.................. 56
Audit Committee's Report.................................. 57
Compensation and Benefits Committee's Report.............. 57
Selected Financial Data................................... 58
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) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Elevated cholesterol ....................................... $ 5,093.2 $ 4,694.1 $ 4,672.3
Hypertension/heart failure ................................. 4,563.8 4,213.5 3,855.0
Osteoporosis ............................................... 1,043.1 775.2 532.1
Anti-ulcerants ............................................. 913.9 1,113.5 1,184.4
Vaccines/biologicals ....................................... 860.0 846.7 733.6
Antibiotics ................................................ 772.3 743.3 774.9
Ophthalmologicals .......................................... 670.0 630.7 639.1
Human immunodeficiency
virus (HIV) ............................................... 664.4 676.3 581.7
Anti-inflammatory/analgesics ............................... 578.5 98.0 116.0
Respiratory ................................................ 501.8 194.0 .4
Animal health/crop protection .............................. -- -- 550.0
Other Merck products ....................................... 1,820.6 1,311.2 557.1
Merck-Medco ................................................ 15,232.4 11,601.7 9,440.3
- ---------------------------------------------------------------------------------------------------------------------
$ 32,714.0 $ 26,898.2 $ 23,636.9
=====================================================================================================================
</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
products among this group, Cozaar, Hyzaar, Prinvil and Vaseretic; osteoporosis,
comprised of Fosamax, for treatment and prevention in postmenopausal women;
anti-ulcerants, of which Pepcid is the largest-selling; vaccines/biologicals, of
which M-M-R II, a pediatric vaccine for measles, mumps and rubella, Varivax, a
live virus vaccine for the prevention of chickenpox, and Recombivax HB
(hepatitis B vaccine recombinant), are the largest-selling; antibiotics, of
which Primaxin and Noroxin are the largest-selling; ophthalmologicals, of which
Timoptic, Timoptic-XE, Trusopt and Cosopt are the largest-selling; HIV, which
includes Crixivan, a protease inhibitor for the treatment of human
immunodeficiency viral infection in adults; anti-inflammatory/analgesics, of
which Vioxx, an agent that specifically inhibits COX-2, is the largest-selling;
and respiratory, comprised of Singulair, a leukotriene receptor antagonist.
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 (now Aventis) 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, pharmaceutical and animal health supply
sales to the Company's joint ventures and, as of July 1, 1998, supply sales to
AstraZeneca LP (AZLP). (See Note 4 to the consolidated financial statements for
further information.) 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 sales of prescription
drugs through managed prescription drug programs, as well as services provided
through programs to manage patient 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 conducts its business are highly competitive
and often highly regulated. Global efforts toward health care cost containment
continue to exert pressure on product pricing and availability. In the United
States, the Company has been working with private and government employers to
slow the increase of health care costs. Demonstrating that the Company's
medicines can help save costs in other areas and pricing flexibly across our
product portfolio have encouraged growing use of our medicines and helped offset
the effects of increasing cost pressures. Legislative bodies continue to work to
expand health care access and reduce associated costs. Such initiatives include
prescription drug benefit proposals for Medicare participants introduced in the
U.S. Congress. Although no one can predict the outcome of this and
Merck & Co., Inc. 1999 Annual Report Financial Section 31
<PAGE>
- --------------------------------------------------------------------------------
other legislation, we are well positioned to respond to the evolving health care
environment and market forces.
Outside of the United States, in difficult environments encumbered by
government cost containment actions, the Company has worked with payers to help
them allocate scarce resources to optimize health care outcomes, limiting the
potentially detrimental effects of government actions on sales growth. In
addition, countries within the European Union (EU), recognizing the economic
importance of the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry and the European Com-
mission on proposals for market deregulation.
Several products face expiration of product patents in the near term. U.S.
product patents will expire for Vasotec and Pepcid in 2000 and for Prilosec,
which is supplied exclusively to AZLP, Prinivil, for which co-marketing rights
have been licensed to a third party, Mevacor, Vaseretic and Prinzide in 2001. In
the aggregate, domestic sales of these products represent 22% of Merck human
health sales for 1999. The Company expects a significant decline in these sales
in the years 2000 through 2002 upon the loss of market exclusivity. With the
exception of Prilosec, for which the Company has U.S. rights only, a decline is
also expected in the Company's European sales for these products in the years
2000 through 2005 upon the loss of market exclusivity in European countries
throughout this period. European sales of these products represent 5% of Merck
human health sales for 1999. While the expiration of a product patent normally
results in a loss of market exclusivity, commercial benefits may continue to be
derived from other patents, for example, patents on processes, intermediates,
compositions, uses and formulations related to the product, and, in the United
States, additional market exclusivity that may be available under federal law.
The U.S. Food and Drug Administration (FDA) recently granted an additional six
months of U.S. market exclusivity to Vasotec for all its uses, based upon
studies performed by the Company for pediatric use.
We anticipate that the worldwide trend toward cost-containment will
continue into the new millennium, resulting in ongoing pressures on health care
budgets. As we continue to launch new products successfully, contribute to
health care debates and monitor reforms, our new products, policies and
strategies will enable us to maintain our strong position in the changing eco-
nomic environment.
Business Strategies
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. Productivity initiatives include, at the manufacturing level,
optimizing plant utilization, implementing lowest-cost processes and improving
technology transfer between research and manufacturing, and throughout the
Company, reducing the cost of purchased materials and services, re-engineering
core and administrative processes and streamlining the organization. At the
manufacturing level, the Company expects that productivity gains will continue
to substantially offset inflation.
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. Merck-Medco manages prescription drug programs through its mail
service and retail pharmacy networks, and offers a series of health management
programs to help payers, providers and patients manage high-risk, high-cost
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.
Joint Ventures
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.
(AMI), in which Merck and Astra each owned a 50% share. The joint venture,
formed in November 1994, developed and marketed most of Astra's new prescription
medicines in the United States. Joint venture sales were $1.7 billion for the
first six months of 1998 and $2.3 billion for 1997, 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.
On July 1, 1998, Merck and Astra completed the restructuring of the
ownership and operations of the joint venture whereby the Company acquired
Astra's interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1
billion, including approximately $700.0 million in cash and assumption of a $2.4
billion preferred stock obligation to Astra. The restructuring provided Astra
with the flexibility to develop global operations, pursue strategic alliances
and manage the U.S. business, free of the restrictions imposed by the prior AMI
joint venture agreement, while preserving the Company's interests and rights to
the U.S. sales of current and future Astra products. As a result of the
acquisition,the Company fully owned KBI's operating assets and the license
rights to make, have made, import, use and sell the existing and future U.S.
pharmaceutical compounds of Astra. The Company then contributed KBI's operating
assets of $644.3 million, including a $598.0 million step-up in carrying value,
to a new U.S. limited partnership, named Astra Pharmaceuticals L.P. (the
Partnership) in exchange for a 1% limited partner interest. The contributed
assets included KBI's workforce, operating facility, trademarks and information
systems. Astra contributed the net assets of its wholly owned subsidiary,Astra
USA, Inc., to the Partnership in exchange for a 99% general partner interest.
For a franchise fee payment of $230.0 million, the Partnership became the
exclusive distributor of the products for which KBI retained rights. The
Partnership was renamed AstraZeneca LP (AZLP) upon Astra's 1999 merger with
Zeneca Group Plc (the AstraZeneca merger), discussed later.
Merck's acquisition of Astra's interest in KBI for $3.1 billion was
accounted for under the purchase method. In addition to the 50% step-up in
carrying value of KBI's operating assets, purchase
32 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
price allocations resulted in the recognition of goodwill totaling $825.9
million which is being amortized on a straight-line basis over 20 years and
other intangibles, principally the retained U.S. patent rights on in-line
products totaling $978.0 million, which are being amortized on a straight-line
basis over 10 years. In connection with the acquisition of the remaining 50% of
the license rights to product candidates within Astra's research pipeline, the
Company recorded a $1.04 billion charge for acquired research associated with 10
product candidates in Phase II or later stages of development and U.S. rights to
research projects which had not yet entered Phase II. At the acquisition date,
technological feasibility for the product candidates and the pre-Phase II
research projects had not been established and no alternative future use
existed. The product candidates were in various therapeutic categories,
principally gastrointestinal (comprising over 50% of the charge for Phase II or
later stages), respiratory and neurological, with projected FDA approval dates
in the years 1999 through 2005. None of these future products is individually
material to the Company. The fair value of the acquired research was determined
based upon the present value of each product's projected future cash flows,
utilizing an income approach reflecting the appropriate cost of capital. Future
cash flows were predominately based on net income forecasts for each product
consistent with historical pricing, margins, and expense levels for similar
products. Revenues were estimated based on relevant market size and growth
factors, expected industry trends, individual product life cycles, and the life
of each product's underlying patent. The implied risk adjusted discount rates
applied to projected cash flows were based on the Company's weighted average
cost of capital, the useful life of each product, the applicable product's stage
of completion, as well as its probability of technical and marketing success,
and averaged 26%, with a range of 12% to 37%. A cost approach was also utilized
to corroborate the values determined under the income approach. In applying the
cost approach, consideration was given to the level of research and development
expenditures within Astra, the appropriate required rates of return within the
market place and the cost of reproduction for the acquired assets. Both of these
approaches are appropriate under generally accepted valuation methods and
yielded similar results. The research projects considered in the valuation are
all subject to the normal risks and uncertainties associated with demonstrating
the safety and efficacy required to obtain timely FDA approval. While Merck will
benefit from future revenues of successful product candidates, AZLP and Astra
will bear all costs to complete the development of these products, unless AZLP
elects not to pursue a particular product candidate, at which time the Company
would bear further development costs at its discretion. Overall, the incremental
revenue and partnership returns arising from this transaction, net of increased
amortization and dividends on KBI's preferred stock obligation to Astra, are
expected to have a favorable impact on future results of operations and cash
flows.
While maintaining a 1% limited partner interest in AZLP, Merck enjoys
consent and protective rights intended to preserve its business and economic
interests, including restrictions on the power of the general partner to make
certain distributions or dispositions. Furthermore, in limited events of
default, additional rights will be granted to the Company, including powers to
direct the actions of, or remove and replace, the Partnership's chief executive
officer and chief financial officer. Merck earns certain Partnership returns,
which are recorded as Equity income from affiliates, as well as ongoing revenue
based on sales of current and future KBI products. The Partnership returns
reflect Merck's share of AZLP earnings in conformity with accounting principles
generally accepted in the United States (GAAP earnings) and include a
preferential return, a priority return and other variable returns which are
based, in part, upon sales of certain former Astra USA, Inc. products. The
preferential return represents Merck's share of the undistributed AZLP GAAP
earnings which is expected to approximate $275.0 million annually through 2008.
The priority return is an amount provided for in the Partnership agreement that
varies based upon the fiscal year, applicable income tax rates and the
occurrence of a partial redemption of our limited partner interest. We expect
this return to approximate $300.0 million annually, subject to availability of
sufficient Partnership profits. The AstraZeneca merger triggers a partial
redemption of Merck's limited partner interest in 2008, reducing this amount to
approximately $210.0 million annually at that time. Upon the partial redemption
of the Company's limited partner interest, AZLP will distribute to KBI an amount
based primarily on a multiple of Merck's annual revenue derived from sales of
the former Astra USA, Inc. products for the three years prior to the redemption
(the Limited Partner Share of Agreed Value).
For a payment of $443.0 million, Astra purchased an option to buy Merck's
interest in the KBI products, excluding the gastrointestinal medicines Prilosec
and esomeprazole, in 2008, 2012 or 2016 (the Asset Option) at an exercise price
based primarily on a multiple of Merck's annual revenue derived from the KBI
products for the three years prior to exercise. As a result of the AstraZeneca
merger, the Asset Option is now only exercisable in 2010 at an exercise price
equal to the net present value as of March 31,2008 of projected future pretax
revenue to be received by the Company from the KBI products (the Appraised
Value). Merck now also has the right to require Astra to purchase such interest
in 2008 at the Appraised Value. The Company also granted Astra an option to buy
Merck's common stock interest in KBI, at an exercise price based on the net
present value of estimated future net sales of Prilosec and esomeprazole (the
Shares Option). This option is exercisable only after Astra's purchase of
Merck's interest in the KBI products. Generally,the Shares Option was not
exercisable before 2017,but as a result of the AstraZeneca merger, is now
exercisable two years after Astra's purchase of Merck's interest in the
KBI products.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB
(AstraZeneca), which constituted a Trigger Event under the KBI restructuring
agreements. As a result of the merger,Astra was required to make two one-time
payments to Merck totaling approximately $1.8 billion. In exchange for Merck's
relinquishment of rights to future Astra products with no existing or pending
U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance
Payment), which is subject to a true-up calculation in 2008 that may require
repayment of all or a portion of this amount. The amount determined by the true-
up calculation (the True-Up Amount) cannot reasonably be estimated because it is
directly dependent on the fair market value in 2008 of the Astra product rights
retained by the Company which extend to compounds currently in development as
well as compounds that have not yet entered development. Accordingly,
recognition of this contingent income has been deferred until the realizable
amount, if any, is determinable, which is not anticipated prior to 2008.
Merck & Co., Inc. 1999 Annual Report Financial Section 33
<PAGE>
In connection with the Company's acquisition of Astra's interest in KBI,
Merck agreed to relinquish rights to the pharmaceutical products of any company
that would merge with or acquire Astra. These rights, which protected the value
of KBI's perpetual interest in Astra's pipeline, were relinquished in exchange
for a payment (the Lump Sum Payment) to be made in the event of the merger or
acquisition of Astra. The Company estimated that it was entitled to receive a
Lump Sum Payment of $822.0 million as the result of the AstraZeneca merger. In
the second quarter of 1999, Astra paid $712.5 million of the Lump Sum Payment
and disputed its obligation to pay the remainder. At December 31, 1999, the
Company was in arbitration seeking to enforce its rights under the agreement
with respect to the disputed amount. Although Merck retains an interest in
current and future Astra products with an existing or pending U.S. patent, this
merger effectively curtailed the Company's perpetual interest in Astra's
pipeline and, thus, reduced the going concern value acquired in 1998.
Accordingly, one-half of the expected payment was an adjustment to the purchase
price Merck paid for Astra's one-half interest in KBI, reducing goodwill by
$411.0 million, less 50% of a reserve relating to disputed proceeds. The balance
represents compensation to the Company for the reduction of the value of its
original one-half interest in KBI and was recorded in Other (income) expense,
net. Because the reduction in goodwill is not tax-effected and the Lump Sum
Payment is fully taxable, this transaction, net of a reserve relating to
disputed proceeds, yielded an after-tax gain of $74.6 million. Subsequent to
year end, the arbitration was concluded and a final decision was rendered,
pursuant to which the Company received $87.2 million of the disputed proceeds
plus interest, which will be accounted for in the first quarter of 2000 .
Under the provisions of the KBI restructuring agreements, because a Trigger
Event has occurred, the sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7
billion. Distribution of the Limited Partner Share of Agreed Value and payment
of the True-Up Amount will occur in 2008. AstraZeneca's purchase of Merck's
interest in the KBI products is contingent upon the exercise of either Merck's
option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.
