Companies: 10,652     total market cap: $140.702 T
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Merck
MRK
#52
Rank
$286.34 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$114.64
Share price
1.12%
Change (1 day)
17.04%
Change (1 year)
๐Ÿ’Š Pharmaceuticals๐Ÿ‡บ๐Ÿ‡ธ Dow jones๐Ÿงฌ Biotech
Categories
  1. Merck
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

Merck - 10-Q quarterly report FY2019 Q2


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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. 1-6571
Merck & Co., Inc.
(Exact name of registrant as specified in its charter)
New Jersey
22-1918501
(State or other jurisdiction of incorporation)
(I.R.S Employer Identification No.)
 
 
2000 Galloping Hill Road
Kenilworth
New Jersey
07033
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code) (908) 740-4000
 
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report.)
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  ☒   No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒   No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
 
 
 
 
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
 
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock ($0.50 par value)
MRK
New York Stock Exchange
1.125% Notes due 2021
MRK/21
New York Stock Exchange
0.500% Notes due 2024
MRK 24
New York Stock Exchange
1.875% Notes due 2026
MRK/26
New York Stock Exchange
2.500% Notes due 2034
MRK/34
New York Stock Exchange
1.375% Notes due 2036
MRK 36A
New York Stock Exchange
The number of shares of common stock outstanding as of the close of business on July 31, 2019: 2,560,374,643
 




Part I - Financial Information
Item 1. Financial Statements
MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Sales
$
11,760

 
$
10,465

 
$
22,575

 
$
20,502

Costs, Expenses and Other
 
 
 
 
 
 
 
Cost of sales
3,401

 
3,417

 
6,453

 
6,601

Selling, general and administrative
2,712

 
2,508

 
5,138

 
5,016

Research and development
2,189

 
2,274

 
4,119

 
5,470

Restructuring costs
59

 
228

 
212

 
323

Other (income) expense, net
140

 
(48
)
 
327

 
(340
)
 
8,501

 
8,379

 
16,249

 
17,070

Income Before Taxes
3,259

 
2,086

 
6,326

 
3,432

Taxes on Income
615

 
370

 
820

 
975

Net Income
2,644

 
1,716

 
5,506

 
2,457

Less: Net (Loss) Income Attributable to Noncontrolling Interests
(26
)
 
9

 
(79
)
 
14

Net Income Attributable to Merck & Co., Inc.
$
2,670

 
$
1,707

 
$
5,585

 
$
2,443

Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders
$
1.04

 
$
0.64

 
$
2.17

 
$
0.91

Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders
$
1.03

 
$
0.63

 
$
2.15

 
$
0.90

 
MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited, $ in millions)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net Income Attributable to Merck & Co., Inc.
$
2,670

 
$
1,707

 
$
5,585

 
$
2,443

Other Comprehensive (Loss) Income Net of Taxes:
 
 
 
 
 
 
 
Net unrealized (loss) gain on derivatives, net of reclassifications
(52
)
 
266

 
(100
)
 
196

Net unrealized gain (loss) on investments, net of reclassifications
44

 
3

 
126

 
(96
)
Benefit plan net gain and prior service credit, net of amortization
11

 
30

 
26

 
66

Cumulative translation adjustment
(19
)
 
(361
)
 
131

 
(104
)
 
(16
)
 
(62
)
 
183

 
62

Comprehensive Income Attributable to Merck & Co., Inc.
$
2,654

 
$
1,645

 
$
5,768

 
$
2,505

 The accompanying notes are an integral part of these condensed consolidated financial statements.

- 2 -



MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions except per share amounts)
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
6,659

 
$
7,965

Short-term investments
446

 
899

Accounts receivable (net of allowance for doubtful accounts of $122 in 2019
and $119 in 2018)
7,964

 
7,071

Inventories (excludes inventories of $1,464 in 2019 and $1,417 in 2018
classified in Other assets - see Note 6)
5,847

 
5,440

Other current assets
3,382

 
4,500

Total current assets
24,298

 
25,875

Investments
3,779

 
6,233

Property, Plant and Equipment, at cost, net of accumulated depreciation of $17,049
in 2019 and $16,324 in 2018
13,862

 
13,291

Goodwill
19,490

 
18,253

Other Intangibles, Net
13,381

 
11,431

Other Assets
9,155

 
7,554

 
$
83,965

 
$
82,637

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Loans payable and current portion of long-term debt
$
3,816

 
$
5,308

Trade accounts payable
3,142

 
3,318

Accrued and other current liabilities
11,054

 
10,151

Income taxes payable
634

 
1,971

Dividends payable
1,439

 
1,458

Total current liabilities
20,085

 
22,206

Long-Term Debt
22,771

 
19,806

Deferred Income Taxes
2,089

 
1,702

Other Noncurrent Liabilities
11,283

 
12,041

Merck & Co., Inc. Stockholders’ Equity
 
 
 
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2019 and 2018
1,788

 
1,788

Other paid-in capital
39,484

 
38,808

Retained earnings
45,295

 
42,579

Accumulated other comprehensive loss
(5,362
)
 
(5,545
)
 
81,205

 
77,630

Less treasury stock, at cost:
1,010,308,500 shares in 2019 and 984,543,979 shares in 2018
53,570

 
50,929

Total Merck & Co., Inc. stockholders’ equity
27,635

 
26,701

Noncontrolling Interests
102

 
181

Total equity
27,737

 
26,882

 
$
83,965

 
$
82,637

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

- 3 -



MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)
 
 
Six Months Ended 
 June 30,
 
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income
$
5,506

 
$
2,457

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,871

 
2,427

Intangible asset impairment charges
252

 
—

Charge for future payments related to collaboration license options
—

 
650

Deferred income taxes
(149
)
 
(258
)
Share-based compensation
204

 
170

Other
114

 
365

Net changes in assets and liabilities
(3,378
)
 
(1,274
)
Net Cash Provided by Operating Activities
4,420

 
4,537

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(1,377
)
 
(1,033
)
Purchases of securities and other investments
(1,810
)
 
(5,248
)
Proceeds from sales of securities and other investments
4,935

 
7,403

Acquisition of Antelliq Corporation, net of cash acquired
(3,620
)
 
—

Other acquisitions, net of cash acquired
(270
)
 
(372
)
Other
85

 
(274
)
Net Cash (Used in) Provided by Investing Activities
(2,057
)
 
476

Cash Flows from Financing Activities
 
 
 
Net change in short-term borrowings
(3,532
)
 
2,069

Payments on debt
—

 
(3,008
)
Proceeds from issuance of debt
4,958

 
—

Purchases of treasury stock
(2,325
)
 
(2,162
)
Dividends paid to stockholders
(2,896
)
 
(2,610
)
Proceeds from exercise of stock options
304

 
299

Other
(207
)
 
(277
)
Net Cash Used in Financing Activities
(3,698
)
 
(5,689
)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
28

 
(108
)
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(1,307
)
 
(784
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted
cash of $2 million at January 1, 2019 included in Other Assets)
7,967

 
6,096

Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash
of $1 million at June 30, 2019 included in Other Assets)
$
6,660

 
$
5,312

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

- 4 -
Notes to Condensed Consolidated Financial Statements (unaudited)

1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February 27, 2019.
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to the current presentation.
Recently Adopted Accounting Standards
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases (ASU 2016-02) and subsequently issued several updates to the new guidance (ASC 842 or new guidance). The new guidance requires that lessees recognize a right-of-use asset and a lease liability for each of its leases (other than leases that meet the definition of a short-term lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to previous operating leases), while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to previous capital leases). The Company adopted the new standard on January 1, 2019 using a modified retrospective approach. Merck elected the transition method that allows for application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company also elected available practical expedients. Upon adoption, the Company recognized $1.1 billion of additional assets and related liabilities on its consolidated balance sheet (see Note 7). The adoption of the new guidance did not impact the Company’s consolidated statements of income or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019, including adoption in any interim period. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In April 2018, the FASB issued new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under revenue recognition guidance (ASC 606). The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is to be applied on a retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not anticipate the adoption of this standard will have a material effect on its consolidated financial statements.
2.
Acquisitions, Research Collaborations and License Agreements
The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment

- 5 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.05 billion in cash; additionally, former Peloton shareholders will be eligible to receive up to an additional $1.15 billion contingent upon successful achievement of future regulatory and sales-based milestones. The acquisition will be accounted for as an acquisition of an asset.
On April 1, 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:
($ in millions)
April 1, 2019
Cash and cash equivalents
$
31

Accounts receivable
73

Inventories
97

Property, plant and equipment
62

Identifiable intangible assets (useful lives ranging from 18-24 years) (1)
2,689

Deferred income tax liabilities
(563
)
Other assets and liabilities, net
(81
)
Total identifiable net assets
2,308

Goodwill (2)
1,343

Consideration transferred
$
3,651

(1) 
The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
(2) 
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.

The Company’s results for the second quarter of 2019 include two months of activity for Antelliq. The Company incurred $47 million of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected in Selling, general and administrative expenses in the second quarter of 2019.
Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets for in-process research and development (IPR&D) of $156 million, cash of $83 million and other net assets of $31 million. The excess of the consideration transferred over the fair value of net assets acquired of $31 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. Actual cash flows are likely to be different than those assumed.
In June 2018, Merck acquired Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to Cavatak (V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the Keytruda and Cavatak combination in melanoma, prostate, lung and bladder cancers. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $34 million (primarily cash) at the acquisition date and Research and development expenses of $344 million in the second quarter and first six months of 2018 related to the transaction. There are no future contingent payments associated with the acquisition.
In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 3).


- 6 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

3.    Collaborative Arrangements
Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below.
AstraZeneca
In July 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of ovarian and breast cancer. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities.
Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research and development costs. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.
As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion in 2017 and will make payments of up to $750 million over a multi-year period for certain license options (of which $250 million was paid in December 2017, $400 million was paid in December 2018 and $100 million is expected to be paid in December 2019). The Company recorded an aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and future license option payments. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.
In the second quarter of 2019, Merck determined it was probable that annual sales of Lynparza in the future would trigger a $300 million sales-based milestone payment from Merck to AstraZeneca. Accordingly, in the second quarter of 2019, Merck recorded a $300 million liability and a corresponding increase to the intangible asset related to Lynparza and also recognized $52 million of cumulative amortization expense within Cost of sales. Prior to 2019, Merck accrued sales-based milestone payments aggregating $700 million related to Lynparza. Of these amounts, $250 million has been paid to AstraZeneca. Potential future sales-based milestone payments of $3.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.
In April 2019, Lynparza received regulatory approval in the European Union (EU) as a monotherapy for the treatment of certain adult patients with advanced breast cancer, triggering a $30 million capitalized milestone payment from Merck to AstraZeneca. In June 2019, Lynparza received regulatory approval in the EU as a monotherapy for the maintenance treatment of certain adult patients with BRCA-mutated advanced ovarian cancer, triggering a $30 million capitalized milestone payment from Merck to AstraZeneca. In 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $140 million in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.7 billion remain under the agreement.
The asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $1.0 billion at June 30, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

- 7 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized financial information related to this collaboration is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Alliance revenue
$
111

 
$
44

 
$
190

 
$
76

 
 
 
 
 
 
 
 
Cost of sales (1)
73

 
24

 
92

 
36

Selling, general and administrative
33

 
9

 
59

 
16

Research and development
33

 
42

 
78

 
71

 
 
 
 
 
 
 
 
($ in millions)
 
 
 
 
June 30, 2019
 
December 31, 2018
Receivables from AstraZeneca included in Other current assets
 
 
 
 
$
105

 
$
52

Payables to AstraZeneca included in Accrued and other current liabilities (2)
 
 
 
 
605

 
405

Payables to AstraZeneca included in Other Noncurrent Liabilities (3)
 
 
 
 
300

 
250

(1) Represents amortization of capitalized milestone payments.
(2) Includes accrued milestone and license option payments.
(3) Includes accrued milestone payments.
Eisai
In March 2018, Merck and Eisai announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Merck’s anti-PD-1 therapy, Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in Research and development costs.
Under the agreement, Merck made an upfront payment to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 (of which $325 million was paid in March 2019, $200 million is expected to be paid in March 2020 and $125 million is expected to be paid in March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in the first quarter of 2018 related to the upfront payment and future option payments. In addition, the agreement provides for Eisai to receive up to $385 million associated with the achievement of certain clinical and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima.
In the first quarter of 2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger $282 million of sales-based milestone payments from Merck to Eisai. Accordingly, in the first quarter of 2019, Merck recorded $282 million of liabilities and corresponding increases to the intangible asset related to Lenvima and also recognized $35 million of cumulative amortization expense within Cost of sales. Merck previously accrued sales-based milestone payments aggregating $268 million related to Lenvima in 2018. Of these amounts, $50 million has been paid to Eisai. Potential future sales-based milestone payments of $3.42 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.
In 2018, Lenvima received regulatory approvals triggering capitalized milestone payments of $250 million in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of $135 million remain under the agreement.
The asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $687 million at June 30, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

- 8 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized financial information related to this collaboration is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Alliance revenue
$
97

 
$
35

 
$
171

 
$
35

 
 
 
 
 
 
 
 
Cost of sales (1)
23

 
1

 
74

 
1

Selling, general and administrative
19

 
2

 
38

 
2

Research and development (2)
62

 
36

 
109

 
1,436

 
 
 
 
 
 
 
 
($ in millions)
 
 
 
 
June 30, 2019
 
December 31, 2018
Receivables from Eisai included in Other current assets
 
 
 
 
$
98

 
$
71

Payables to Eisai included in Accrued and other current liabilities (3)
 
 
 
 
709

 
375

Payables to Eisai included in Other Noncurrent Liabilities (3)
 
 
 
 
125

 
543

(1) Represents amortization of capitalized milestone payments.
(2) Amount for the first six months of 2018 includes the upfront payment and future option payments.
(3) Includes accrued milestone and option payments.
Bayer AG
In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas, which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have implemented a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. Under the agreement, Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead commercialization in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.
In the first quarter of 2018, Merck made a $350 million sales-based milestone payment to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. In the second quarter of 2018, Merck determined it was probable that annual worldwide sales of Adempas in the future would trigger a $375 million sales-based milestone payment from Merck to Bayer; accordingly, Merck recorded a $375 million liability and a corresponding increase to the intangible asset related to Adempas and also recognized $106 million of cumulative amortization expense within Cost of sales. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.
The intangible asset balance related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $956 million at June 30, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to impairment testing.