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 joint venture products were as follows:
1999 1998 1997
- -----------------------------------------------------------------------------
Gastrointestinal products ............... $ 359.3 $ 387.2 $ 386.3
Other products .......................... 128.1 127.0 97.4
- -----------------------------------------------------------------------------
$ 487.4 $ 514.2 $ 483.7
=============================================================================
In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an
independent, research-driven, worldwide pharmaceutical joint venture, The DuPont
Merck Pharmaceutical Company (DMPC), equally owned by each party. Joint venture
sales were $686.2 million for the first six months of 1998 and $1.3 billion for
1997, consisting primarily of cardiovascular, radiopharmaceutical and central
nervous system products. On July 1, 1998, the Company sold its one-half interest
in DMPC to DuPont for $2.6 billion in cash. (See Note 3 to the consolidated
financial statements for further information.)
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established a 50% owned joint venture to market vaccines and collaborate in the
development of combination vaccines, for distribution in Europe. Sales of joint
venture products were as follows:
1999 1998 1997
- -------------------------------------------------------------------
Hepatitis vaccines......................... $ 159.6 $189.0 $216.2
Viral vaccines............................. 68.6 64.6 63.3
Other vaccines............................. 338.6 306.8 301.8
- -------------------------------------------------------------------
$ 566.8 $560.4 $581.3
===================================================================
In August 1997, Merck and Rhone-Poulenc (now Aventis) 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. Aventis contributed research and
development, manufacturing, sales and marketing activities, and animal health
products as well as its poultry genetics business. Animal health sales reported
in Merck's 1997 consolidated sales were $448.3 million prior to August 1. Sales
of joint venture products were as follows:
1999 1998 1997
- ---------------------------------------------------------------------------
Avermectin products...................... $ 564.9 $ 616.4 $ 308.6
Fipronil products........................ 316.0 300.8 83.1
Other products........................... 799.2 842.2 354.6
- ---------------------------------------------------------------------------
$ 1,680.1 $ 1,759.4 $ 746.3
===========================================================================
Foreign Operations
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales of Merck human health products by subsidiaries
outside the United States were 40% of Merck human health sales in 1999, and 43%
and 46% in 1998 and 1997, respectively. The 1999 and 1998 percentages were
affected by increased domestic supply sales to AZLP, as a result of the
restructuring of AMI.
Distribution of 1999 Foreign Human Health Sales
Splits
------
Western Europe 51%
Asia/Pacific 27%
Other Foreign 22%
------
Total 100%
The Company's worldwide business is subject to risks of currency
fluctuations and governmental actions. The Company does not regard these risks
as a deterrent to further expansion
34 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
of its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
Within the EU, there has been an evolution toward a single market in
pharmaceuticals, for which Economic and Monetary Union, including the adoption
of the euro as a single currency, marks an important step. The Company has
recognized the strategic significance of this development and adopted the euro
in 1999. In this way, we are demonstrating our support for the European
Community's industrial policy, while working toward the EU's goal of a
competition-driven market that will enhance access to quality healthcare for
European citizens.
In recent years, Merck has been expanding its operations in countries located
in Latin America, the Middle East, Africa, 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
sometimes less stable, offer important opportunities for growth over time.
Operating Results
Total sales for 1999 increased 22% in total and 17% on a volume basis from
1998, including a two point increase attributable to supply sales to AZLP, as a
result of the 1998 restructuring of AMI. Foreign exchange had less than a one
point unfavorable effect on 1999 sales growth. Total sales for 1998 increased
14% from 1997, including a three point benefit attributable to the AMI
restructuring. Foreign exchange reduced 1998 sales growth by two percentage
points. Sales growth for 1998 was affected by the 1997 formation of the Merial
joint venture and the divestiture of the crop protection business. Adjusting for
these effects, 1998 sales grew 16% in total and 13% on a volume basis.
Components of Human Health Sales Growth
Total Sales Sales Volume Net Pricing Foreign
Growth Growth Actions Exchange Rates
----------- ------------ ----------- --------------
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
1998 10.9 14.1 -- -3.2
1999 15.3 16.1 -0.1 -0.7
This chart illustrates the effects of price, volume and exchange on sales of
Merck human health products. Growth for 1995 has been adjusted for the effect of
the Astra Merck joint venture formation. Growth for 1999 and 1998 includes a
three and five point increase, respectively, attributable to the 1998 AMI
restructuring. 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 1999, sales of Merck human health products grew 15%, including a three
point increase attributable to the 1998 restructuring of AMI. Foreign exchange
rates had a one 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 21%, including a six point increase attributable to the restructuring of
AMI, while foreign sales grew 8% including a two percentage point unfavorable
effect from exchange. The unit volume growth from sales of Merck human health
products was driven by established products, including Zocor and Prinivil, as
well as newer products, including Fosamax, Cozaar, Hyzaar, Singulair, Propecia,
Maxalt, Aggrastat and the 1999 launch of Vioxx.
Zocor, one of Merck's cholesterol-lowering agents, continued to show strong
growth. In 1999, it was the world's leading statin medicine and became the first
statin approved by the FDA to raise levels of "good" cholesterol (HDL) in people
with high levels of "bad" cholesterol (LDL). Newly published studies have
confirmed that low HDL levels are a significant cardiovascular risk factor, and
Zocor has been shown to increase HDL by 8% to 16% in patients who also have high
LDL cholesterol. New analyses of data from the 1994 Landmark Scandinavian
Simvastatin Survival Study show that Zocor helped reduce death from heart
disease by 55% in people with diabetes who have high LDL levels.
Prinivil,one of Merck's angiotensin converting enzyme (ACE) inhibitors for
high blood pressure, heart failure and other cardiovascular disorders, recorded
strong growth in 1999. The drug offers a key competitive advantage of convenient
once-daily dosing for the treatment of hypertension, heart failure and acute
myocardial infarction.
In 1999, Fosamax, Merck's nonhormonal medicine to treat and prevent
postmenopausal osteoporosis and reduce the incidence of hip fractures, the most
serious fractures related to osteoporosis, continued to record strong growth and
continues to be the most widely prescribed medicine in the world for treatment
of postmenopausal osteoporosis. In November 1999, Merck presented results of a
study showing that a once-weekly formulation of Fosamax provides the same bone-
building benefit as once-daily treatment. Consumer research has shown that women
prefer the convenience of once-weekly therapy. The Company has submitted an
application to the FDA for approval of the once-weekly formulation. A study
presented in October 1999 to the American Society for Bone and Mineral Research
suggests that treatment with Fosamax may also be beneficial to men with
osteoporosis.
Cozaar, and its companion agent, Hyzaar (a combination of Cozaar and the
diuretic hydrochlorothiazide), are Merck's newest antihypertensive drugs and
rank among Merck's fastest-growing products. Cozaar is sold in more than 80
countries and Hyzaar in more than 60. Together they are the world's most widely
prescribed drugs in the angiotensin II antagonists class. In the United States,
the Company initiated a "Get-to-Goal Guarantee" whereby patients on Cozaar who
fail to reach health improvement goals set by their physicians are reimbursed by
Merck for up to six months worth of treatment. Extensive clinical trials are
under way to investigate whether Cozaar improves survival and reduces disability
associated with hypertension, diabetic kidney disease and recent heart attacks.
Merck & Co., Inc. 1999 Annual Report Financial Section 35
<PAGE>
Singulair, Merck's once-a-day tablet for the treatment of chronic asthma in
adults and children age six and older, is the most widely prescribed leukotriene
receptor antagonist in the world. The product has been introduced in 71
countries. A study published in July 1999 by the British Medical Journal showed
that patients with chronic asthma who took Singulair in addition to their
inhaled steroid medicine were able to reduce their daily doses of inhaled
steroids by 47% (versus 30% taking a placebo) and still keep their asthma under
control. In addition, 40% (versus 29% taking a placebo) of these patients were
able to gradually stop taking inhaled steroids completely. The Company has filed
an application with the FDA to market a pediatric dosage form for children as
young as two. Studies are under way to test Singulair's effectiveness in
combating allergic rhinitis and as a hospital-based intravenous treatment for
acute asthma sufferers.
Propecia, the first and only tablet to treat male pattern hair loss, has been
introduced in the United States and 34 other countries. It offers men a highly
effective, generally well tolerated and easy-to-use option in managing hair loss
on the vertex and anterior mid-scalp. In the United States, about 600,000 men
have taken it for male pattern hair loss. Research has proven that Propecia
regrows natural hair in about two out of three men who take it and maintains
existing hair in about five out of six. Innovative advertising and promotional
campaigns have been designed to keep Propecia on the minds of potential
customers who could benefit from this treatment.
Maxalt, Merck's treatment for acute migraine headaches in adults, continues to
make solid gains in the United States and 24 other countries where it is
available. In 1999, it was the fastest growing oral migraine medication in the
U.S. and European markets. Maxalt provides fast and effective relief of the
debilitating headache pain and other symptoms such as nausea and sensitivity to
light and noise that often accompany a migraine attack. Maxalt is the first and
only migraine medicine in the United States available in both conventional
tablets and convenient, rapidly dissolving oral wafers, which disintegrate
within seconds on the tongue without liquids.
Aggrastat, a member of a new class of drugs known as glycoprotein IIb/IIIa
antagonists, is used to treat patients with unstable angina and non-Q-wave
myocardial infarction, otherwise known as a "small" heart attack. Aggrastat
reduces the risk of heart attack by 47% within the first seven days of an
episode and 30% within the first month. Aggrastat has gained steadily in the
IIb/IIIa antagonist market by targeting hospitals in the United States that
treat the vast majority of patients with acute coronary syndrome. About 70% of
those targeted have added Aggrastat to their formularies.
In May 1999, following a six-month priority review, the FDA cleared Vioxx,
Merck's once-daily agent that specifically inhibits COX-2, for relief of the
signs and symptoms of osteoarthritis, management of acute pain in adults and
treatment of menstrual pain. With its product profile for strength, safety and
once-daily simplicity, Vioxx remains the country's fastest growing prescription
arthritis medicine. In the product's first seven months, U.S. physicians wrote
more than five million prescriptions. Vioxx is also enjoying success in the 47
other countries in which it has been launched. Vioxx was the first agent that
specifically inhibits COX-2 to receive mutual recognition approval for marketing
in all of the European Union countries and quickly became the most successful
pharmaceutical launch in the United Kingdom after its introduction. In September
1999, Merck entered into an agreement with a leader in dental products to co-
promote Vioxx to U.S. dentists, periodontists and oral surgeons. The Company is
conducting extensive clinical studies with Vioxx to evaluate its efficacy in the
treatment of rheumatoid arthritis and in the prevention and treatment of
Alzheimer's disease. Merck also has begun studies in patients with colon polyps
- - a broad population at risk of developing colon cancer. Reducing the number of
these polyps may reduce the incidence of colon cancer.
A group of mature products, including Pepcid, Mevacor, Vasotec, Timoptic and
Noroxin, while still contributing to 1999 revenues, declined in unit volume due
to generic and therapeutic competition.
In 1998, sales of Merck human health products grew 11%, including a five point
increase attributable to the restructuring of AMI. Foreign exchange rates had a
three percentage point unfavorable effect on sales growth, while price changes
had essentially no effect. Domestic sales growth was 17%, including a nine point
increase attributable to the restructuring of AMI, while foreign sales grew 4%
including a seven percentage point unfavorable effect from exchange. The unit
volume growth from sales of Merck human health products was paced by established
products, including Zocor, Prinivil, Proscar and M-M-R II, newer products,
including Cozaar, Hyzaar, Fosamax, Crixivan, Varivax, Vaqta, Comvax and Trusopt,
as well as the 1998 product launches of Singulair, Propecia, Maxalt, Cosopt and
Aggrastat.
Merck-Medco sales contributed significantly to 1999 and 1998 sales growth. By
continuing to invest in the development of important clinical programs,
including high-cost, high-risk diseases, enhanced information management systems
and communications technologies, including Internet initiatives, Merck-Medco has
strengthened its leadership position in managing prescription drug care. By
year-end, more than 700,000 plan members had logged on to the Company's Internet
web site (merckmedco.com) and Company mail service pharmacies were dispensing
about 250,000 prescriptions monthly that members had ordered online. The number
of prescriptions managed by Merck-Medco grew to more than 370 million in 1999,
up 16% from 322 million prescriptions in 1998.
Costs, Expenses and Other
- --------------------------------------------------------------------------
($ in millions) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------
Materials and
production......... $17,534.2 +26% $13,925.4 +18% $11,790.3
Marketing and
administrative..... 5,199.9 +15% 4,511.4 + 5% 4,299.2
Research and
development........ 2,068.3 +14% 1,821.1 + 8% 1,683.7
Acquired research..... 51.1 -95% 1,039.5 * --
Equity income
from affiliates.... (762.0) -14% (884.3) +21% (727.9)
Gains on sales
of businesses...... -- * (2,147.7) * (213.4)
Other (income)
expense, net....... 3.0 -99% 499.7 +46% 342.7
- --------------------------------------------------------------------------
$24,094.5 +28% $18,765.1 + 9% $17,174.6
==========================================================================
* 100% or greater
In 1999, materials and production costs increased 26%, compared to a 22% sales
growth rate. 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. Excluding the effect of exchange and inflation, these costs increased
17%, the same as the unit sales volume growth in 1999.
36 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
In 1998, materials and production costs increased 18%. Adjusting for the effects
of the 1997 formation of the Merial joint venture and the sale of the crop
protection business, materials and production costs increased 19%, compared to a
16% sales growth rate on the same basis. Adjusting for the aforementioned
effects, and excluding exchange and inflation, these costs increased 12%,
compared to a 13% unit sales volume gain in 1998.
Marketing and administrative expenses increased 15% in 1999. Excluding the
effect of exchange and inflation, these expenses increased 13%, including a 10
point increase attributable to marketing expenses, primarily in support of
recent product launches including the 1999 launch of Vioxx. Marketing and
administrative expenses increased 5% in 1998. Adjusting for the effects of the
1997 formation of the Merial joint venture and the sale of the crop protection
business, these expenses increased 9%. Adjusting for the aforementioned effects,
and excluding exchange and inflation, these expenses also increased 9%,
primarily due to the commitment of resources to support recent product launches,
including five new products in 1998, expansion of sales forces in the United
States and several key international markets, and investments in information
technology initiatives by Merck-Medco. Marketing and administrative expenses as
a percentage of sales were 16% in 1999, 17% in 1998 and 18% in 1997. The
improvement in these ratios primarily reflects the lower growth of marketing and
administrative costs relative to Merck-Medco sales growth.
Research and development expenses increased 14% in 1999. Excluding the effect
of exchange and inflation, these expenses increased 10%. Research and
development expenses increased 8% in 1998. Adjusting for the effects of the 1997
formation of the Merial joint venture and sale of the crop protection business,
these expenses increased 10%. Adjusting for the aforementioned effects, and
excluding the effects of exchange and inflation, these expenses increased 8%.
Research and development in the pharmaceutical industry is inherently a long-
term process. The following data show an unbroken trend of year-to-year
increases in research and development spending. For the period 1990 to 1999, the
compounded annual growth rate in research and development was 11%. Research and
development expenses for 2000 are estimated to approximate $2.4 billion.