- 9 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized financial information related to this collaboration is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Net product sales recorded by Merck
$
53

 
$
47

 
$
100

 
$
90

Merck’s profit share from sales in Bayer’s marketing territories
51

 
28

 
94

 
53

Total sales
104

 
75

 
194

 
143

 
 
 
 
 
 
 
 
Cost of sales (1)
29

 
132

 
58

 
159

Selling, general and administrative
11

 
10

 
20

 
17

Research and development
32

 
28

 
62

 
56

 
 
 
 
 
 
 
 
($ in millions)
 
 
 
 
June 30, 2019
 
December 31, 2018
Receivables from Bayer included in Other current assets
 
 
 
 
$
41

 
$
32

Payables to Bayer included in Other Noncurrent Liabilities (2)
 
 
 
 
375

 
375

(1) Includes amortization of intangible assets.
(2) Represents accrued milestone payment.
4.
Restructuring
Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $800 million to $1.2 billion. The Company estimates that approximately 55% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 45% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $500 million in 2019 related to the program. Actions under previous global restructuring programs have been substantially completed.
The Company recorded total pretax costs of $159 million and $235 million in the second quarter of 2019 and 2018, respectively, and $346 million and $339 million for the first six months of 2019 and 2018, respectively, related to restructuring program activities. For segment reporting, restructuring charges are unallocated expenses.
The following tables summarize the charges related to restructuring program activities by type of cost:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Cost of sales
$
—

 
$
64

 
$
1

 
$
65

 
$
—

 
$
98

 
$
1

 
$
99

Selling, general and administrative
—

 
32

 
—

 
32

 
—

 
32

 
—

 
32

Research and development
—

 
2

 
1

 
3

 
—

 
2

 
1

 
3

Restructuring costs
25

 
—

 
34

 
59

 
153

 
—

 
59

 
212

 
$
25

 
$
98

 
$
36

 
$
159

 
$
153

 
$
132

 
$
61

 
$
346

 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Cost of sales
$
—

 
$
—

 
$
3

 
$
3

 
$
—

 
$
—

 
$
9

 
$
9

Selling, general and administrative
—

 
—

 
1

 
1

 
—

 
1

 
1

 
2

Research and development
—

 
—

 
3

 
3

 
—

 
(3
)
 
8

 
5

Restructuring costs
200

 
—

 
28

 
228

 
255

 
—

 
68

 
323

 
$
200

 
$
—

 
$
35

 
$
235

 
$
255

 
$
(2
)
 
$
86

 
$
339


Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.

- 10 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2019 and 2018 includes asset abandonment, shut-down and other related costs, as well as pretax gains and losses resulting from sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 11) and share-based compensation.
The following table summarizes the charges and spending relating to restructuring program activities for the six months ended June 30, 2019:
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Restructuring reserves January 1, 2019
$
443

 
$
—

 
$
91

 
$
534

Expense
153

 
132

 
61

 
346

(Payments) receipts, net
(126
)
 
—

 
(77
)
 
(203
)
Non-cash activity
—

 
(132
)
 
(2
)
 
(134
)
Restructuring reserves June 30, 2019 (1)
$
470

 
$
—

 
$
73

 
$
543

(1) 
The remaining cash outlays are expected to be substantially completed by the end of 2023.
5.
Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect 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 hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts is recorded in Accumulated other comprehensive income (AOCI) and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

- 11 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.
The Company also uses forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI and remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.
The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:
 
Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)
 
Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net Investment Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
17

 
$
(12
)
 
$
7

 
$
(14
)
 
$
(8
)
 
$
(3
)
 
$
(15
)
 
$
(3
)
Euro-denominated notes
28

 
(271
)
 
(2
)
 
(92
)
 
—

 
—

 
—

 
—

(1) No amounts were reclassified from AOCI into income related to the sale of a subsidiary.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
At June 30, 2019, the Company was a party to 19 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.

- 12 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 
June 30, 2019
($ in millions)
Par Value of Debt
 
Number of Interest Rate Swaps Held
 
Total Swap Notional Amount
1.85% notes due 2020
1,250

 
5

 
1,250

3.875% notes due 2021
1,150

 
5

 
1,150

2.40% notes due 2022
1,000

 
4

 
1,000

2.35% notes due 2022
1,250

 
5

 
1,250

The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
 
Carrying Amount of Hedged Liabilities
 
Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Balance Sheet Line Item in which Hedged Item is Included
 
 
 
 
 
 
 
Loans payable and current portion of long-term debt
$
1,244

 
$
—

 
$
(6
)
 
$
—

Long-Term Debt
3,406

 
4,560

 
11

 
(82
)

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:
 
 
June 30, 2019
 
December 31, 2018
 
 
Fair Value of Derivative
 
U.S. Dollar
Notional
 
Fair Value of Derivative
 
U.S. Dollar
Notional
($ in millions)
Balance Sheet Caption
Asset
 
Liability
 
Asset
 
Liability
 
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other Assets
$
14

 
$
—

 
$
2,150

 
$
—

 
$
—

 
$
—

Interest rate swap contracts
Accrued and other current liabilities
—

 
6

 
1,250

 
—

 
—

 
—

Interest rate swap contracts
Other Noncurrent Liabilities
—

 
2

 
1,250

 
—

 
81

 
4,650

Foreign exchange contracts
Other current assets
168

 
—

 
6,389

 
263

 
—

 
6,222

Foreign exchange contracts
Other Assets
49

 
—

 
2,790

 
75

 
—

 
2,655

Foreign exchange contracts
Accrued and other current liabilities
—

 
13

 
1,252

 
—

 
7

 
774

Foreign exchange contracts
Other Noncurrent Liabilities
—

 
—

 
—

 
—

 
1

 
89

 
 
$
231


$
21


$
15,081


$
338


$
89


$
14,390

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
$
70

 
$
—

 
$
6,665

 
$
116

 
$
—

 
$
5,430

Foreign exchange contracts
Accrued and other current liabilities
—

 
63

 
4,982

 
—

 
71

 
9,922

 
 
$
70

 
$
63

 
$
11,647

 
$
116

 
$
71

 
$
15,352

 
 
$
301


$
84


$
26,728


$
454


$
160


$
29,742


As noted above, the Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:
 
June 30, 2019
 
December 31, 2018
($ in millions)
Asset
 
Liability
 
Asset
 
Liability
Gross amounts recognized in the consolidated balance sheet
$
301

 
$
84

 
$
454

 
$
160

Gross amounts subject to offset in master netting arrangements not offset in the consolidated
balance sheet
(69
)
 
(69
)
 
(121
)
 
(121
)
Cash collateral received
(32
)
 
—

 
(107
)
 
—

Net amounts
$
200

 
$
15

 
$
226

 
$
39



- 13 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:
 
Sales
 
Other (income) expense, net (1)
 
Other comprehensive income (loss)
 
Sales
 
Other (income) expense, net (1)
 
Other comprehensive income (loss)
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded
$
11,760

 
$
10,465

 
$
140

 
(48
)
 
$
(16
)
 
$
(62
)
 
22,575

 
$
20,502

 
$
327

 
$
(340
)
 
$
183

 
$
62

(Gain) loss on fair value hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedged items
—

 
—

 
55

 
(15
)
 
—

 
—

 
—

 
—

 
88

 
(77
)
 
—

 
—

Derivatives designated as hedging instruments
—

 
—

 
(45
)
 
22

 
—

 
—

 
—

 
—

 
(68
)
 
84

 
—

 
—

Impact of cash flow hedging relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of income (loss) recognized in OCI on derivatives
—

 
—

 
—

 
—

 
10

 
264

 
—

 
—

 
—

 
—

 
(2
)
 
84

Increase (decrease) in Sales as a result of AOCI reclassifications
75

 
(73
)
 
—

 
—

 
(75
)
 
73

 
119

 
(166
)
 
—

 
—

 
(119
)
 
166

Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain recognized in Other (income) expense, net on derivatives
—

 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
—

 
—

Amount of loss recognized in OCI on derivatives
—

 
—

 
—

 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
—

 
(5
)
 
(2
)
(1) Interest expense is a component of Other (income) expense, net.
The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:
 
 
 
Amount of Derivative Pretax (Gain) Loss Recognized in Income
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions)
Income Statement Caption
 
2019
 
2018
 
2019
 
2018
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts (1)
Other (income) expense, net
 
$
2

 
$
(195
)
 
$
120

 
$
(167
)
Foreign exchange contracts (2)
Sales
 
(6
)
 
(14
)
 
4

 
(5
)
(1) These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.
(2) These derivative contracts serve as economic hedges of forecasted transactions.
At June 30, 2019, the Company estimates $76 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.