R&D Expenditures
---------------------
($ in millions)
Year Total R&D Expenditures
---- ----------------------
1990 $ 854
1991 988
1992 1,112
1993 1,173
1994 1,231
1995 1,331
1996 1,487
1997 1,684
1998 1,821
1999 2,068
In 1999, in connection with the acquisition of SIBIA Neurosciences, Inc.
(SIBIA), the Company recorded a pretax and after-tax charge of $51.1 million for
acquired research associated with specific research projects for which, at the
acquisition date, technological feasibility had not been established and no
alternative future use existed. (See Note 3 to the consolidated financial
statements for further information.)
In 1998, in connection with the restructuring of AMI, the Company recorded a
$1.04 billion charge for acquired research associated with 10 product candidates
in Phase II or later stages of development and U.S. rights to future Astra
products which had not yet entered Phase II, and for which, at the acquisition
date, technological feasibility had not been established and no alternative
future use existed. (See Note 4 to the consolidated financial statements for
further information.)
Equity income from affiliates reflects the favorable performance of our
joint ventures, and beginning in the second half of 1998, partnership returns
from AZLP, which are recorded on a pretax basis, as well as the absence of
equity income from DMPC following the Company's third quarter 1998 sale of its
one-half interest.
The Company recorded a pretax gain of $2.15 billion ($1.25 billion after
tax) on the sale of its one-half interest in DMPC in the third quarter of 1998.
(See Note 3 to the consolidated financial statements for further information.)
This gain was substantially offset on an after-tax basis by a $1.04 billion
pretax and after-tax charge for acquired research in connection with the
restructuring of AMI and $338.6 million of pretax other charges ($193.1 million
after tax). These other charges,which are included in Other (income) expense,
net, were primarily for environmental remediation costs and asset write-offs,
principally deferred start-up costs which were expensed in accordance with the
Company's adoption of Statement of Position No. 98-5,"Reporting on the Costs of
Start-up Activities."
In 1997, the Company recorded a pretax 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 pretax charges included in Other (income) expense, net,
primarily for the loss on sale of assets, endowment of The Merck Company
Foundation and environmental remediation costs.
In 1999, other expense, net, decreased primarily due to $411.0 million of
income associated with the Lump Sum Payment from Astra, partially offset by a
reserve related to disputed proceeds and $110.0 million of charges, primarily
for endowment of both The Merck Company Foundation and The Merck Genome Research
Institute, as approved by the Board of Directors based on projected future
operating requirements of these organizations, and provisions for the settlement
of claims. Also contributing to the decrease was $77.9 million of income
resulting from the reversal of a restructuring reserve established in 1995 for
the anticipated 1999 closure of a manufacturing facility and the absence of
$338.6 million of charges recorded in 1998. These decreases were also partially
offset by higher interest expense, increased minority interest expense
reflecting a full year of dividends paid to Astra on preferred stock of a
subsidiary and a full year of amortization of goodwill and other intangibles
resulting from the 1998 restructuring of AMI. In 1998, other expense, net,
increased primarily due to the aforementioned $338.6 million of charges,
increased amortization of goodwill and other intangibles arising from the
restructuring of AMI, increased minority interest expense reflecting dividends
Merck & Co., Inc. 1999 Annual Report Financial Section 37
<PAGE>
paid to Astra on preferred stock of a subsidiary and higher interest expense.
This increase was partially offset by higher interest income benefiting from the
proceeds from the sale of the Company's one-half interest DMPC and $207.3
million of charges recorded in 1997, which sustantially offset the gain on the
sale of the crop protection business. (See Notes 4 and 14 to the consolidated
financial statements for further information.)
Earnings
- --------------------------------------------------------------------------------
($ in millions except
per share amounts) 1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Net income................. $ 5,890.5 +12% $5,248.2 +14% $4,614.1
As a % of sales......... 18.0% 19.5% 19.5%
As a % of average
total assets......... 17.5% 18.2% 18.5%
Earnings per
common share
assuming dilution....... $2.45 +14% $2.15 +15% $1.87
================================================================================
Net income was up 12% in 1999 and 14% in 1998. Net income as a percentage of
sales was 18.0% in 1999, compared to 19.5% in 1998 and 1997. The decline in the
ratio from 1998 is principally due to a higher growth rate in Medco's
historically lower-margin business and the commitment of resources to support
recent product launches, including the 1999 launch of Vioxx. Foreign currency
exchange had a one percentage point unfavorable effect as compared to a four
percentage point unfavorable effect in 1998. The Company's effective income tax
rate in 1999 was 31.7%, compared to 35.5% in 1998 and 28.6% in 1997. The lower
effective tax rate in 1999 was primarily driven by the absence of 1998
nonrecurring items, principally the nondeductibility of the acquired research
charge in connection with the restructuring of AMI and the state tax cost of the
gain on the sale of the Company's one-half interest in DMPC. This impact was
partially offset by the 1999 nondeductibility of both the goodwill write-off
resulting from the AstraZeneca merger and the acquired research charge in
connection with the SIBIA acquisition. The higher effective rate in 1998 versus
1997 principally relates to the aforementioned 1998 nonrecurring items. The
increased tax rate in 1998 substantially offset the growth in pretax income from
these items, resulting in no significant effect on net income growth. Net income
as a percentage of average total assets was 17.5% in 1999, 18.2% in 1998 and
18.5% in 1997. Earnings per common share assuming dilution grew 14% in 1999,
compared to 15% in 1998. In 1999 and 1998, earnings per common share assuming
dilution increased at a faster rate than net income as a result of treasury
stock purchases.
Distribution of 1999 Sales and Equity Income
--------------------------------------------
Splits
------
Raw Materials and Production Costs 52%
Operating Expenses 23%
Taxes and Net Interest 7%
Dividends 8%
Retained Earnings 10%
------
Total 100%
======
Environmental and Other Matters
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. In 1999, the Company incurred
capital expenditures of approximately $101.7 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $600.0 million for the years 2000 through 2004. In addition, the
Company's operating and maintenance expenditures for pollution control were
approximately $74.2 million in 1999. Expenditures for this purpose for the years
2000 through 2004 are forecasted to exceed $428.0 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. The
Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites and has taken an active role in
identifying and providing for these costs. In management's opinion, the
liabilities for all environmental matters which are probable and reasonably
estimable have been accrued. Expenditures for remediation and environmental
liabilities were $28.2 million in 1999, and are estimated at $232.0 million for
the years 2000 through 2004. These amounts do not consider potential recoveries
from insurers or other parties. Although it is not possible to predict with
certainty the outcome of these environmental matters, or the ultimate costs of
remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of those provided should result in a
materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources for any year. (See Note 9 to the
consolidated financial statements for further information.)
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
August 1998, the Company and Merck-Medco reached an agreement with the FTC which
resolves their portion of the investigation. The agreement formalizes the
policies and practices the Company and Merck-Medco voluntarily adopted over four
years ago governing the operation of their businesses. The agreement will not
affect how the Company and Merck-Medco currently compete in the marketplace,
serve their customers or conduct business with third parties. Accordingly, the
Company does not believe that the agreement will have a materially adverse
effect on the Company's financial position, results of operations or liquidity.
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 this investigation,
and believes that it is currently operating in all material respects in
accordance with applicable standards. While it is not feasible to predict or
determine the outcome of this investigation, management does not believe that it
should result in a materially adverse effect on the Company's financial
position, results of operations or liquidity.
The Company initiated a program in 1996 to assess the risks of Year 2000
noncompliance,remediate all non-compliant systems, assess the readiness of key
third parties and develop contingency plans. The critical aspects of the Year
2000 readiness program were completed in the third quarter of 1999. The Company
has
38 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
not experienced any significant business disruptions related to the transition
to the Year 2000; however, we will continue to actively monitor our systems and
third party suppliers throughout most of the first quarter. Contingency plans
are in place to prevent the failure of critical systems from having a material
effect on the Company and address the risk of third party noncompliance. Total
costs to address the Year 2000 issue were not material to the Company's
financial position, results of operations or cash flows.
Capital Expenditures
Capital expenditures were $2.6 billion in 1999 and $2.0 billion in 1998.
Expenditures in the United States were $2.0 billion in 1999 and $1.4 billion in
1998. Expenditures during 1999 included $1.0 billion for production facilities,
$664.5 million for research and development facilities, $101.7 million for envi-
ronmental projects, and $784.4 million for administrative, safety and general
site projects. Capital expenditures approved but not yet spent at December 31,
1999 were $2.5 billion. Capital expenditures for 2000 are estimated to be $2.8
billion.
Depreciation was $771.2 million in 1999 and $700.0 million in 1998, of which
$552.3 million and $512.3 million, respectively, applied to locations in the
United States.
Capital Expenditures
--------------------
($ in millions)
Year Capital Expenditures
---- --------------------
1990 $ 671
1991 1,042
1992 1,067
1993 1,013
1994 1,009
1995 1,005
1996 1,197
1997 1,449
1998 1,973
1999 2,561
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 1999, pretax cash
flows from operations were $8.6 billion, reflecting the continued growth of the
Company's earnings. This cash was used to fund capital expenditures of $2.6
billion, to pay Company dividends of $2.6 billion and to partially fund the
purchase of treasury shares. At December 31, 1999, the total of worldwide cash
and investments was $8.0 billion, including $3.2 billion in cash, cash
equivalents and short-term investments, and $4.8 billion of long-term
investments. The above totals include $1.2 billion in cash and investments held
by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership
interest.
Selected Data
- --------------------------------------------------------------------------------
($ in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Working capital........................... $ 2,500.4 $4,159.7 $2,644.4
Total debt to total liabilities
and equity............................. 16.8% 12.1% 8.7%
Cash provided by operations
to total debt.......................... 1.0:1 1.4:1 2.8:1
================================================================================
Working capital levels are more than adequate to meet the operating
requirements of the Company. Working capital in 1998 reflects proceeds of $2.6
billion from the sale of the Company's one-half interest in DMPC and $1.38
billion from the issuance of a long-term note to Astra. These proceeds were used
to fund a portion of the Company's stock repurchase program and for other
general corporate purposes.
Debt levels were affected by the issuance of $2.2 billion of commercial paper
borrowings in 1999 and the issuances of the $1.38 billion note to Astra and two
$500.0 million debentures in 1998, increasing the ratio of total debt to total
liabilities and equity. The ratio of cash provided by operations to total debt,
although impacted by these debt issuances, still reflects the ability of the
Company to cover its debt obligations.
In July 1998, the Board of Directors approved purchases of up to $5.0 billion
of Merck shares. From 1997 to 1999, the Company purchased $5.9 billion of
treasury shares under previously authorized completed programs, and $3.9
billion under the 1998 program. Total treasury stock purchased in 1999 was $3.6
billion. For the period 1990 to 1999, the Company has purchased 469.0 million
shares at a total cost of $16.7 billion. In February 2000, the Board of
Directors approved purchases of up to an additional $10.0 billion of Merck
shares.
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. In both February and November
1998, the Company issued $500.0 million of 30-year debentures under the shelf,
bearing coupons of 6.4% and 6.0%, respectively, payable semi-annually. The
remaining capacity under the shelf is $.7 billion at December 31, 1999. Also in
1997, the Company established a $1.5 billion Euro Medium Term Note program,
under which no securities have been issued. Proceeds from the sale of these
securities are to be used for general corporate purposes.
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. Merck relies on sustained cash flows generated from foreign sources
to support its long-term commitment to U.S. dollar-based research and develop-
ment. 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, Merck has
instituted balance sheet and revenue hedging programs to partially hedge this
risk.
Merck & Co., Inc. 1999 Annual Report Financial Section 39
<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. Merck seeks to fully hedge exposure denominated in developed country
currencies, primarily the euro, Japanese yen and Canadian dollar, 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. Merck 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 indicated that if the U.S. dollar uniformly
weakened by 10% against all currency exposures of the Company at December 31,
1999 and 1998, Income before taxes would have declined by $2.5 million and $53.9
million, respectively. Since Merck is in a net short position relative to its
major foreign currencies after consideration of forward contracts, a uniform
weakening of the U.S. dollar will yield the largest overall potential net loss
in earnings due to exchange. This measurement assumes that a change in one
foreign currency relative to the U.S. dollar would not affect other foreign
currencies relative to the U.S. dollar. Although not predictive in nature, the
Company believes that a 10% threshold reflects reasonably possible near-term
changes in Merck's major foreign currency exposures relative to the U.S. dollar.
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 from these contracts are reported as 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,
primarily the euro and Japanese yen. 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. Merck 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, the market value of
the Company's hedges would have declined by $86.7 million and $86.3 million,
respectively, from a uniform 10% weakening of the U.S. dollar at December 31,
1999 and 1998. The market value was determined using a foreign exchange option
pricing model and holding all factors except exchange rates constant. Since
Merck uses purchased local currency put options, a uniform weakening of the U.S.
dollar will yield the largest overall potential loss in the market value of
these options. The December 31, 1999 measurement included written euro put
options with terms identical to deep-in-the-money purchased put options. The
changes in market value of the written options equally offset market value
changes of the purchased options. The sensitivity measurement assumes that a
change in one foreign currency relative to the U.S. dollar would not affect
other foreign currencies relative to the U.S. dollar. Although not predictive in
nature, the Company believes that a 10% threshold reflects reasonably possible
near-term changes in Merck's major foreign currency exposures relative to 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 from these contracts are reported as 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 variable rate foreign currency denominated
investing transactions. Cross-currency interest rate swap contracts are used,
which, in addition to exchanging cash flows derived from interest rates on the
underlying financial instruments for those derived from interest rates inherent
in the contracts, exchange currencies at both inception and termination of the
contracts. These swap contracts allow the Company to receive variable rate
returns and limit foreign exchange risk. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement of Cash Flows.
The Company's investment portfolio is principally exposed to short- to medium-
term U.S. dollar fixed interest rates. The Company's debt portfolio is
principally exposed to medium- to long-term U.S. dollar fixed interest rates. A
sensitivity analysis to measure potential changes in the market value of the
Company's investments and debt from a change in interest rates indicated that a
one percentage point increase in interest rates at December 31, 1999 and 1998
would have positively impacted the net aggregate market value of these
instruments by $205.0 million and $424.8 million, respectively. A one percentage
point decrease at December 31, 1999 and 1998 would have negatively impacted the
net aggregate market value by $266.5 million and $616.6 million, respectively.
The fair value of the Company's debt was determined using pricing models
reflecting one percentage point shifts in the appropriate yield curves. The fair
value of the Company's investments was determined using a combination of pricing
and duration models. Whereas duration is a linear approximation that works well
for modest changes in yields and generates a symmetrical result,
40 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
pricing models reflecting the convexity of the price/yield relationship provide
greater precision and reflect the asymmetry of price movements for interest rate
changes in opposite directions. The impact of convexity is more pronounced in
longer-term maturities and low interest rate environments. The reduced
sensitivities at December 31, 1999 compared to the prior year were principally
due to the shorter weighted average maturity of the Company's debt portfolio and
higher interest rates.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at fair value and that changes in fair value be recognized
currently in earnings, unless specific hedge accounting criteria are met. In
June 1999, the FASB issued Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which delays the required adoption of FAS 133 to fiscal 2001.