- 14 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Investments in Debt and Equity Securities
Information on investments in debt and equity securities is as follows:
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
($ in millions)
Gains
 
Losses
 
Gains
 
Losses
 
Corporate notes and bonds
$
2,666

 
$
36

 
$
(2
)
 
$
2,700

 
$
4,985

 
$
3

 
$
(68
)
 
$
4,920

Asset-backed securities
789

 
4

 
(1
)
 
792

 
1,285

 
1

 
(11
)
 
1,275

U.S. government and agency securities
575

 
10

 
—

 
585

 
895

 
2

 
(5
)
 
892

Foreign government bonds
41

 
—

 
—

 
41

 
167

 
—

 
(1
)
 
166

Mortgage-backed securities
5

 
—

 
—

 
5

 
8

 
—

 
—

 
8

Total debt securities
$
4,076


$
50


$
(3
)
 
$
4,123

 
$
7,340


$
6


$
(85
)
 
$
7,261

Publicly traded equity securities (1)
 
 
 
 
 
 
756

 


 


 


 
456

Total debt and publicly traded equity securities








 
$
4,879

 








 
$
7,717


(1) Unrealized net (losses) gains recognized in Other (income) expense, net on equity securities still held at June 30, 2019 were $(39) million and $7 million, for the second quarter of 2019 and 2018, respectively, and were $75 million and $50 million for the first six months of 2019 and 2018, respectively.
At June 30, 2019, the Company also had $465 million of equity investments without readily determinable fair values included in Other Assets. During the first six months of 2019, the Company recognized unrealized gains of $4 million on certain of these equity investments recorded in Other (income) expense, net based on favorable observable price changes from transactions involving similar investments of the same investee. In addition, during the first six months of 2019, the Company recognized unrealized losses of $10 million in Other (income) expense, net related to certain of these investments based on unfavorable observable price changes. Since January 1, 2018, cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in equity investments without readily determinable fair values were $172 million and $21 million, respectively.
Available-for-sale debt securities included in Short-term investments totaled $398 million at June 30, 2019. Of the remaining debt securities, $3.4 billion mature within five years. At June 30, 2019 and December 31, 2018, there were no debt securities pledged as collateral.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities, Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

- 15 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements Using
 
Fair Value Measurements Using
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
($ in millions)
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate notes and bonds
$
—

 
$
2,660

 
$
—

 
$
2,660

 
$
—

 
$
4,835

 
$
—

 
$
4,835

Asset-backed securities (1)
—

 
788

 
—

 
788

 
—

 
1,253

 
—

 
1,253

U.S. government and agency securities
—

 
508

 
—

 
508

 
—

 
731

 
—

 
731

Foreign government bonds
—

 
41

 
—

 
41

 
—

 
166

 
—

 
166

Publicly traded equity securities
228

 
—

 
—

 
228

 
147

 
—

 
—

 
147

 
228

 
3,997

 
—

 
4,225

 
147

 
6,985

 
—

 
7,132

Other assets (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
58

 
19

 
—

 
77

 
55

 
106

 
—

 
161

Corporate notes and bonds
—

 
40

 
—

 
40

 
—

 
85

 
—

 
85

Mortgage-backed securities
—

 
5

 
—

 
5

 
—

 
8

 
—

 
8

Asset-backed securities (1)
—

 
4

 
—

 
4

 
—

 
22

 
—

 
22

Publicly traded equity securities
528

 
—

 
—

 
528

 
309

 
—

 
—

 
309

 
586


68


—


654


364


221


—


585

Derivative assets (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased currency options
—

 
158

 
—

 
158

 
—

 
213

 
—

 
213

Forward exchange contracts
—

 
129

 
—

 
129

 
—

 
241

 
—

 
241

Interest rate swaps
—

 
14

 
—

 
14

 
—

 
—

 
—

 
—

 
—


301


—


301


—


454


—


454

Total assets
$
814


$
4,366


$
—


$
5,180


$
511


$
7,660


$
—


$
8,171

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$
—

 
$
—

 
$
753

 
$
753

 
$
—

 
$
—

 
$
788

 
$
788

Derivative liabilities (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward exchange contracts
—

 
73

 
—

 
73

 
—

 
74

 
—

 
74

Interest rate swaps
—

 
8

 
—

 
8

 
—

 
81

 
—

 
81

Written currency options
—

 
3

 
—

 
3

 
—

 
5

 
—

 
5

 
—

 
84

 
—

 
84

 
—

 
160

 
—

 
160

Total liabilities
$
—


$
84


$
753


$
837


$
—


$
160


$
788


$
948

(1) 
Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.
(2) 
Investments included in other assets are restricted as to use, primarily for the payment of benefits under employee benefit plans.
(3) 
The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
There were no transfers between Level 1 and Level 2 during the first six months of 2019. As of June 30, 2019, Cash and cash equivalents of $6.7 billion included $5.9 billion of cash equivalents (which would be considered Level 2 in the fair value hierarchy).

- 16 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Contingent Consideration
Summarized information about the changes in liabilities for contingent consideration is as follows:
 
Six Months Ended June 30,
($ in millions)
2019
 
2018
Fair value January 1
$
788

 
$
935

Changes in estimated fair value (1)
50

 
122

Additions
—

 
8

Payments
(85
)
 
(235
)
Fair value June 30 (2)
$
753

 
$
830

(1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.
(2) Balance at June 30, 2019 includes $114 million recorded as a current liability for amounts expected to be paid within the next 12 months.
The payments of contingent consideration in both periods include payments related to liabilities recorded in connection with the 2016 termination of the Sanofi-Pasteur MSD joint venture. The payments of contingent consideration in the first six months of 2018 also include $175 million related to the achievement of a clinical development milestone for MK-7264 (gefapixant), a program obtained in connection with the acquisition of Afferent Pharmaceuticals.
Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at June 30, 2019, was $28.6 billion compared with a carrying value of $26.6 billion and at December 31, 2018, was $25.6 billion compared with a carrying value of $25.1 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash received by the Company from various counterparties was $32 million and $107 million at June 30, 2019 and December 31, 2018, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities. No cash collateral was advanced by the Company to counterparties as of June 30, 2019 or December 31, 2018.


- 17 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

6.
Inventories
Inventories consisted of:
($ in millions)
June 30, 2019
 
December 31, 2018
Finished goods
$
1,750

 
$
1,658

Raw materials and work in process
5,388

 
5,004

Supplies
202

 
194

Total (approximates current cost)
7,340

 
6,856

(Decrease) increase to LIFO costs
(29
)
 
1

 
$
7,311

 
$
6,857

Recognized as:
 
 
 
Inventories
$
5,847

 
$
5,440

Other assets
1,464

 
1,417


Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At June 30, 2019 and December 31, 2018, these amounts included $1.3 billion and $1.4 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $118 million and $7 million at June 30, 2019 and December 31, 2018, respectively, of inventories produced in preparation for product launches.
7.
Loans Payable, Long-Term Debt and Leases
Long-Term Debt
In March 2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings.
Leases
As discussed in Note 1, on January 1, 2019, Merck adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. As permitted under the transition guidance in ASC 842, the Company elected a package of practical expedients which, among other provisions, allowed the Company to carry forward historical lease classifications. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial.
Under ASC 842 transition guidance, Merck elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of eight years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.
Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. As a practical expedient, the Company has made an accounting policy election not to separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.
Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

- 18 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Operating lease cost was $82 million and $165 million for the second quarter and first six months of 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $65 million and $138 million for the second quarter and first six months of 2019, respectively.
Supplemental balance sheet information related to operating leases is as follows:
($ in millions)
June 30, 2019
Assets
 
Other Assets (1)
$
1,063

Liabilities
 
Accrued and other current liabilities
$
241

Other Noncurrent Liabilities
752

 
$
993

 
 
Weighted-average remaining lease term (years)
7.5

Weighted-average discount rate
3.4
%
(1) Includes prepaid leases that have no related lease liability.

Maturities of operating leases liabilities are as follows:
($ in millions)
June 30, 2019
2019 (excluding the six months ended June 30, 2019)
$
138

2020
232

2021
172

2022
146

2023
98

Thereafter
339

Total lease payments
1,125

Less: imputed interest
(132
)
 
$
993



As of June 30, 2019, the Company had entered into additional real estate operating leases that had not yet commenced. The obligations associated with these leases totaled $127 million, of which $72 million related to a lease that commenced in July 2019 and has a lease term of 10 years.
As of December 31, 2018, prior to the adoption of ASC 842, the minimum aggregate rental commitments under noncancellable leases were as follows: 2019, $188 million; 2020, $198 million; 2021, $150 million; 2022, $134 million; 2023, $84 million and thereafter, $243 million.
8.
Contingencies
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.
Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent

- 19 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.
Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax (Fosamax Litigation). As of June 30, 2019, approximately 3,900 cases have been filed and either are pending or conditionally dismissed (as noted below) against Merck in either federal or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.
In March 2011, Merck submitted a Motion to Transfer to the Judicial Panel on Multidistrict Litigation (JPML) seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. All federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL, Glynn v. Merck, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the Glynn case and held that the plaintiff’s failure to warn claim was preempted by federal law.
In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the Glynn case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. Merck filed a petition for a writ of certiorari to the U.S. Supreme Court in August 2017 seeking review of the Third Circuit’s decision. In December 2017, the Supreme Court invited the Solicitor General to file a brief in the case expressing the views of the United States, and in May 2018, the Solicitor General submitted a brief stating that the Third Circuit’s decision was wrongly decided and recommended that the Supreme Court grant Merck’s cert petition. The Supreme Court granted Merck’s petition in June 2018, and an oral argument before the Supreme Court was held on January 7, 2019. On May 20, 2019, the Supreme Court issued its opinion and decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court’s opinion. The Third Circuit has requested, by August 6, 2019, ten page letters from each side addressing two specific issues central to the appeal.
Accordingly, as of June 30, 2019, 11 cases were actively pending in the Femur Fracture MDL, and approximately 1,060 cases have either been dismissed without prejudice or administratively closed pending final resolution by the Supreme Court of the appeal of the Femur Fracture MDL court’s preemption order.
As of June 30, 2019, approximately 2,555 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge James Hyland in Middlesex County. The parties selected an initial group of cases to be reviewed through fact discovery. Merck has continued to select additional cases to be reviewed through fact discovery from 2016 to the present.
As of June 30, 2019, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California.
Additionally, there are four Femur Fracture cases pending in other state courts.
Discovery is presently stayed in the Femur Fracture MDL and in the state court cases in California. Merck intends to defend against these lawsuits.
Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia and/or Janumet. As of June 30, 2019, Merck is aware of approximately 1,350 product users alleging that Januvia and/or Janumet caused the development of pancreatic cancer and other injuries.

- 20 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). Outside of the MDL, the majority of claims have been filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).
In November 2015, the MDL and California State Court-in separate opinions-granted summary judgment to defendants on grounds of federal preemption.
Plaintiffs appealed in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery, which is ongoing. In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in the MDL and the California coordinated proceeding agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption issues and for renewing summary judgment and Daubert motions. Under the stipulated case management schedule, the filing deadline for Daubert and summary judgment motions will take place in May 2020.
As of June 30, 2019, seven product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the United States Supreme Court issued its opinion in Merck Sharp & Dohme Corp. v. Albrecht, No. 17-290. Merck filed the opinion in Albrecht with the Illinois Supreme Court in June 2019. The petition for leave to appeal remains pending.
In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against these lawsuits.
Governmental Proceedings
In the fall of 2018, the Company received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena sought information relating to any actual or potential business relationship or arrangement Merck has had with Practice Fusion, Inc. (PFI), a cloud-based, electronic health records (EHR) company that was acquired by Allscripts in January 2018. The Company cooperated with the government and responded to that subpoena. Subsequently, on May 21, 2019, Merck received a second records subpoena from the VT USAO that broadened the government’s information request by seeking information relating to Merck’s relationship with any EHR company. Shortly thereafter, the VT USAO served a Civil Investigation Demand (CID) upon Merck similarly seeking information on the Company’s relationships with EHR vendors. The CID explains that the government is conducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal healthcare programs that violate the Federal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.
On April 15, 2019, Merck received a set of investigative interrogatories from the California Attorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information concerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the resolution of that litigation. Merck is cooperating with the California Attorney General’s investigation.
As previously disclosed, the Company’s subsidiaries in China have, in the past, received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.
As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the United States. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

- 21 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Commercial and Other Litigation
Zetia Antitrust Litigation
As previously disclosed, Merck, MSD, Schering Corporation and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. In December 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. On February 6, 2019, the magistrate judge issued a report and recommendation recommending that the district judge grant in part and deny in part defendants’ motions to dismiss on non-arbitration issues. On February 20, 2019, defendants and retailer opt-out plaintiffs filed objections to the report and recommendation. The parties await a decision from the district judge. Trial is currently scheduled to begin on September 30, 2020.
Merck KGaA Litigation
As previously disclosed, in January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the UK, Germany, Switzerland, Mexico, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the parties’ coexistence agreement. The litigation is ongoing in the United States with no trial date set, and also ongoing in numerous jurisdictions outside of the United States; the Company is defending those suits in each jurisdiction.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.
Inegy — The patents protecting Inegy in Europe expired; supplemental protection certificates (SPCs) in many European countries expired in April 2019. The Company filed actions for patent infringement seeking damages against those companies that launched generic products before April 2019.
Januvia, Janumet, Janumet XR — In February 2019, Par Pharmaceutical, Inc. (Par Pharmaceutical) filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of a patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection in 2022, but prior to the expiration of the later-granted patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026, and a later granted patent owned by the Company covering the Janumet formulation which expires in 2028. Par Pharmaceutical dismissed its case in the U.S. District Court for the District of New Jersey against the Company and will litigate the action in the U.S. District Court for the District of Delaware. The Company filed a patent infringement lawsuit against Mylan Pharmaceuticals Inc. and Mylan Inc. (Mylan) in the Northern District of West Virginia. The Company has a pending, unopposed motion before the Judicial Panel of Multidistrict Litigation to transfer the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district. The U.S. District Court for the District of Delaware has scheduled the lawsuits for a single 3-day trial on invalidity issues beginning October 4, 2021. The Court will schedule separate 1-day trials on infringement issues if necessary.
Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate.