The timing of adoption of FAS 133 and effect on the Company's financial position
or results of operations have not yet been determined.
Cautionary Factors That May Affect Future Results
This annual 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,"
"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.
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, 1999, which will be
filed in March 2000, 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 for the year ended December 31, 1999, reference should be made to Item
1 of the Company's annual report on Form 10-K for the year ended December 31,
1998. 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.
<TABLE>
<CAPTION>
Condensed Interim Financial Data
- ------------------------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales..................................... $ 8,963.4 $ 8,195.7 $ 8,018.2 $ 7,536.7
Materials and production
costs.................................. 4,644.0 4,365.9 4,370.2 4,154.2
Marketing/administrative
expenses............................... 1,588.6 1,272.7 1,184.4 1,154.3
Research/development
expenses............................... 627.9 516.0 482.7 441.8
Acquired research......................... -- 51.1 -- --
Equity income from
affiliates............................. (180.4) (227.1) (179.6) (174.8)
Other (income)
expense, net........................... 71.9 (17.6) (170.1) 118.4
Income before taxes....................... 2,211.4 2,234.7 2,330.6 1,842.8
Net income................................ 1,573.2 1,539.6 1,478.1 1,299.6
Basic earnings per
common share........................... $.68 $.65 $.63 $.55
Earnings per common
share assuming dilution................. $.66 $.64 $.61 $.54
- ------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------
Sales..................................... $7,530.7 $6,838.3 $6,470.4 $6,058.8
Materials and production
costs.................................. 3,762.3 3,544.1 3,383.4 3,235.6
Marketing/administrative
expenses............................... 1,370.2 1,087.2 1,058.8 995.1
Research/development
expenses............................... 541.2 450.4 441.0 388.5
Acquired research......................... -- 1,039.5 -- --
Equity income from
affiliates............................. (176.6) (210.5) (271.1) (226.1)
Gains on sales of
businesses............................. -- (2,147.7) -- --
Other (income)
expense, net........................... 77.1 360.0 32.2 30.5
Income before taxes....................... 1,956.5 2,715.3 1,826.1 1,635.2
Net income................................ 1,400.7 1,367.0 1,316.1 1,164.4
Basic earnings per
common share........................... $.60 $.57 $.55 $.49
Earnings per common
share assuming dilution................ $.58 $.56 $.54 $.47
============================================================================================
</TABLE>
In the chart above, amounts for the third and fourth quarters of 1998 were
affected by the restructuring of the ownership and operations of AMI and the
sale of the Company's one-half interest in DMPC.
<TABLE>
<CAPTION>
Dividends Paid per Common Share
- --------------------------------------------------------------------------------
Year 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999......................... $1.10 $.29 $.27 $.27 $.27
1998......................... .94 1/2 .27 .22 1/2 .22 1/2 .22 1/2
================================================================================
<CAPTION>
Common Stock Market Prices
- --------------------------------------------------------------------------------
1999 4th Q 3rd Q 2nd Q 1st Q
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High......................... $81 1/8 $75 15/16 $85 1/16 $87 3/8
Low.......................... 64 1/2 60 15/16 66 67 15/32
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
High......................... $80 7/8 $69 9/16 $67 1/8 $66 13/32
Low.......................... 60 13/16 57 1/2 55 3/4 50 11/16
================================================================================
</TABLE>
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
Merck & Co., Inc. 1999 Annual Report Financial Section 41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ............................................................................... $ 32,714.0 $ 26,898.2 $ $23,636.9
- -----------------------------------------------------------------------------------------------------------------------------------
Costs, Expenses and Other
Materials and production ............................................................ 17,534.2 13,925.4 11,790.3
Marketing and administrative ........................................................ 5,199.9 4,511.4 4,299.2
Research and development ............................................................ 2,068.3 1,821.1 1,683.7
Acquired research ................................................................... 51.1 1,039.5 --
Equity income from affiliates ....................................................... (762.0) (884.3) (727.9)
Gains on sales of businesses ........................................................ -- (2,147.7) (213.4)
Other (income) expense, net ......................................................... 3.0 499.7 342.7
- -----------------------------------------------------------------------------------------------------------------------------------
24,094.5 18,765.1 17,174.6
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes ................................................................. 8,619.5 8,133.1 6,462.3
Taxes on Income ..................................................................... 2,729.0 2,884.9 1,848.2
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income .......................................................................... $ 5,890.5 $ 5,248.2 $ 4,614.1
===================================================================================================================================
Basic Earnings per Common Share ..................................................... $2.51 $2.21 $1.92
===================================================================================================================================
Earnings per Common Share Assuming Dilution ......................................... $2.45 $2.15 $1.87
===================================================================================================================================
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Retained Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
<CAPTION>
($ in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1 .................................................................. $ 20,186.7 $ 17,291.5 $ 14,772.2
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income .......................................................................... 5,890.5 5,248.2 4,614.1
Common Stock Dividends Declared ..................................................... (2,629.3) (2,353.0) (2,094.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 ................................................................ $ 23,447.9 $ 20,186.7 $ 17,291.5
===================================================================================================================================
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
- -----------------------------------------------------------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
<CAPTION>
($ in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income .......................................................................... $ 5,890.5 $ 5,248.2 $ 4,614.1
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Net unrealized gain (loss) on investments,
net of tax and net income realization ............................................ 25.6 (5.6) (17.6)
Minimum pension liability, net of tax ............................................... 3.8 (24.7) (12.4)
- -----------------------------------------------------------------------------------------------------------------------------------
29.4 (30.3) (30.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income ................................................................ $ 5,919.9 $ 5,217.9 $ 4,584.1
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents.......................................................................... $ 2,021.9 $ 2,606.2
Short-term investments............................................................................. 1,180.5 749.5
Accounts receivable................................................................................ 4,089.0 3,374.1
Inventories........................................................................................ 2,846.9 2,623.9
Prepaid expenses and taxes......................................................................... 1,120.9 874.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets............................................................................... 11,259.2 10,228.5
- -----------------------------------------------------------------------------------------------------------------------------------
Investments........................................................................................ 4,761.5 3,607.7
- -----------------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment (at cost)
Land............................................................................................... 259.2 228.8
Buildings.......................................................................................... 4,465.8 3,664.0
Machinery, equipment and office furnishings........................................................ 7,385.7 6,211.7
Construction in progress........................................................................... 2,236.3 1,782.1
- -----------------------------------------------------------------------------------------------------------------------------------
14,347.0 11,886.6
Less allowance for depreciation.................................................................... 4,670.3 4,042.8
- -----------------------------------------------------------------------------------------------------------------------------------
9,676.7 7,843.8
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill and Other Intangibles (net of accumulated amortization
of $1,488.7 million in 1999 and $1,123.9 million in 1998)......................................... 7,584.2 8,287.2
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets....................................................................................... 2,353.3 1,886.2
- -----------------------------------------------------------------------------------------------------------------------------------
$35,634.9 $31,853.4
===================================================================================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities........................................................... $ 4,158.7 $ 3,682.1
Loans payable and current portion of long-term debt................................................ 2,859.0 624.2
Income taxes payable............................................................................... 1,064.1 1,125.1
Dividends payable.................................................................................. 677.0 637.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities.......................................................................... 8,758.8 6,068.8
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt..................................................................................... 3,143.9 3,220.8
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes and Noncurrent Liabilities................................................... 7,030.1 6,057.0
- -----------------------------------------------------------------------------------------------------------------------------------
Minority Interests................................................................................. 3,460.5 3,705.0
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, one cent par value
Authorized - 5,400,000,000 shares
Issued - 2,968,030,509 shares - 1999
- 2,967,851,980 shares - 1998.............................................................. 29.7 29.7
Other paid-in capital.............................................................................. 5,920.5 5,614.5
Retained earnings.................................................................................. 23,447.9 20,186.7
Accumulated other comprehensive income (loss)...................................................... 8.1 (21.3)
- -----------------------------------------------------------------------------------------------------------------------------------
29,406.2 25,809.6
Less treasury stock, at cost
638,953,059 shares - 1999
607,399,428 shares - 1998......................................................................... 16,164.6 13,007.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity......................................................................... 13,241.6 12,801.8
- -----------------------------------------------------------------------------------------------------------------------------------
$35,634.9 $31,853.4
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
Merck & Co., Inc. 1999 Annual Report Financial Section 43
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C> <C>
Income before taxes................................................................ $ 8,619.5 $ 8,133.1 $ 6,462.3
Adjustments to reconcile income before taxes to cash
provided from operations before taxes:
Acquired research................................................................ 51.1 1,039.5 --
Gains on sales of businesses..................................................... -- (2,147.7) (213.4)
Depreciation and amortization.................................................... 1,144.8 1,015.1 837.1
Other............................................................................ (547.7) 156.6 528.4
Net changes in assets and liabilities:
Accounts receivable............................................................. (752.9) (579.1) (271.7)
Inventories..................................................................... (223.0) (409.5) (53.5)
Accounts payable and accrued liabilities........................................ 404.5 250.1 321.8
Noncurrent liabilities.......................................................... (150.9) (13.0) (29.4)
Other........................................................................... 69.9 9.8 29.9
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities Before Taxes................................. 8,615.3 7,454.9 7,611.5
Income Taxes Paid.................................................................. (2,484.6) (2,126.6) (1,294.9)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities.......................................... 6,130.7 5,328.3 6,316.6
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures............................................................... (2,560.5) (1,973.4) (1,448.8)
Purchase of securities, subsidiaries and other investments......................... (42,211.2) (29,675.4) (22,986.7)
Proceeds from sale of securities, subsidiaries and other investments............... 40,308.7 28,618.9 22,075.4
Proceeds from relinquishment of certain AstraZeneca product rights................. 1,679.9 -- --
Proceeds from sales of businesses.................................................. -- 2,586.2 910.0
Other.............................................................................. (33.9) 432.3 (152.6)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities.............................................. (2,817.0) (11.4) (1,602.7)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in short-term borrowings................................................ 2,137.9 (457.2) 431.3
Proceeds from issuance of debt..................................................... 11.6 2,379.5 653.1
Payments on debt................................................................... (17.5) (340.6) (590.0)
Redemption of preferred stock of subsidiary........................................ -- -- (1,000.0)
Purchase of treasury stock......................................................... (3,582.1) (3,625.5) (2,572.8)
Dividends paid to stockholders..................................................... (2,589.7) (2,253.1) (2,039.9)
Proceeds from exercise of stock options............................................ 322.9 490.1 413.3
Other.............................................................................. (152.5) (114.1) (153.9)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities.............................................. (3,869.4) (3,920.9) (4,858.9)
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents....................... (28.6) 85.1 (82.3)
- ---------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents............................... (584.3) 1,481.1 (227.3)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year..................................... 2,606.2 1,125.1 1,352.4
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year........................................... $ 2,021.9 $ 2,606.2 $ 1,125.1
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
44 Merck & Co., Inc. 1999 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 sales of prescription drugs through managed
prescription drug programs as well as services provided through programs to
manage patient 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 in which a controlling
interest is maintained. For those consolidated subsidiaries where Merck
ownership is less than 100%, the outside stockholders' interests are shown as
Minority interests. Investments in affiliates over which the Company has
significant influence but not a controlling interest are carried on the equity
basis.
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.
Revenue Recognition - Revenues from sales of Merck human health products are
recognized upon shipment of product. Revenues generated by Merck-Medco's
pharmaceutical benefit services, comprised principally of sales of prescription
drugs, are recognized, net of certain rebates, upon dispensing of product.
Specifically, revenues from plan member orders dispensed at Merck-Medco's mail
service pharmacies are recognized when the product is shipped, while revenues
from orders dispensed by retail network pharmacies are recognized when the
prescription is filled. For the majority of the retail business, Merck-Medco
assumes financial risk through having independent contractual arrangements to
bill plan sponsors and pay the retail network pharmacy providers. In such cases,
revenues are recognized for the amount billed to the plan sponsor. When
Merck-Medco acts solely as a liaison to reimburse retail pharmacies on the plan
sponsor's behalf, no financial risk has been assumed, and therefore, revenues
are recognized only for the amount of the administrative fee received from the
plan sponsor.
Merck-Medco has contracts with multiple pharmaceutical manufacturers that
offer rebates on drugs included on Merck-Medco formularies. These rebates are
recognized as a credit to cost of sales in the period earned based upon the
dispensed volume of specific drugs stipulated in the contracts.
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. The estimated useful lives primarily range from 10
to 50 years for Buildings, and from 3 to 15 years for Machinery, equipment and
office furnishings.
Goodwill and Other Intangibles - Goodwill of $3.8 billion in 1999 and $4.3
billion in 1998 (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 $2.6 billion
in 1999 and $2.7 billion in 1998 (net of accumulated amortization) that arose in
connection with the acquisition of Medco Containment Services, Inc. (renamed
Merck-Medco Managed Care) and patent rights approximating $.8 billion in 1999
and $.9 billion in 1998 (net of accumulated amortization) acquired as part of
the restructuring of Astra Merck Inc. (AMI). (See Note 4.) These acquired
intangibles are recorded at cost and are amortized on a straight-line basis over
their estimated useful lives of up to 40 years. The weighted average
amortization period for Goodwill and Other Intangibles was 33 years at December
31, 1999 and 1998. The Company reviews goodwill and other intangibles to assess
recoverability from future operations using undiscounted cash flows derived from
the lowest appropriate asset groupings, generally the subsidiary level.
Impairment of enterprise goodwill is typically evaluated at the acquired entity
level. Impairments are recognized in operating results to the extent that
carrying value exceeds fair value, which is determined based on the net present
value of estimated future cash flows.
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 accounting principles generally accepted in the United States
(GAAP) and, accordingly, include amounts that are based on management's best
estimates and judgments.
Reclassifications - Certain reclassifications have been made to prior year
amounts to conform with current year presentation.
3. Acquisition and Divestitures
On September 2, 1999, the Company acquired the controlling interest in the
outstanding common stock of SIBIA Neurosciences, Inc. (SIBIA) and on November
12, 1999, completed the acquisition by obtaining the remaining shares. The
purchase price was approximately $97.4 million, consisting of $88.0 million in
cash and employee stock options valued at $9.4 million. SIBIA is engaged in the
discovery and development of novel molecule therapeutics for the treatment of
neurodegenerative,
Merck & Co., Inc. 1999 Annual Report Financial Section 45
<PAGE>
neuropsychiatric and neurological disorders. The acquisition was accounted for
by the purchase method and, accordingly, SIBIA's results of operations have been
included with the Company's since the acquisition date. Pro forma information is
not provided as the impact of the transaction does not have a material effect on
the Company's results of operations for 1999 or 1998. The purchase price
allocation resulted in assets acquired of $61.4 million, liabilities assumed of
$15.1 million and a charge for acquired research of $51.1 million associated
with research projects for which, at the acquisition date, technological
feasibility had not been established and no alternative future use existed.
On July 1, 1998, the Company sold its one-half interest in The DuPont Merck
Pharmaceutical Company (DMPC), its joint venture with E.I. du Pont de Nemours
and Company (DuPont), to DuPont for $2.6 billion in cash, resulting in a pretax
gain of $2.15 billion ($1.25 billion after tax). The joint venture was not
significant to the Company's financial position or results of operations. This
gain was substantially offset on an after-tax basis by a $1.04 billion pretax
and after-tax charge for acquired research (see Note 4) and $338.6 million of
pretax other charges ($193.1 million after tax) included in Other (income)
expense, net. (See Note 14.)
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 pretax charges included in
Other (income) expense, net. (See Note 14.)
4. 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 AMI, in which Merck
and Astra each owned a 50% share. This joint venture, formed in 1994, developed
and marketed most of Astra's new prescription medicines in the United States.
Joint venture sales were $1.7 billion for the first six months of 1998 and $2.3
billion for 1997, 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.
On July 1, 1998, Merck and Astra completed the restructuring of the ownership
and operations of the joint venture whereby the Company acquired Astra's
interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1
billion, including approximately $700.0 million in cash and assumption of a $2.4
billion preferred stock obligation to Astra, which is included in Minority
interests in the consolidated financial statements. (See Note 10 for further
information.) As a result of the acquisition, the Company fully owned KBI's
operating assets and the license rights to make, have made, import, use and sell
the existing and future U.S. pharmaceutical compounds of Astra. The Company then
contributed KBI's operating assets of $644.3 million, including a $598.0 million
step-up in carrying value, to a new U.S. limited partnership, named Astra
Pharmaceuticals L.P. (the Partnership) in exchange for a 1% limited partner
interest. The contributed assets included KBI's workforce, operating facility,
trademarks and information systems. Astra contributed the net assets of its
wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a
99% general partner interest. For a franchise fee payment of $230.0 million, the
Partnership became the exclusive distributor of the products for which KBI
retained rights. The Partnership was renamed AstraZeneca LP (AZLP) upon Astra's
1999 merger with Zeneca Group Plc (the AstraZeneca merger), discussed later.
Merck's acquisition of Astra's interest in KBI for $3.1 billion was
accounted for under the purchase method and, accordingly, 100% of KBI's results
of operations have been included with the Company's since July 1, 1998. Pro
forma information is not provided as the impact of the transaction did not
have a material effect on the Company's results of operations for 1998 and 1997.
The purchase price was allocated based upon the fair values of the portion of
assets and liabilities acquired. In addition to the 50% step-up in carrying
value of KBI's operating assets, purchase price allocations resulted in the
recognition of goodwill totaling $825.9 million which is being amortized on a
straight-line basis over 20 years and other intangibles, principally the
retained U.S. patent rights on in-line products totaling $978.0 million, which
are being amortized on a straight-line basis over 10 years. In connection with
the acquisition of the remaining 50% of the license rights to product candidates
within Astra's research pipeline, the Company recorded a $1.04 billion charge
for acquired research associated with 10 product candidates in Phase II or later
stages of development and U.S. rights to research projects which had not yet
entered Phase II. At the acquisition date, technological feasibility for the
product candidates and the pre-Phase II research projects had not been estab-
lished and no alternative future use existed. The product candidates were in
various therapeutic categories, principally gastrointestinal (comprising over
50% of the charge for Phase II or later stages), respiratory and
neurological, with projected U.S. Food and Drug Administration (FDA) approval
dates in the years 1999 through 2005. None of these future products is indi-
vidually material to the Company. The fair value of the acquired research was
determined based upon the present value of each product's projected future cash
flows, utilizing an income approach reflecting the appropriate cost of capital.
Future cash flows were predominately based on net income forecasts for each
product consistent with historical pricing, margins, and expense levels for
similar products. Revenues were estimated based on relevant market size and
growth factors, expected industry trends, individual product life cycles, and
the life of each product's underlying patent. The implied risk adjusted discount
rates applied to projected cash flows were based on the Company's weighted
average cost of capital, the useful life of each product, the applicable
product's stage of completion, as well as its probability of technical and
marketing success, and averaged 26%, with a range of 12% to 37%. A cost approach
was also utilized to corroborate the values determined under the income
approach. In applying the cost approach, consideration was given to the level of
research and development expenditures within Astra, the appropriate required
rates of return within the market place and the cost of reproduction for the
acquired assets. Both of these approaches are appropriate under generally
accepted valuation methods and yielded similar results. The research projects
considered in the valuation are all subject to the normal risks and
uncertainties associated with demonstrating the safety and efficacy required to
obtain timely FDA approval. While Merck will benefit from future revenues of
successful product candidates, AZLP and Astra will bear all costs to complete
the development of these products unless AZLP elects not to pursue a particular
product candidate, at which time the Company would bear further development
costs at its discretion.
46 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
While maintaining a 1% limited partner interest in AZLP, Merck enjoys
consent and protective rights intended to preserve its business and economic
interests, including restrictions on the power of the general partner to make
certain distributions or dispositions. Furthermore, in limited events of
default, additional rights will be granted to the Company, including powers to
direct the actions of, or remove and replace, the Partnership's chief executive
officer and chief financial officer. Merck earns certain Partnership returns,
which are recorded as Equity income from affiliates, as well as ongoing revenue
based on sales of current and future KBI products. The Partnership returns
reflect Merck's share of AZLP GAAP earnings and include a preferential return, a
priority return and other variable returns which are based, in part, upon sales
of certain former Astra USA, Inc. products. The preferential return represents
Merck's share of the undistributed AZLP GAAP earnings which is expected to
approximate $275.0 million annually through 2008. The priority return is an
amount provided for in the Partnership agreement that varies based upon the
fiscal year, applicable income tax rates and the occurrence of a partial
redemption of our limited partner interest. We expect this return to approximate
$300.0 million annually, subject to availability of sufficient Partnership
profits. The AstraZeneca merger triggers a partial redemption of Merck's limited
partnership interest in 2008, reducing this amount to approximately $210.0
million annually at that time. Upon the partial redemption of the Company's
limited partner interest, AZLP will distribute to KBI an amount based primarily
on a multiple of Merck's annual revenue derived from sales of the former Astra
USA, Inc. products for the three years prior to the redemption (the Limited
Partner Share of Agreed Value).
For a payment of $443.0 million, which has been deferred, Astra purchased
an option to buy Merck's interest in the KBI products, excluding the
gastrointestinal medicines Prilosec and esomeprazole, in 2008, 2012 or 2016 (the
Asset Option), at an exercise price based primarily on a multiple of Merck's
annual revenue derived from the KBI products for the three years prior to
exercise. As a result of the AstraZeneca merger, the Asset Option is now only
exercisable in 2010 at an exercise price equal to the net present value as of
March 31, 2008 of projected future pretax revenue to be received by the Company
from the KBI products (the Appraised Value). Merck now also has the right to
require Astra to purchase such interest in 2008 at the Appraised Value. The
Company also granted Astra an option to buy Merck's common stock interest in
KBI, at an exercise price based on the net present value of estimated future net
sales of Prilosec and esomeprazole (the Shares Option). This option is
exercisable only after Astra's purchase of Merck's interest in the KBI products.
Generally, the Shares Option was not exercisable before 2017, but as a result of
the AstraZeneca merger, is now exercisable two years after Astra's purchase of
Merck's interest in the KBI products.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB
(AstraZeneca), which constituted a Trigger Event under the KBI restructuring
agreements. As a result of the merger, Astra was required to make two one-time
payments to Merck totaling approximately $1.8 billion. In exchange for Merck's
relinquishment of rights to future Astra products with no existing or pending
U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance
Payment), which is subject to a true-up calculation in 2008 that may require
repayment of all or a portion of this amount. The amount determined by the
true-up calculation (the True-Up Amount) cannot reasonably be estimated
because it is directly dependent on the fair market value in 2008 of the Astra
product rights retained by the Company which extend to compounds currently in
development as well as compounds that have not yet entered development.
Accordingly, recognition of this contingent income has been deferred until the
realizable amount, if any, is determinable, which is not anticipated prior to
2008.
In connection with the Company's acquisition of Astra's interest in
KBI, Merck agreed to relinquish rights to the pharmaceutical products of any
company that would merge with or acquire Astra. These rights, which protected
the value of KBI's perpetual interest in Astra's pipeline, were relinquished in
exchange for a payment (the Lump Sum Payment) to be made in the event of the
merger or acquisition of Astra. The Company estimated that it was entitled to
receive a Lump Sum Payment of $822.0 million as the result of the AstraZeneca
merger. In the second quarter of 1999, Astra paid $712.5 million of the Lump Sum
Payment and disputed its obligation to pay the remainder. At December 31, 1999,
the Company was in arbitration seeking to enforce its rights under the agreement
with respect to the disputed amount. Although Merck retains an interest in
current and future Astra products with an existing or pending U.S. patent, this
merger effectively curtailed the Company's perpetual interest in Astra's
pipeline and, thus, reduced the going concern value acquired in 1998. Accord-
ingly, one-half of the expected payment was an adjustment to the purchase price
Merck paid for Astra's one-half interest in KBI, reducing goodwill by $411.0
million, less 50% of a reserve relating to disputed proceeds. The balance
represents compensation to the Company for the reduction of the value of its
original one-half interest in KBI and was recorded in Other (income) expense,
net. Because the reduction in goodwill is not tax-effected and the Lump Sum
Payment is fully taxable, this transaction, net of a reserve relating to
disputed proceeds, yielded an after-tax gain of $74.6 million. This gain was
largely offset on an after-tax basis by $110.0 million of pretax charges ($66.2
million after tax) also recorded in Other (income) expense, net. (See Note 14.)
Subsequent to year end, the arbitration was concluded and a final decision was
rendered, pursuant to which the Company received $87.2 million of the disputed
proceeds plus interest, which will be accounted for in the first quarter of
2000.
Under the provisions of the KBI restructuring agreements, because a
Trigger Event has occurred, the sum of the Limited Partner Share of Agreed
Value, the Appraised Value and the True-Up Amount is guaranteed to be a minimum
of $4.7 billion. Distribution of the Limited Partner Share of Agreed Value and
payment of the True-Up Amount will occur in 2008. AstraZeneca's purchase of
Merck's interest in the KBI products is contingent upon the exercise of either
Merck's option in 2008 or AstraZeneca's option in 2010 and, therefore, payment
of the Appraised Value may or may not occur.
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 $487.4 million for 1999, $514.2
million for 1998 and $483.7 million for 1997.
In 1991, Merck and DuPont formed an independent, research-driven,
worldwide pharmaceutical joint venture, equally owned by each party. Joint
venture sales were $686.2 million for the first six months of 1998 and $1.3
billion for 1997, consisting primarily of cardiovascular, radiopharmaceutical
and central nervous system products. On July 1, 1998, the Company sold its
one-half interest in the joint venture to DuPont for $2.6 billion in cash. (See
Note 3.)
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established an equally owned joint venture to market
Merck & Co., Inc. 1999 Annual Report Financial Section 47
<PAGE>
vaccines and collaborate in the development of combination vaccines for
distribution in Europe. Joint venture vaccine sales were $566.8 million for
1999, $560.4 million for 1998 and $581.3 million for 1997.
In August 1997, Merck and Rhone-Poulenc (now Aventis) 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. Aventis contributed
research and development, manufacturing, sales and marketing activities, and
animal health products, as well as its poultry genetics business. The formation
of Merial has not had a material impact on comparability of net income. Merial
sales were $1.7 billion for 1999, $1.8 billion for 1998 and $746.3 million for
1997. Animal health sales reported in Merck's 1997 consolidated sales were
$448.3 million prior to August 1.
5. Affiliates Accounted for Using the Equity Method
Investments in affiliates accounted for using the equity method are included in
Other assets and were $1.4 billion at December 31, 1999 and $1.1 billion at
December 31, 1998. Dividends and distributions received from these affiliates
were $412.2 million in 1999, $919.3 million in 1998 and $791.0 million in 1997.
The decrease in 1999 primarily relates to the 1998 restructuring of AMI.
Summarized information for these affiliates is as follows:
Years Ended December 31 1999 1998 1997
- ----------------------------------------------------------------------
Sales ............................ $ 7,443.7 $ 7,095.6 $ 5,655.8
Materials and production costs ... 2,895.2 2,191.1 1,349.3
Other expense, net ............... 2,854.5 2,757.8 1,852.9
Income before taxes .............. 1,694.0 2,146.7 2,453.6
======================================================================
December 31 1999 1998
- ---------------------------------------------------------
Current assets ................... $ 2,763.7 $ 2,693.0
Noncurrent assets ................ 3,018.6 2,036.6
Current liabilities .............. 2,468.1 2,280.2
Noncurrent liabilities ........... 267.1 281.4
=========================================================
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 local currency put 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 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. From
time to time, the Company will adjust its portfolio to decrease the coverage
provided by purchased options that are no longer necessary due to changes in
exposure to forecasted revenues or to preserve the value of deep-in-the-money
purchased options. The most cost-effective means of adjusting the portfolio is
to write options with terms identical to the purchased options. 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 market value changes in the options
written by the Company in 1999 were not significant. 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 purchased currency options used to hedge
forecasted revenues amounted to $172.9 million and $37.4 million at December 31,
1999 and $12.6 million and $45.3 million at December 31, 1998, 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, 1999 and 1998, the Company had contracts to exchange
foreign currencies, principally of the euro region and Japan, for U.S. dollars
in the following notional amounts:
1999 1998
- -------------------------------------------------------------------------------
Purchased currency options............................ $ 3,005.4 $ 4,583.5
Written currency options.............................. 739.5 --
Forward sale contracts................................ 2,500.0 1,972.3
Forward purchase contracts............................ 1,265.0 542.8
===============================================================================
Interest Rate Risk Management
The Company uses interest rate swap contracts on certain investing and borrowing
transactions. Interest rate swap contracts are intended to be an integral part
of these 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
48 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
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 leverage 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 $239.4 million at December 31,
1999 and $231.3 million at December 31, 1998 and, in 1997, a seven-year interest
rate and currency swap contract with a notional amount of $353.1 million at
December 31, 1999 and $344.1 million at December 31, 1998. In 1998, a portion of
the 1995 swap contract was terminated in conjunction with the sale of a portion
of the related asset with an immaterial impact on net income. These 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 Accumulated other comprehensive income
(loss).
Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 1999 and 1998. Fair values were estimated
based on market prices, where available, or dealer quotes.