- 22 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of June 30, 2019 and December 31, 2018 of approximately $260 million and $245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
9.
Equity
 
Three Months Ended June 30,
 
  
Common Stock
Other
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Non-
Controlling
Interests
Total
($ and shares in millions except per share amounts)
Shares
Par Value
Shares
Cost
Balance at April 1, 2018
3,577

$
1,788

$
39,874

$
41,107

$
(5,060
)
885

$
(44,041
)
$
233

$
33,901

Net income attributable to Merck & Co., Inc.
—

—

—

1,707

—

—

—

—

1,707

Other comprehensive loss, net of taxes
—

—

—

—

(62
)
—

—

—

(62
)
Cash dividends declared on common stock ($0.48 per share)
—

—

—

(1,291
)
—

—

—

—

(1,291
)
Treasury stock shares purchased
—

—

—

—

—

27

(1,596
)
—

(1,596
)
Share-based compensation plans and other
—

—

(133
)
—

—

(5
)
236

—

103

Net income attributable to noncontrolling interests
—

—

—

—

—

—

—

9

9

Distributions attributable to noncontrolling interests
—

—

—

—

—

—

—

(5
)
(5
)
Balance at June 30, 2018
3,577

$
1,788

$
39,741

$
41,523

$
(5,122
)
907

$
(45,401
)
$
237

$
32,766

Balance at April 1, 2019
3,577

$
1,788

$
38,768

$
44,065

$
(5,346
)
994

$
(51,736
)
$
131

$
27,670

Net income attributable to Merck & Co., Inc.
—

—

—

2,670

—

—

—

—

2,670

Other comprehensive loss, net of taxes
—

—

—

—

(16
)
—

—

—

(16
)
Cash dividends declared on common stock ($0.55 per share)
—

—

—

(1,440
)
—

—

—

—

(1,440
)
Treasury stock shares purchased
—

—

1,000

—

—

24

(2,235
)
—

(1,235
)
Share-based compensation plans and other
—

—

(284
)
—

—

(8
)
401

—

117

Net loss attributable to noncontrolling interests
—

—

—

—

—

—

—

(26
)
(26
)
Other changes in noncontrolling ownership interests
—

—

—

—

—

—

—

(3
)
(3
)
Balance at June 30, 2019
3,577

$
1,788

$
39,484

$
45,295

$
(5,362
)
1,010

$
(53,570
)
$
102

$
27,737


- 23 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 
Six Months Ended June 30,
 
  
Common Stock
Other
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Non-
Controlling
Interests
Total
($ and shares in millions except per share amounts)
Shares
Par Value
Shares
Cost
Balance at January 1, 2018
3,577

$
1,788

$
39,902

$
41,350

$
(4,910
)
880

$
(43,794
)
$
233

$
34,569

Net income attributable to Merck & Co., Inc.
—

—

—

2,443

—

—

—

—

2,443

Adoption of new accounting standards
—

—

—

322

(274
)
—

—

—

48

Other comprehensive income, net of taxes
—

—

—

—

62

—

—

—

62

Cash dividends declared on common stock ($0.96 per share)
—

—

—

(2,592
)
—

—

—

—

(2,592
)
Treasury stock shares purchased
—

—

—

—

—

37

(2,162
)
—

(2,162
)
Share-based compensation plans and other
—

—

(161
)
—

—

(10
)
555

—

394

Net income attributable to noncontrolling interests
—

—

—

—

—

—

—

14

14

Distributions attributable to noncontrolling interests
—

—

—

—

—

—

—

(10
)
(10
)
Balance at June 30, 2018
3,577

$
1,788

$
39,741

$
41,523

$
(5,122
)
907

$
(45,401
)
$
237

$
32,766

Balance at January 1, 2019
3,577

$
1,788

$
38,808

$
42,579

$
(5,545
)
985

$
(50,929
)
$
181

$
26,882

Net income attributable to Merck & Co., Inc.
—

—

—

5,585

—

—

—

—

5,585

Other comprehensive income, net of taxes
—

—

—

—

183

—

—

—

183

Cash dividends declared on common stock ($1.10 per share)
—

—

—

(2,869
)
—

—

—

—

(2,869
)
Treasury stock shares purchased
—

—

1,000

—

—

38

(3,325
)
—

(2,325
)
Share-based compensation plans and other
—

—

(324
)
—

—

(13
)
684

—

360

Net loss attributable to noncontrolling interests
—

—

—

—

—

—

—

(79
)
(79
)
Balance at June 30, 2019
3,577

$
1,788

$
39,484

$
45,295

$
(5,362
)
1,010

$
(53,570
)
$
102

$
27,737



On October 25, 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of $5 billion made by Merck to the Dealers on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. The payments to the Dealers were recorded as reductions to shareholders’ equity, consisting of a $4 billion increase in treasury stock, which reflected the value of the initial 56.7 million shares received on October 29, 2018, and a $1 billion decrease in other-paid-in capital, which reflected the value of the stock held back by the Dealers pending final settlement. Upon settlement of the ASR agreements in April 2019, Merck received an additional 7.7 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to 64.4 million. The receipt of the additional shares was reflected as an increase to treasury stock and an increase to other-paid-in capital in the second quarter of 2019.
10.
Share-Based Compensation Plans
The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, 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 grant.
The following table provides the amounts of share-based compensation cost recorded in the Condensed Consolidated Statement of Income:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Pretax share-based compensation expense
$
111

 
$
90

 
$
204

 
$
170

Income tax benefit
(15
)
 
(13
)
 
(28
)
 
(28
)
Total share-based compensation expense, net of taxes
$
96

 
$
77

 
$
176

 
$
142


During the first six months of 2019, the Company granted 6 million RSUs with a weighted-average grant date fair value of $76.31 per RSU and during the first six months of 2018 granted 7 million RSUs with a weighted-average grant date fair value of $58.15 per RSU. During the first six months of 2019, the Company granted 609 thousand PSUs with a weighted-average

- 24 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

grant date fair value of $90.50 per PSU and during the first six months of 2018 granted 855 thousand PSUs with a weighted-average grant date fair value of $56.70 per PSU.
During the first six months of 2019, the Company granted 3 million stock options with a weighted-average exercise price of $80.00 per option and during the first six months of 2018 granted 3 million stock options with a weighted-average exercise price of $57.72 per option. The weighted-average fair value of options granted during the first six months of 2019 and 2018 was $10.63 and $8.19 per option, respectively, and was determined using the following assumptions:
  
Six Months Ended 
 June 30,
 
2019
 
2018
Expected dividend yield
3.2
%
 
3.4
%
Risk-free interest rate
2.4
%
 
2.8
%
Expected volatility
18.7
%
 
19.1
%
Expected life (years)
5.9

 
6.1


At June 30, 2019, there was $800 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of 2.2 years. For segment reporting, share-based compensation costs are unallocated expenses.
11.
Pension and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net periodic benefit cost of such plans consisted of the following components: 
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
($ in millions)
U.S.
 