1999 1998
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------
Cash and cash
equivalents ............... $ 2,021.9 $ 2,021.9 $ 2,606.2 $ 2,606.2
Short-term investments ..... 1,180.5 1,180.5 749.5 749.5
Long-term investments ...... 4,761.5 4,755.2 3,607.7 3,604.3
Purchased currency
options ................... 131.2 266.7 170.2 137.5
Forward exchange
contracts and
currency swap ............. 128.8 128.8 72.8 72.8
- -----------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------
Loans payable and
current portion of
long-term debt ............ $ 2,859.0 $ 2,857.6 $ 624.2 $ 654.7
Long-term debt ............. 3,143.9 2,870.0 3,220.8 3,336.5
Written currency
options ................... 106.0 106.0 -- --
Forward exchange
contracts and
currency swap ............. 104.2 104.2 86.1 86.1
=======================================================================
A summary of the carrying values and fair values of the Company's
investments at December 31 is as follows:
1999 1998
-------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------
Available-for-sale
Debt securities ........... $ 4,242.2 $ 4,242.2 $ 2,639.0 $ 2,639.0
Equity securities ......... 1,155.0 1,155.0 1,000.6 1,000.6
Held-to-maturity
securities................. 544.8 538.5 717.6 714.2
=======================================================================
A summary of gross unrealized gains and losses on the Company's
investments at December 31 is as follows:
1999 1998
---------------- ----------------
Gross Unrealized Gross Unrealized
---------------- ----------------
Gains Losses Gains Losses
- -------------------------------------------------------------------------------
Available-for-sale
Debt securities ............. $ 76.3 $ (75.2) $ 22.1 $ (12.5)
Equity securities ........... 202.0 (98.8) 124.1 (64.2)
Held-to-maturity
securities .................. -- (6.3) .6 (4.0)
===============================================================================
Gross unrealized gains and losses with respect to available-for-sale
investments are recorded, net of tax and minority interests, in Accumulated
other comprehensive income (loss).
Available-for-sale debt securities and held-to-maturity securities maturing
within one year totaled $1.0 billion and $160.3 million, respectively, at
December 31, 1999. Of the remaining debt securities, $2.6 billion mature
within five years.
At December 31, 1999 and 1998, $575.0 million and $507.3 million,
respectively, of held-to-maturity securities maturing within four years set off
$575.0 million and $507.3 million of 5.0% nontransferable note obligations due
by 2003 issued by the Company.
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:
1999 1998
- ---------------------------------------------------------------------
Finished goods ......................... $ 1,895.6 $ 1,701.2
Raw materials and work in process ...... 869.8 851.6
Supplies ............................... 81.5 71.1
- ---------------------------------------------------------------------
Total (approximates current cost) ...... 2,846.9 2,623.9
Reduction to LIFO cost ................. -- --
- ---------------------------------------------------------------------
$ 2,846.9 $ 2,623.9
=====================================================================
Inventories valued under the LIFO method comprised approximately 37% of
inventories at December 31, 1999 and 1998.
8. Loans Payable and Long-Term Debt
Loans payable at December 31, 1999 consisted primarily of $2.2 billion of
commercial paper borrowings. Loans payable also reflected $488.5 million and
$500.0 million of 5.8% notes at December 31, 1999 and 1998, respectively. These
notes, due 2037, are subject to repayment at par at the option of the holders in
May of each year. Loans payable at December 31, 1999 also included $66.9 million
of tax-exempt floating rate pollution control and industrial revenue bonds,
which the Company intends to redeem at par in March 2000. The remainder in both
Merck & Co., Inc. 1999 Annual Report Financial Section 49
<PAGE>
years was principally borrowings by foreign subsidiaries. The weighted average
interest rate for these borrowings was 5.6% and 6.6% at December 31, 1999 and
1998, respectively.
Long-term debt at December 31 consisted of:
1999 1998
- ----------------------------------------------------------------------------
6.0% note due 2008................................. $ 1,380.0 $ 1,380.0
6.8% euronotes due 2005............................ 499.3 499.2
6.4% debentures due 2028........................... 499.0 499.0
6.0% debentures due 2028........................... 496.0 495.8
6.3% debentures due 2026........................... 246.9 246.8
Other.............................................. 22.7 100.0
- ----------------------------------------------------------------------------
$ 3,143.9 $ 3,220.8
============================================================================
The $1.38 billion note issued to Astra, originally due 2038, is now payable
in 2008 as a result of Astra's 1999 merger with Zeneca. (See Note 4 for further
information.)
In both years, other consisted of foreign borrowings at varying rates up to
9.0%. At December 31, 1998, other also included $66.9 million of tax-exempt
floating rate pollution control and industrial revenue bonds.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 2000, $75.5 million; 2001, $7.4 million; 2002, $5.8 million;
2003, $4.1 million; 2004, $2.9 million.
9. Contingencies and Environmental 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 chal-
lenging 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 1996, the Company and several other defendants finalized an
agreement to settle the federal class action alleging conspiracy, which
represents the single largest group of retail pharmacy claims, pursuant to which
the Company paid $51.8 million. Since that time, the Company has entered into
other settlements on satisfactory terms. The Company has not engaged in any
conspiracy, and no admission of wrongdoing was made nor was included in the
final agreements. 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. When a
legitimate claim for contribution is asserted, a liability is initially
accrued based upon the estimated transaction costs to manage the site. Accruals
are adjusted as feasibility studies and related cost assessments of remedial
techniques are completed, and as the extent to which other potentially
responsible parties (PRPs) who may be jointly and severally liable can be
expected to contribute is determined.
The Company is also remediating environmental contamination resulting from
past industrial activity at certain of its sites and has taken an active role in
identifying and providing for these costs. In 1989, the Company initiated a
worldwide survey to assess all of its sites that had not been previously
investigated for potential contamination resulting from past industrial
activities. Where assessment indicated that physical investigation was
warranted, such investigation was performed, providing a better evaluation of
the need for remedial action. Where such need was identified, remedial action
was then initiated. Estimates of the extent of contamination at each site were
initially made at the pre-investigation stage and liabilities for the potential
cost of remediation were accrued at that time. As more definitive information
became available during the course of investigations and/or remedial efforts at
each site, estimates were refined and accruals were adjusted accordingly. These
estimates and related accruals continue to be refined annually via the worldwide
survey of all environmental exposures.
In management's opinion, the liabilities for all environmental matters
which are probable and reasonably estimable have been accrued and totaled $305.5
million and $336.0 million at December 31, 1999 and 1998, respectively. These
liabilities are undiscounted, do not consider potential recoveries from insurers
or other parties and will be paid out over the periods of remediation for the
applicable sites, which are expected to occur primarily over the next 15 years.
Although it is not possible to predict with certainty the outcome of these
matters, or the ultimate costs of remediation, management does not believe that
any reasonably possible expenditures that may be incurred in excess of the
liabilities accrued should exceed $104.0 million in the aggregate. Management
also 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 for any year.
10. Preferred Stock of Subsidiary Company
In connection with the 1998 restructuring of AMI (see Note 4), the Company
assumed a $2.4 billion par value preferred stock obligation with a dividend rate
of 5% per annum which is carried by KBI. Because the preferred stock
obligation is held by a subsidiary, it is included in Minority interests in the
consolidated financial statements at December 31, 1999 and 1998. While a small
portion of the preferred stock is convertible into KBI common shares, none of it
is convertible into the Company's common shares and, therefore, it is not
included as common shares issuable for purposes of computing Earnings per common
share assuming dilution. (See Note 16.)
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 PECs were redeemed by
the Company at par in September 1997.
50 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
11. Stockholders' Equity
In 1999, 1998 and 1997, Other paid-in capital increased by $306.0 million,
$390.1 million and $286.5 million, respectively, principally as a result of
issuances of treasury stock for exercises of stock options.
A summary of treasury stock transactions (shares in millions) is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -----------------
Shares Cost Shares Cost Shares Cost
- ----------------------------------------------------------------------------------------------------------
Balance,
<S> <C> <C> <C> <C> <C> <C>
Jan. 1 .................................... 607.4 $13,007.8 580.6 $ 9,959.9 554.0 $7,814.7
Purchases .................................... 50.0 3,582.1 56.9 3,625.5 55.0 2,572.8
Issuances/(1)/ ............................... (18.5) (425.3) (30.1) (577.6) (28.4) (427.6)
- ----------------------------------------------------------------------------------------------------------
Balance,
Dec. 31 ................................... 638.9 $16,164.6 607.4 $13,007.8 580.6 $9,959.9
==========================================================================================================
</TABLE>
/(1)/ Issued primarily under stock option plans.
At December 31, 1999 and 1998, 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's stock option
plan for employees also provides for the granting of performance-based stock
awards. In connection with the 1999 acquisition of SIBIA, stock options
outstanding on the acquisition date were converted into options to purchase
shares of Company common stock with equivalent value.
Summarized information relative to the Company's stock option plans (shares
in thousands) is as follows:
Number Average
of Shares Price/(1)/
- ----------------------------------------------------------------
Outstanding at December 31, 1996 .. 172,418.6 $19.19
Granted ........................... 31,877.9 48.74
Exercised ......................... (27,994.7) 14.77
Forfeited ......................... (5,390.6) 24.30
- ----------------------------------------------------------------
Outstanding at December 31, 1997 .. 170,911.2 25.27
Granted ........................... 34,802.8 63.43
Exercised ......................... (29,727.4) 16.49
Forfeited ......................... (3,645.9) 39.06
- ----------------------------------------------------------------
Outstanding at December 31, 1998 .. 172,340.7 34.20
Granted ........................... 28,929.5 80.04
Exercised ......................... (18,367.7) 17.59
Forfeited ......................... (4,363.7) 51.08
Equivalent Options Assumed ........ 153.8 40.55
- ----------------------------------------------------------------
Outstanding at December 31, 1999 .. 178,692.6 $42.92
================================================================
/(1)/ Weighted average exercise price
The number of shares and average price of options exercisable at December
31, 1999, 1998 and 1997 were 51.3 million shares at $19.14, 45.3 million shares
at $17.75 and 47.3 million shares at $16.49, respectively. At December 31, 1999
and 1998, 57.7 million shares and 83.0 million 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 $288.9
million, or $.12 per share in 1999, $192.4 million,or $.08 per share in 1998 and
$102.5 million,or $.04 per share in 1997. This pro forma impact only takes into
account the expense related to options granted since January 1, 1995, which is
being amortized ratably over the vesting period. The average fair value of
options granted during 1999, 1998 and 1997 was $24.75, $20.13 and
$15.82, respectively. This fair value was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at grant date of
$80.04 in 1999, $63.43 in 1998 and $48.74 in 1997 and the following weighted
average assumptions:
Years Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------
Dividend yield ..................................... 1.4% 1.5% 1.7%
Risk-free interest rate ............................ 5.1% 5.6% 6.4%
Volatility ......................................... 24% 25% 24%
Expected life (years) .............................. 6.7 6.5 6.6
==========================================================================
Summarized information about stock options outstanding and exercisable at
December 31, 1999 (shares in thousands) 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>
Under $15 ...... 10,366.6 6.43 $12.46 10,366.6 $12.46
$15 to 20 ...... 27,536.5 4.16 16.86 27,528.7 16.86
$20 to 25 ...... 26,163.9 4.26 21.38 7,870.5 21.63
$25 to 40 ...... 26,347.0 5.75 32.10 2,995.8 27.00
$40 to 50 ...... 25,674.3 7.18 48.50 970.8 45.88
$50 to 65 ...... 32,146.9 8.13 62.39 1,140.7 55.11
Over $65 ...... 30,457.4 8.98 79.45 412.9 71.66
- ------------------------------------------------------------------------------------
178,692.6 51,286.0
====================================================================================
</TABLE>
/(1)/ Weighted average contractual life remaining in years.
/(2)/ Weighted average exercise price.
Merck & Co., Inc. 1999 Annual Report Financial Section 51
<PAGE>
- --------------------------------------------------------------------------------
13. Pension and Other Postretirement Benefit Plans
The net cost for the Company's pension plans consisted of the following
components:
Years Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost ................................ $ 159.4 $ 134.8 $ 105.9
Interest cost ............................... 179.0 158.7 149.4
Expected return on plan assets .............. (229.4) (199.2) (175.5)
Net amortization ............................ 27.0 15.0 4.7
- --------------------------------------------------------------------------------
Net pension cost ............................ $ 136.0 $ 109.3 $ 84.5
================================================================================
The net pension cost attributable to international plans included in the
above table was $66.9 million in 1999, $58.8 million in 1998 and $49.9 million
in 1997.
The net cost of postretirement benefits other than pensions consisted of
the following components:
Years Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost ................................ $ 39.4 $ 33.7 $ 24.7
Interest cost ............................... 58.8 53.6 48.2
Expected return on plan assets .............. (73.2) (64.2) (53.5)
Net amortization ............................ (18.7) (20.0) (18.0)
- --------------------------------------------------------------------------------
Net postretirement benefit cost ............. $ 6.3 $ 3.1 $ 1.4
================================================================================
The cost of health care and life insurance benefits for active employees
was $212.7 million in 1999, $183.4 million in 1998 and $163.8 million in 1997.
Summarized information about the changes in plan assets and benefit
obligation is as follows:
Other
Postretirement
Pension Benefits Benefits
------------------ ---------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Fair value of plan assets
at January 1 ......... $ 2,720.9 $ 2,349.5 $ 735.0 $ 647.4
Actual return on
plan assets .......... 570.1 334.5 202.3 93.3
Company contributions ... 212.8 198.7 17.6 .1
Benefits paid from
plan assets .......... (172.9) (166.6) (6.3) (5.8)
Other ................... 38.0 4.8 -- --
- --------------------------------------------------------------------------------
Fair value of plan assets
at December 31 ....... $ 3,368.9 $ 2,720.9 $ 948.6 $ 735.0
================================================================================
Benefit obligation
at January 1 ......... $ 2,785.9 $ 2,388.7 $ 866.5 $ 734.9
Service cost ............ 159.4 134.8 39.4 33.7
Interest cost ........... 179.0 158.7 58.8 53.6
Actuarial (gains) losses. (140.5) 258.0 (108.5) 98.3
Benefits paid ........... (190.8) (183.7) (38.0) (38.2)
Other ................... 27.9 29.4 .4 (15.8)
- --------------------------------------------------------------------------------
Benefit obligation
at December 31 ....... $ 2,820.9 $ 2,785.9 $ 818.6 $ 866.5
================================================================================
The fair value of international pension plan assets included in the
preceding table was $933.7 million in 1999 and $793.2 million in 1998. The
pension benefit obligation of international plans included in this table was
$1.1 billion in 1999 and $998.2 million in 1998.
A reconciliation of the plans' funded status to the net asset (liability)
recognized at December 31 is as follows:
Other
Postretirement
Pension Benefits Benefits
---------------- ----------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Plan assets in excess of (less
than) benefit obligation. $ 548.0 $ (65.0) $ 130.0 $ (131.5)
Unrecognized net
(gain) loss ............. (125.1) 380.6 (328.9) (95.7)
Unrecognized plan
changes ................. 75.0 78.8 (116.1) (130.3)
Unrecognized transitional
net asset ............... (29.0) (39.4) -- --
- --------------------------------------------------------------------------------
Net asset (liability) ...... $ 468.9 $ 355.0 $ (315.0) $ (357.5)
- --------------------------------------------------------------------------------
Recognized as:
Other assets ............ $ 651.3 $ 513.4 $ -- $ --
Accounts payable and
accrued liabilities .. (7.4) (7.9) (24.9) (24.8)
Deferred income taxes and
noncurrent liabilities (307.8) (284.3) (290.1) (332.7)
Accumulated other
comprehensive loss ... 132.8 133.8 -- --
================================================================================
For pension plans with benefit obligations in excess of plan assets at
December 31, 1999 and 1998, the fair value of plan assets was $357.2 million and
$402.6 million, respectively, and the benefit obligation was $813.7 million and
$871.1 million, respectively. For those plans with accumulated benefit obliga-
tions in excess of plan assets at December 31, 1999 and 1998, the fair value of
plan assets was $279.3 million and $332.2 million, respectively, and the
accumulated benefit obligation was $503.9 million and $551.0 million,
respectively.