International
 
U.S.
 
International
 
U.S.
 
International
 
U.S.
 
International
Service cost
$
74

 
$
60

 
$
85

 
$
58

 
$
144

 
$
120

 
$
168

 
$
125

Interest cost
113

 
44

 
107

 
45

 
228

 
89

 
215

 
91

Expected return on plan assets
(205
)
 
(107
)
 
(211
)
 
(108
)
 
(411
)
 
(214
)
 
(425
)
 
(221
)
Amortization of unrecognized prior service credit
(12
)
 
(3
)
 
(13
)
 
(3
)
 
(25
)
 
(6
)
 
(25
)
 
(7
)
Net loss amortization
35

 
16

 
56

 
21

 
70

 
31

 
112

 
43

Termination benefits
3

 
1

 
7

 
—

 
5

 
1

 
17

 
—

Curtailments
—

 
—

 
5

 
(1
)
 
1

 
—

 
3

 
(1
)
Settlements
—

 
—

 
—

 
4

 
—

 
—

 
1

 
4

 
$
8


$
11


$
36


$
16

 
$
12

 
$
21

 
$
66

 
$
34

The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net credit of such plans consisted of the following components: 
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Service cost
$
12

 
$
14

 
$
24

 
$
28

Interest cost
18

 
18

 
35

 
35

Expected return on plan assets
(18
)
 
(21
)
 
(36
)
 
(41
)
Amortization of unrecognized prior service credit
(21
)
 
(21
)
 
(43
)
 
(42
)
Termination benefits
—

 
1

 
—

 
2

Curtailments
(1
)
 
(2
)
 
(1
)
 
(6
)
 
$
(10
)
 
$
(11
)
 
$
(21
)
 
$
(24
)

In connection with restructuring actions (see Note 4), termination charges were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments and settlements were recorded on pension and other postretirement benefit plans as reflected in the tables above.

- 25 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 12), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted above.
12.
Other (Income) Expense, Net
Other (income) expense, net, consisted of: 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Interest income
$
(75
)
 
$
(81
)
 
$
(164
)
 
$
(165
)
Interest expense
233

 
194

 
442

 
379

Exchange losses
27

 
71

 
128

 
77

Income from investments in equity securities, net (1)
(58
)
 
(153
)
 
(32
)
 
(178
)
Net periodic defined benefit plan (credit) cost other than service cost
(140
)
 
(130
)
 
(281
)
 
(265
)
Other, net
153

 
51

 
234

 
(188
)
 
$
140

 
$
(48
)
 
$
327

 
$
(340
)

(1) 
Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investments funds.
The higher exchange losses in the first six months of 2019 reflect losses on forward exchange contracts related to the acquisition of Antelliq.
Other, net (as reflected in the table above) in the second quarter and first six months of 2019 includes $78 million and $162 million of goodwill impairment charges related to certain businesses in the Healthcare Services segment. Other, net in the first six months of 2018 includes a $115 million gain on the settlement of certain patent litigation.
Interest paid for the six months ended June 30, 2019 and 2018 was $356 million and $341 million, respectively.
13.
Taxes on Income
The effective income tax rates of 18.9% and 17.8% for the second quarter of 2019 and 2018, respectively, and 13.0% and 28.4% for the first six months of 2019 and 2018, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rate for the first six months of 2019 reflects the favorable impact of a $360 million net tax benefit related to the settlement of certain federal income tax matters (discussed below). The effective income tax rate for the first six months of 2018 reflects the unfavorable impact of a $1.4 billion pretax charge recorded in connection with the formation of a collaboration with Eisai for which no tax benefit was recognized.
In the first quarter of 2019, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of $107 million. The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $360 million net tax benefit in the first six months of 2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for.


- 26 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

14.
Earnings Per Share
The calculations of earnings per share are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ and shares in millions except per share amounts)
2019
 
2018
 
2019
 
2018
Net income attributable to Merck & Co., Inc.
$
2,670

 
$
1,707

 
$
5,585

 
$
2,443

Average common shares outstanding
2,574

 
2,683

 
2,579

 
2,689

Common shares issuable (1)
14

 
13

 
17

 
13

Average common shares outstanding assuming dilution
2,588

 
2,696

 
2,596

 
2,702

Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
$
1.04

 
$
0.64

 
$
2.17

 
$
0.91

Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
$
1.03

 
$
0.63

 
$
2.15

 
$
0.90

(1) 
Issuable primarily under share-based compensation plans.
For the second quarter of 2019 and 2018, 3 million and 13 million, respectively, and for the first six months of 2019 and 2018, 4 million and 15 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
15.
Other Comprehensive Income (Loss)
Changes in AOCI by component are as follows:
 
Three Months Ended June 30,
($ in millions)
Derivatives
 
Investments
 
Employee
Benefit
Plans
 
Cumulative
Translation
Adjustment
 
Accumulated Other
Comprehensive
Income (Loss)
Balance April 1, 2018, net of taxes
$
(201
)
 
$
(167
)
 
$
(3,095
)
 
$
(1,597
)
 
$
(5,060
)
Other comprehensive income (loss) before reclassification adjustments, pretax
265

 
(17
)
 
(1
)
 
(301
)
 
(54
)
Tax
(56
)
 
—

 
1

 
(60
)
 
(115
)
Other comprehensive income (loss) before reclassification adjustments, net of taxes
209

 
(17
)
 
—

 
(361
)
 
(169
)
Reclassification adjustments, pretax
72

(1) 
20

(2) 
40

(3) 
—

 
132

Tax
(15
)
 
—

 
(10
)
 
—

 
(25
)
Reclassification adjustments, net of taxes
57


20


30


—

 
107

Other comprehensive income (loss), net of taxes
266

 
3

 
30

 
(361
)
 
(62
)
Balance June 30, 2018, net of taxes
$
65

 
$
(164
)
 
$
(3,065
)
 
$
(1,958
)
 
$
(5,122
)
Balance April 1, 2019, net of taxes
$
118

 
$
4

 
$
(3,541
)
 
$
(1,927
)
 
$
(5,346
)
Other comprehensive income (loss) before reclassification adjustments, pretax
10

 
55

 
—

 
(25
)
 
40

Tax
(2
)
 
—

 
—

 
6

 
4

Other comprehensive income (loss) before reclassification adjustments, net of taxes
8

 
55

 
—

 
(19
)
 
44

Reclassification adjustments, pretax
(76
)
(1) 
(11
)
(2) 
14

(3) 
—

 
(73
)
Tax
16

 
—

 
(3
)
 
—

 
13

Reclassification adjustments, net of taxes
(60
)

(11
)

11


—

 
(60
)
Other comprehensive income (loss), net of taxes
(52
)
 
44

 
11

 
(19
)
 
(16
)
Balance June 30, 2019, net of taxes
$
66


$
48


$
(3,530
)

$
(1,946
)

$
(5,362
)

- 27 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 
Six Months Ended June 30,
($ in millions)
Derivatives
 
Investments
 
Employee
Benefit
Plans
 
Cumulative
Translation
Adjustment
 
Accumulated Other
Comprehensive
Income (Loss)
Balance January 1, 2018, net of taxes
$
(108
)
 
$
(61
)
 
$
(2,787
)
 