Assumptions used in determining U.S. plan information are
as follows:
Pension and Other
Postretirement Benefits
-----------------------
December 31 1999 1998 1997
- ----------------------------------------------------
Discount rate ......... 7.75% 6.75% 7.0%
Expected rate of return
on plan assets ..... 10.0 10.0 10.0
Salary growth rate .... 4.5 4.5 4.5
====================================================
52 Merck & Co. Inc. 1999 Annual Report Financial Section
<PAGE>
- --------------------------------------------------------------------------------
For the three years presented, international pension plan assumptions
ranged from 4.0% to 8.0% for the discount rate, 5.5% to 10.0% for the expected
rate of return on plan assets and 2.0% to 6.0% for the salary growth rate.
The health care cost trend rate for other postretirement benefit plans was
7.0% at December 31, 1999. The rate will gradually decline to 5.0% over a 4-year
period. A one percentage point change in the health care cost trend rate would
have had the following effects:
One Percentage Point
----------------------------
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total service and interest cost
components ................................... $ 18.8 $ (15.7)
Effect on benefit obligation .................. 130.6 (112.6)
================================================================================
14. Other (Income) Expense, Net
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income .................... $ (364.7) $ (307.7) $ (221.4)
Interest expense ................... 316.9 205.6 129.5
Exchange gains ..................... (27.2) (44.7) (18.0)
Minority interests ................. 222.3 162.4 131.8
Amortization of goodwill
and other intangibles ............. 317.4 264.3 197.2
Other, net ......................... (461.7) 219.8 123.6
- -------------------------------------------------------------------------------------------------
$ 3.0 $ 499.7 $ 342.7
=================================================================================================
</TABLE>
Minority interests include third parties' share of exchange gains and
losses arising from translation of the financial statements into U.S. dollars.
The increase in minority interests in 1999 and 1998 primarily reflect dividends
paid to Astra on $2.4 billion par value preferred stock of a subsidiary
beginning in July 1998. (See Note 10.)
Increased amortization of goodwill and other intangibles in 1999 and 1998
primarily reflects amortization of goodwill and other intangibles associated
with the restructuring of AMI in July 1998. (See Note 4.)
In 1999, other, net, includes $411.0 million of income associated with the
Lump Sum Payment from Astra, partially offset by a reserve relating to disputed
proceeds (see Note 4) and $110.0 million of charges primarily for endowment of
both The Merck Company Foundation and The Merck Genome Research Institute, as
approved by the Board of Directors based on projected future operating
requirements of these organizations, and provisions for the settlement of
claims. Other, net, also includes $77.9 million of income resulting from the
reversal of a restructuring reserve established in 1995 for the anticipated 1999
closure of a manufacturing facility. As a result of favorable incentives agreed
to in July 1999 with local authorities combined with changes in available
production capacity across plant sites, management decided to continue operating
the facility.
In 1998, other, net, includes $338.6 million of charges, primarily for
environmental remediation costs and asset write-offs, principally deferred
start-up costs.
In 1997, other, net, includes $207.3 million of charges primarily for the
loss on sale of assets, endowment of The Merck Company Foundation and
environmental remediation costs.
Interest paid was $276.8 million in 1999, $192.3 million in 1998 and $130.5
million in 1997.
15. Taxes on Income
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate is as follows:
<TABLE>
<CAPTION>
Tax Rate
---------------------------------------------
1999
Amount 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. statutory rate applied
to pretax income ................. $ 3,016.8 35.0% 35.0% 35.0%
Differential arising from:
Foreign earnings ................. (245.1) (2.8) .6 (.8)
Tax exemption for
Puerto Rico operations .......... (133.2) (1.5) (1.6) (1.9)
Equity income from
affiliates ...................... 8.8 .1 (1.7) (2.4)
Acquired research ................ 17.9 .2 4.5 --
State taxes ...................... 169.6 2.0 1.6 1.0
Other ............................ (105.8) (1.3) (2.9) (2.3)
- --------------------------------------------------------------------------------------------------------------------
$ 2,729.0 31.7% 35.5% 28.6%
====================================================================================================================
</TABLE>
The decrease in the effective tax rate in 1999 primarily reflects the
absence of 1998 nonrecurring items, principally the nondeductibility of the
acquired research charge in connection with the restructuring of AMI and the
state tax cost of the gain on the sale of the Company's one-half interest in
DMPC. This impact was partially offset by the 1999 nondeductibility of both the
goodwill write-off resulting from the AstraZeneca merger and the acquired
research charge in connection with the SIBIA acquisition. The increase in the
effective tax rate in 1998 primarily reflects the aforementioned 1998
nonrecurring items.
In 1998 and 1997, the differential arising from equity income from
affiliates reflected the benefit of recording AMI joint venture results in
equity income on an after-tax basis. This benefit was eliminated upon the July
1998 restructuring of AMI, which resulted in recording partnership returns from
AZLP in equity income on a pretax basis.
Domestic companies contributed approximately 65% in 1999, 74% in 1998 and
71% in 1997 to consolidated pretax income.
Taxes on income consisted of:
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision
Federal ......................... $ 2,674.9 $ 1,750.5 $ 1,322.2
Foreign ......................... 439.9 699.5 476.8
State ........................... 297.1 264.7 90.5
- ---------------------------------------------------------------------------------------------------
3,411.9 2,714.7 1,889.5
- ---------------------------------------------------------------------------------------------------
Deferred provision
Federal ......................... (718.9) 226.2 (48.1)
Foreign ......................... 21.9 (21.0) (6.4)
State ........................... 14.1 (35.0) 13.2
- ---------------------------------------------------------------------------------------------------
(682.9) 170.2 (41.3)
- ---------------------------------------------------------------------------------------------------
$ 2,729.0 $ 2,884.9 $ 1,848.2
===================================================================================================
</TABLE>
Merck & Co., Inc. 1999 Annual Report Financial Section 53
<PAGE>
Deferred income taxes at December 31 consisted of:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other intangibles ... $ 198.3 $ 1,372.1 $ 6.7 $ 1,434.6
Inventory related ... 799.1 316.3 546.6 210.5
Accelerated
depreciation ....... -- 642.2 -- 606.6
Advance payment ..... 338.6 -- -- --
Investment related .. -- 216.1 -- 210.0
Equity investments .. 57.8 201.6 57.8 91.7
Pensions and OPEB ... 185.5 192.5 176.9 140.1
Compensation related 129.3 -- 118.9 --
Environmental related 115.6 -- 131.0 --
Restructuring charge 71.3 -- 107.9 --
Other ............... 897.1 424.3 758.0 413.3
- -----------------------------------------------------------------------------------------------------------------
Subtotal ............ 2,792.6 3,365.1 1,903.8 3,106.8
Valuation allowance . (4.1) -- (9.1) --
- -----------------------------------------------------------------------------------------------------------------
Total deferred taxes $ 2,788.5 $ 3,365.1 $ 1,894.7 $ 3,106.8
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax
liabilities ........ $ 576.6 $ 1,212.1
- -----------------------------------------------------------------------------------------------------------------
Recognized as:
Prepaid expenses
and taxes ......... $ (869.2) $ (666.3)
Other assets ....... (50.3) (48.2)
Income taxes payable 151.9 163.5
Deferred income
taxes and noncur-
rent liabilities .. 1,344.2 1,763.1
================================================================================================================
</TABLE>
Income taxes paid in 1999, 1998 and 1997 were $2.5 billion, $2.1 billion
and $1.3 billion, respectively. The increase in 1999 primarily reflects taxes
paid on two one-time payments from Astra and a full year of partnership returns
from AZLP, resulting from the 1998 AMI restructuring, offset by absence of taxes
paid in 1998 on the gain on the sale of the Company's one-half interest in DMPC.
The increase in 1998 primarily reflects taxes paid on the aforementioned gain on
the sale of the Company's one-half interest in DMPC and a partial year of
partnership returns from AZLP.
At December 31, 1999, foreign earnings of $7.5 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 1992.
16. Earnings per Share
The weighted average common shares used in the computations of basic earnings
per common share and earnings per common share assuming dilution (shares in
millions) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares
outstanding ....................... 2,349.0 2,378.8 2,409.0
Common shares issuable/(1)/ ........ 55.6 62.3 60.5
- ------------------------------------------------------------------------------------------------
Average common shares
outstanding assuming dilution ..... 2,404.6 2,441.1 2,469.5
================================================================================================
</TABLE>
/(1)/ Issuable primarily under stock option plans.
17. Comprehensive Income
The components of Other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
After
Pretax(1) Tax Tax
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gain on
investments ....................... $ 91.0 $ (64.9) $ 26.1
Net income realization ............. (6.7) 6.2 (.5)
- ------------------------------------------------------------------------------------------------
Subtotal ........................... 84.3 (58.7) 25.6
Minimum pension liability .......... 9.7 (5.9) 3.8
- ------------------------------------------------------------------------------------------------
$ 94.0 $ (64.6) $ 29.4
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- ------------------------------------------------------------------------------------------------
Net unrealized gain on
investments ....................... $ 20.6 $ (4.8) $ 15.8
Net income realization ............. (41.9) 20.5 (21.4)
- ------------------------------------------------------------------------------------------------
Subtotal ........................... (21.3) 15.7 (5.6)
Minimum pension liability .......... (47.2) 22.5 (24.7)
- ------------------------------------------------------------------------------------------------
$ (68.5) $ 38.2 $ (30.3)
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------
Net unrealized loss on
investments ....................... $ (74.6) $ 57.0 $ (17.6)
Minimum pension liability .......... (37.8) 25.4 (12.4)
- ------------------------------------------------------------------------------------------------
$ (112.4) $ 82.4 $ (30.0)
================================================================================================
</TABLE>
/(1)/ Net of minority interest.
The components of Accumulated other comprehensive income (loss) are as
follows:
December 31 1999 1998
- --------------------------------------------------------------------------------
Net unrealized gain on
investments ................................. $ 47.9 $ 22.3
Minimum pension liability .................... (39.8) (43.6)
- --------------------------------------------------------------------------------
$ 8.1 $ (21.3)
================================================================================
18. Segment Reporting
The Company's operations are principally managed on a products and services
basis and are comprised of two reportable segments: Merck Pharmaceutical and
Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold
by prescription, for the treatment of human disorders. Merck-Medco revenues are
derived from the filling and management
54 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
- --------------------------------------------------------------------------------
of prescriptions and health management programs. All Other includes
non-reportable human and animal health segments. Revenues and profits for these
segments are as follows:
<TABLE>
<CAPTION>
Merck
Pharm- Merck- All
aceutical Medco Other Total
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment revenues ........... $ 14,418.7 $ 18,109.0 $ 2,890.8 $ 35,418.5
Segment profits ............ 8,495.4 578.3 2,654.9 11,728.6
Included in segment
profits:
Equity income (loss)
from affiliates ........ 16.3 -- 465.1 481.4
Depreciation and
amortization ............ (113.6) (84.8) (48.2) (246.6)
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Segment revenues ........... $ 12,839.9 $ 14,338.0 $ 2,274.4 $ 29,452.3
Segment profits ............ 7,637.3 475.8 2,390.5 10,503.6
Included in segment
profits:
Equity income (loss)
from affiliates ......... 12.7 (.4) 850.0 862.3
Depreciation and
amortization ............ (103.6) (91.9) (47.6) (243.1)
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
Segment revenues ........... $ 12,122.2 $ 11,996.0 $ 1,851.8 $ 25,970.0
Segment profits ............ 7,396.2 333.9 1,895.1 9,625.2
Included in segment
profits:
Equity income (loss)
from affiliates ......... 15.0 (.5) 894.6 909.1
Depreciation and
amortization ............ (89.0) (74.8) (31.5) (195.3)
======================================================================================================================
</TABLE>
Segment profits are comprised of segment revenues less certain elements of
materials and production costs and operating expenses, including components of
equity income (loss) from joint ventures and depreciation and amortization
expenses. The Company does not internally allocate the vast majority of indirect
production costs, research and development expenses and general and
administrative expenses, all predominantly related to the Merck pharmaceutical
business, as well as the cost of financing these activities. Separate divisions
maintain responsibility for monitoring and managing these costs, including
depreciation related to fixed assets utilized by these divisions and, therefore,
they are not included in the marketing segment profits. The vast majority of
goodwill and other intangibles amortization, predominantly related to the
Merck-Medco business, as well as the cost of financing capital employed, also
are not allocated internally and, therefore, are not included in the marketing
segment profits.
A reconciliation of total segment revenues to consolidated sales is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment revenues ................ $ 35,418.5 $ 29,452.3 $ 25,970.0
Other revenues .................. 172.2 182.2 222.6
Adjustments ..................... (2,876.7) (2,736.3) (2,555.7)
- ------------------------------------------------------------------------------------------------------
$ 32,714.0 $ 26,898.2 $ 23,636.9
======================================================================================================
</TABLE>
Other revenues primarily represent sales related to divested products or
businesses. Adjustments represent the elimination of receipts reported as
revenues in the internal management system which are not reportable as revenues
under generally accepted accounting principles.
Consolidated revenues by country where derived are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States ................... $ 25,662.1 $ 20,199.3 $ 16,984.9
Japan ........................... 1,412.7 1,160.6 1,235.1/(1)/
Other ........................... 5,639.2 5,538.3 5,416.9
- ------------------------------------------------------------------------------------------------------
$ 32,714.0 $ 26,898.2 $ 23,636.9
======================================================================================================
</TABLE>
/(1)/ Exceeds 5% of consolidated sales.
A reconciliation of total segment profits to consolidated income before
taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment profits ............... $ 11,728.6 $ 10,503.6 $ 9,625.2
Other profits ................. 83.1 86.7 137.3
Adjustments ................... 252.1 180.5 145.6
Unallocated:
Gains on sales of businesses -- 2,147.7 213.4
Interest income ............ 364.7 307.7 221.4
Interest expense ........... (316.9) (205.6) (129.5)
Equity income (loss)
from affiliates ......... 280.6 22.0 (181.2)
Depreciation and
amortization ............ (898.2) (772.0) (641.8)
Acquired research .......... (51.1) (1,039.5) --
Research and
development ............. (2,068.3) (1,821.1) (1,683.7)
Other expenses, net ........ (755.1) (1,276.9) (1,244.4)
- ------------------------------------------------------------------------------------------------------
$ 8,619.5 $ 8,133.1 $ 6,462.3
======================================================================================================
</TABLE>
Other profits primarily represent operating income related to divested
products or businesses. Adjustments represent the elimination of the effect of
double counting certain items of income and expense. Equity income (loss) from
affiliates includes taxes paid at the joint venture level and a portion of
equity income that is not reported in segment profits. Other expenses, net,
include expenses from corporate and manufacturing cost centers and other
miscellaneous income (expense), net.
Net property, plant and equipment (PP&E) by country where located are as
follows:
<TABLE>
<CAPTION>
December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States ......................... $ 7,346.8 $ 5,888.3 $ 5,017.9
Japan ................................. 401.4 388.5 365.4/(2)/
Other ................................. 1,928.5 1,567.0 1,226.1
- ----------------------------------------------------------------------------------------------------------
$ 9,676.7 $ 7,843.8 $ 6,609.4
==========================================================================================================
</TABLE>
/(2)/ Exceeds 5% of consolidated net PP&E
The Company does not disaggregate assets on a products and services basis
for internal management reporting and, therefore, such information is not
presented.
Merck & Co., Inc. 1999 Annual Report Financial Section 55
<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, 1999, 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, 1999 and 1998,
and the related consolidated statements of income, retained earnings,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
New York, New York ARTHUR ANDERSEN LLP
January 26, 2000
56 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
- --------------------------------------------------------------------------------
Audit Committee's
Report
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors is comprised
of seven outside directors. The members of the Committee are:
Charles E. Exley Jr., Chairman; Carolyne K. Davis, Ph.D.; Sir
Derek Birkin; Carleton S. Fiorina; William N. Kelley, M.D.;
Samuel O. Thier, M.D.; and, effective December 21, 1999,
William B. Harrison Jr. The Committee held four meetings
during 1999.
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 1999.
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
Merck & Co., Inc. 1999 Annual Report Financial Section 57
<PAGE>
- --------------------------------------------------------------------------------
Selected Financial Data/(1)/
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Merck & Co., Inc. and Subsidiaries
($ in millions except
per share amounts) 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results for Year:
Sales ........................ $ 32,714.0 $ 26,898.2 $ 23,636.9 $ 19,828.7 $ 16,681.1 $ 14,969.8
Materials and production costs 17,534.2 13,925.4 11,790.3 9,319.2 7,456.3 5,962.7
Marketing/administrative
expenses .................... 5,199.9 4,511.4 4,299.2 3,841.3 3,297.8 3,177.5
Research/development expenses 2,068.3 1,821.1 1,683.7 1,487.3 1,331.4 1,230.6
Acquired research ............ 51.1 1,039.5 -- -- -- --
Equity (income) loss
from affiliates ............. (762.0) (884.3) (727.9) (600.7) (346.3) (56.6)
Gains on sales of businesses . -- (2,147.7) ( 213.4) -- (682.9) --
Restructuring charge ......... -- -- -- -- -- --
Gain on joint venture
formation ................... -- -- -- -- -- (492.0)
Provision for joint
venture obligation ........... -- -- -- -- -- 499.6
Other (income) expense, net .. 3.0 499.7 342.7 240.8 827.6 232.8
Income before taxes .......... 8,619.5 8,133.1 6,462.3 5,540.8 4,797.2 4,415.2
Taxes on income .............. 2,729.0 2,884.9 1,848.2 1,659.5 1,462.0 1,418.2
Net income ................... 5,890.5 5,248.2 4,614.1 3,881.3 3,335.2 2,997.0
Basic earnings per
common share ................ $2.51 $2.21 $1.92 $1.60 $1.35 $1.19
Earnings per common share
assuming dilution ........... $2.45 $2.15 $1.87 $1.56 $1.32 $1.17
Dividends declared ........... 2,629.3 2,353.0 2,094.8 1,793.4 1,578.0 1,463.1
Dividends paid per
common share ................ $1.10 $.95 $.85 $.71 $.62 $.57
Capital expenditures ......... 2,560.5 1,973.4 1,448.8 1,196.7 1,005.5 1,009.3
Depreciation ................. 771.2 700.0 602.4 521.7 463.3 475.6
- -------------------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital .............. $ 2,500.4 $ 4,159.7 $ 2,644.4 $ 2,897.4 $ 3,870.2 $ 2,291.4
Property, plant and
equipment (net) ............. 9,676.7 7,843.8 6,609.4 5,926.7 5,269.1 5,296.3
Total assets ................. 35,634.9 31,853.4 25,735.9 24,266.9 23,831.8 21,856.6
Long-term debt ............... 3,143.9 3,220.8 1,346.5 1,155.9 1,372.8 1,145.9
Stockholders' equity ......... 13,241.6 12,801.8 12,594.6 11,964.0 11,735.7 11,139.0
- -------------------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ....................... 18.0% 19.5% 19.5% 19.6% 20.0% 20.0%
Average total assets ........ 17.5% 18.2% 18.5% 16.1% 14.6% 14.3%
- -------------------------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding (millions) ...... 2,349.0 2,378.8 2,409.0 2,427.2 2,472.3 2,514.3
Average common shares
outstanding assuming
dilution (millions) ......... 2,404.6 2,441.1 2,469.5 2,489.6 2,527.3 2,557.7
Number of stockholders
of record ................... 280,500 269,600 263,900 247,300 243,000 244,700
Number of employees .......... 62,300 57,300 53,800 49,100 45,200 47,500
===============================================================================================================================
<CAPTION>
Merck & Co., Inc. and Subsidiaries
($ in millions except
per share amounts) 1993 1992/(2)/ 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results for Year:
Sales ........................ $ 10,498.2 $ 9,662.5 $ 8,602.7 $ 7,671.5 $ 6,550.5
Materials and production costs 2,497.6 2,096.1 1,934.9 1,778.1 1,550.3
Marketing/administrative
expenses .................... 2,913.9 2,963.3 2,570.3 2,388.0 2,013.4
Research/development expenses 1,172.8 1,111.6 987.8 854.0 750.5
Acquired research ............ -- -- -- -- --
Equity (income) loss
from affiliates ............. 26.1 (25.8) 21.1 22.4 11.5
Gains on sales of businesses . -- -- -- -- --
Restructuring charge ......... 775.0 -- -- -- --
Gain on joint venture
formation ................... -- -- -- -- --
Provision for joint
venture obligation .......... -- -- -- -- --
Other (income) expense, net .. 10.1 (46.3) (78.1) (69.8) (58.2)
Income before taxes .......... 3,102.7 3,563.6 3,166.7 2,698.8 2,283.0
Taxes on income .............. 936.5 1,117.0 1,045.0 917.6 787.6
Net income ................... 2,166.2 2,446.6 2,121.7 1,781.2 1,495.4
Basic earnings per
common share ................ $.94 $1.06 $.91 $.76 $.63
Earnings per common share
assuming dilution ........... $.93 $1.05 $.91 $.75 $.62
Dividends declared ........... 1,239.0 1,106.9 920.3 788.1 681.5
Dividends paid per
common share ................ $.52 $.46 $.39 $.32 $.28
Capital expenditures ......... 1,012.7 1,066.6 1,041.5 670.8 433.0
Depreciation ................. 348.4 290.3 242.7 231.4 206.4
- --------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital .............. $ 541.6 $ 1,241.1 $ 1,496.5 $ 939.2 $ 1,502.5
Property, plant and
equipment (net) ............. 4,894.6 4,271.1 3,504.5 2,721.7 2,292.5
Total assets ................. 19,927.5 11,086.0 9,498.5 8,029.8 6,756.7
Long-term debt ............... 1,120.8 495.7 493.7 124.1 117.8
Stockholders' equity ......... 10,021.7 5,002.9 4,916.2 3,834.4 3,520.6
- --------------------------------------------------------------------------------------------------------------
Financial Ratios:
Net income as a % of:
Sales ....................... 20.6% 25.3% 24.7% 23.2% 22.8%
Average total assets ........ 14.0% 24.1% 24.2% 24.1% 23.2%
- --------------------------------------------------------------------------------------------------------------
Year-End Statistics:
Average common shares
outstanding (millions) ...... 2,313.0 2,307.0 2,319.8 2,344.1 2,376.6
Average common shares
outstanding assuming
dilution (millions) ......... 2,332.0 2,330.6 2,343.3 2,363.7 2,401.6
Number of stockholders
of record ................... 231,300 161,200 91,100 82,300 75,600
Number of employees .......... 47,100/(3)/ 38,400 37,700 36,900 34,400
===============================================================================================================
</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)/ Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees.
58 Merck & Co., Inc. 1999 Annual Report Financial Section
<PAGE>
Exhibit 21
MERCK & CO., INC. SUBSIDIARIES
as of 12/31/99
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
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 Investments, Inc. Delaware
Merck Capital Resources, Inc. Delaware
MSD Technology, L.P./1/ Delaware
Merck Finance Co., Inc. Delaware
Merck Enterprises Canada, Ltd. Canada
Merck Foreign Sales Corporation Ltd. Bermuda
Merck Hamilton, Inc. California
Merck Holdings, Inc. Delaware
Frosst Laboratories, Inc. Delaware
Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal
Istituto Gentili S.p.A./Inc. Italy/Delaware
KBI Inc. Delaware
KBI Sub Inc. Delaware
KBI-E Inc. Delaware
KBI-P Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Merck-Medco Holdings II Corp. Delaware
Cloverleaf International Holdings S.A. Luxembourg
Coordinated Patient Care Scandinavia AS Norway
Medco Holdings S. de R.L. de C.V. Mexico
Medco de Mexico Managed Care S. de R.L. de C.V. Mexico
Medco Servicios de Mexico, S. de R.L. de C.V. Mexico
Medidoc AB Sweden
Coordination Medicale et Pharmaceutique, S.A. France
Fontelabor-Produtos Farmaceuticos, Lda. Portugal
Merck Frosst Canada & Co. Canada
Maple Leaf Holdings SRL Barbados
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
MSD (Nippon Holdings) BV Amsterdam
Chibret Pharmazeutische GmbH Germany
Laboratoires Martin-Johnson & Johnson-MSD 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
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
Laboratorios Frosst, 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
Sharp & Dohme, S.A. Spain
Merck Sharp & Dohme Chibret A.G. Switzerland
Merck Sharp & Dohme de Venezuela S.R.L. Venezuela
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
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 Britain
Merck Sharp & Dohme Finance Europe Great Britain
Thomas Morson & Son Limited Great Britain
Merck Sharp & Dohme IDEA, Inc. Switzerland
Merck Sharp & Dohme (Sweden) A.B. Sweden
Merck Sharp & Dohme (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 (Puerto Rico) Ltd. Bermuda
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
Tradewinds Manufacturing SRL Barbados
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
Cuyahoga, C.A. Venezuela
Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico
Merck Sharp & Dohme (I.A.) Corp. Delaware
Merck Sharp & Dohme (Argentina) Inc. Delaware
MSD Korea Ltd. Korea/Delaware
Merck Sharp Dohme Ilaclari Limited Sirketi Turkey
Merck Sharp & Dohme Farmaceutica 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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 Lakemedel (Scandinavia) Aktiebolog Sweden
Prosalud Peruana S.A. Peru
STELLARx, Inc. Nevada
TELERx Marketing Inc. Pennsylvania
Merck Investment Co., Inc. Delaware
Merck Liability Management Company Delaware
Merck LMC Cash Management (Bermuda) Ltd. Bermuda
Merck LMC Cash Management, Inc. Delaware
Merck-Medco Managed Care, L.L.C. Delaware
CM Delaware Corporation Delaware
DM-MG, L.L.C. Delaware
MCCO Corp. New Jersey
Medco Containment Insurance Company of New Jersey New Jersey
Medco Containment Insurance Company of New York New York
Medco Containment Life Insurance Company Pennsylvania
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
Merck-Medco Rx Services of Willingboro New Jersey, L.L.C. New Jersey
Mergerco Delaware No. 10, L.L.C. Delaware
MW Holdings, L.L.C. Delaware
NJRE, L.L.C. New Jersey
NRx Federal Corp. Delaware
National Rx Services, Inc. of Missouri Missouri
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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
The Institute for Effectiveness Research, L.L.C. Delaware
Systemed, L.L.C. 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 SRL 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
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
SIBIA Neurosciences, Inc. California
The O'Hare Group, Inc./1/ Delaware
</TABLE>
______________________
/1/ own less than 100%
5
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned does hereby appoint CELIA A. COLBERT 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 10-K Annual Report of Merck & Co., Inc. for the
fiscal year ended December 31, 1999 under the Securities Exchange Act of 1934,
including amendments thereto and all exhibits and other documents in connection
therewith.
IN WITNESS WHEREOF, this instrument has been duly executed as of the
22nd day of February, 2000.
MERCK & CO., Inc.
By /s/ Raymond V. Gilmartin
---------------------------------
Raymond V. Gilmartin
(Chairman of the Board, President
and Chief Executive Officer)
/s/ Raymond V. Gilmartin Chairman of the Board, President
- ----------------------------------
Raymond V. Gilmartin and Chief Executive Officer
(Principal Executive Officer; Director)
/s/ Judy C. Lewent Senior Vice President and Chief Financial
- ---------------------------------- Officer (Principal Financial Officer)
Judy C. Lewent
/s/ Richard C. Henriques, Jr. Vice President, Controller
- ----------------------------------
Richard C. Henriques, Jr. (Principal Accounting Officer)
DIRECTORS
/s/ H. Brewster Atwater, Jr. /s/ William B. Harrison, Jr.
- ---------------------------------- ----------------------------------------
H. Brewster Atwater, Jr. William B. Harrison, Jr.
/s/ Derek Birkin /s/ William N. Kelley
- ---------------------------------- ----------------------------------------
Derek Birkin William N. Kelley
/s/ Lawrence A. Bossidy /s/ Edward M. Scolnick
- ----------------------------------- ----------------------------------------
Lawrence A. Bossidy Edward M. Scolnick
/s/ William G. Bowen /s/ Anne M. Tatlock
- ----------------------------------- ----------------------------------------
William G. Bowen Anne M. Tatlock
/s/ Carolyne K. Davis /s/ Samuel O. Thier
- ----------------------------------- ----------------------------------------
Carolyne K. Davis Samuel O. Thier
/s/ Lloyd C. Elam /s/ Dennis Weatherstone
- ----------------------------------- ----------------------------------------
Lloyd C. Elam Dennis Weatherstone
/s/ Charles E. Exley, Jr.
- -----------------------------------
Charles E. Exley, Jr.
<PAGE>
EXHIBIT 24
I, Debra A. Bollwage, 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 22, 2000, 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. 10 - 2000
--------------------------------
RESOLVED, that the proposed form of Form 10-K Annual Report of the
Company for the fiscal year ended December 31, 1999 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 10-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 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 10-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 10th day of March, 2000.
[Corporate Seal] /s/ Debra A. Bollwage
---------------------------
Debra A. Bollwage
Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,022
<SECURITIES> 1,181
<RECEIVABLES> 4,089
<ALLOWANCES> 0<F1>
<INVENTORY> 2,847
<CURRENT-ASSETS> 11,259
<PP&E> 14,347
<DEPRECIATION> (4,670)
<TOTAL-ASSETS> 35,635
<CURRENT-LIABILITIES> 8,759
<BONDS> 3,144
0
0
<COMMON> 30
<OTHER-SE> 13,212
<TOTAL-LIABILITY-AND-EQUITY> 35,635
<SALES> 32,714
<TOTAL-REVENUES> 32,714
<CGS> 17,534
<TOTAL-COSTS> 17,534
<OTHER-EXPENSES> 2,068
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 317
<INCOME-PRETAX> 8,620
<INCOME-TAX> 2,729
<INCOME-CONTINUING> 5,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,891
<EPS-BASIC> 2.51
<EPS-DILUTED> 2.45
<FN>
<F1>NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