$
(1,954
)
 
$
(4,910
)
Other comprehensive income (loss) before reclassification adjustments, pretax
84

 
(133
)
 
(2
)
 
18

 
(33
)
Tax
(18
)
 
1

 
4

 
(122
)
 
(135
)
Other comprehensive income (loss) before reclassification adjustments, net of taxes
66

 
(132
)
 
2

 
(104
)
 
(168
)
Reclassification adjustments, pretax
164

(1) 
36

(2) 
81

(3) 
—

 
281

Tax
(34
)
 
—

 
(17
)
 
—

 
(51
)
Reclassification adjustments, net of taxes
130

 
36

 
64

 
—

 
230

Other comprehensive income (loss), net of taxes
196

 
(96
)
 
66

 
(104
)
 
62

 
 
 
 
 
 
 
 
 
 
Adoption of ASU 2018-02
(23
)
 
1

 
(344
)
 
100

 
(266
)
Adoption of ASU 2016-01
—

 
(8
)
 
—

 
—

 
(8
)
 
 
 
 
 
 
 
 
 
 
Balance June 30, 2018, net of taxes
$
65


$
(164
)

$
(3,065
)

$
(1,958
)

$
(5,122
)
Balance January 1, 2019, net of taxes
$
166

 
$
(78
)
 
$
(3,556
)
 
$
(2,077
)
 
$
(5,545
)
Other comprehensive income (loss) before reclassification adjustments, pretax
(3
)
 
131

 
(1
)
 
131

 
258

Tax
1

 
—

 
6

 
—

 
7

Other comprehensive income (loss) before reclassification adjustments, net of taxes
(2
)
 
131

 
5

 
131

 
265

Reclassification adjustments, pretax
(124
)
(1) 
(5
)
(2) 
28

(3) 
—

 
(101
)
Tax
26

 
—

 
(7
)
 
—

 
19

Reclassification adjustments, net of taxes
(98
)
 
(5
)
 
21

 
—

 
(82
)
Other comprehensive income (loss), net of taxes
(100
)
 
126

 
26

 
131

 
183

Balance June 30, 2019, net of taxes
$
66


$
48


$
(3,530
)

$
(1,946
)

$
(5,362
)

(1) 
Relates to foreign currency cash flow hedges that were reclassified from AOCI to Sales.
(2) 
Represents net realized (gains) losses on the sales of available-for-sale debt securities that were reclassified from AOCI to Other (income) expense, net.
(3) 
Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 11).
16.
Segment Reporting
The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical and Animal Health segments are the only reportable segments.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. During 2019, as a result of changes to the Company’s internal reporting structure, certain costs that were previously included in the Pharmaceutical segment are now being included as part of non-segment expenses within Merck Research Laboratories. Prior period Pharmaceutical segment profits have been recast to reflect these changes on a comparable basis.
The Animal Health segment discovers, develops, manufactures and markets animal health products, including pharmaceutical and vaccine products, for the prevention, treatment and control of disease in all major livestock and companion animal species, which the Company sells to veterinarians, distributors and animal producers.
The Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients.
The Alliances segment primarily includes activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.


- 28 -
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Sales of the Company’s products were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 ($ in millions)
U.S.
 
Int’l
 
Total
 
U.S.
 
Int’l
 
Total
 
U.S.
 
Int’l
 
Total
 
U.S.
 
Int’l
 
Total
Pharmaceutical:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oncology
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Keytruda
$
1,498

 
$
1,136

 
$
2,634

 
$
959

 
$
707

 
$
1,667

 
$
2,782

 
$
2,121

 
$
4,903

 
$
1,797

 
$
1,333

 
$
3,131

Emend
67

 
54

 
121

 
89

 
59

 
148

 
130

 
107

 
237

 
168

 
105

 
273

Alliance revenue - Lynparza
66

 
45

 
111

 
31

 
13

 
44

 
116

 
74

 
190

 
55

 
22

 
76

Alliance revenue - Lenvima
54

 
43

 
97

 
19

 
16

 
35

 
104

 
67

 
171

 
19

 
16

 
35

Vaccines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gardasil/Gardasil 9
456

 
430

 
886

 
302

 
306

 
608

 
818

 
906

 
1,724

 
682

 
586

 
1,269

ProQuad/M-M-R II/Varivax
500

 
174

 
675

 
356

 
70

 
426

 
843

 
328

 
1,171

 
668

 
150

 
818

RotaTeq
104

 
68

 
172

 
99

 
57

 
156

 
258

 
125

 
383

 
250

 
99

 
349

Pneumovax 23
123

 
47

 
170

 
122

 
71

 
193

 
248

 
107

 
355

 
234

 
137

 
372

Vaqta
38

 
20

 
58

 
42

 
23

 
65

 
67

 
39

 
105

 
60

 
42

 
101

Hospital Acute Care
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridion
129

 
149

 
278

 
95

 
145

 
240

 
248

 
285

 
533

 
175

 
269

 
444

Noxafil
100

 
93

 
193

 
87

 
100

 
188

 
191

 
192

 
383

 
168

 
195

 
363

Cubicin
22

 
45

 
67

 
48

 
46

 
94

 
64

 
91

 
155

 
95

 
97

 
192

Invanz
18

 
60

 
78

 
87

 
63

 
149

 
31

 
118

 
150

 
177

 
123

 
300

Primaxin
—

 
70

 
71

 
—

 
68

 
68

 
1

 
129

 
130

 
5

 
135

 
140

Cancidas
3

 
64

 
67

 
4

 
83

 
87

 
4

 
125

 
129

 
7

 
171

 
178

Immunology
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Simponi
—

 
214

 
214

 
—

 
233

 
233

 
—

 
422

 
422

 
—

 
464

 
464

Remicade
—

 
98

 
98

 
—

 
157

 
157

 
—

 
221

 
221

 
—

 
324

 
324

Neuroscience
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Belsomra
21

 
55

 
76

 
29

 
42

 
71

 
45

 
98

 
143

 
52

 
73

 
125

Virology
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Isentress/Isentress HD
94

 
153

 
247

 
132

 
174

 
305

 
202

 
300

 
502

 
260

 
326

 
586

Zepatier
39

 
68

 
108

 
(10
)
 
123

 
113

 
72

 
149

 
221

 
(10
)
 
253

 
243

Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zetia
6

 
150

 
156

 
8

 
218

 
226

 
6

 
290

 
296

 
25

 
505

 
531

Vytorin
3

 
73

 
76

 
3

 
152

 
155

 
6

 
167

 
174

 
11

 
311

 
322

Atozet
—

 
92

 
92

 
—

 
101

 
101

 
—

 
186

 
186

 
—

 
174

 
174

Adempas
—

 
104

 
104

 
—

 
75

 
75

 
—

 
194

 
194

 
—

 
143

 
143

Diabetes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Januvia
471

 
437

 
908

 
503

 
446

 
949

 
855

 
877

 
1,732

 
968

 
862

 
1,829

Janumet
166

 
366

 
533

 
209

 
377

 
585

 
333

 
730

 
1,063

 
401

 
729

 
1,129

Women’s Health
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NuvaRing
206

 
34

 
240

 
187

 
49

 
236

 
391

 
68

 
459

 
357

 
95

 
452

Implanon/Nexplanon
136

 
48

 
183

 
114

 
60

 
174

 
285

 
98

 
382

 
242

 
106

 
348

Diversified Brands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Singulair
8

 
153

 
160

 
5

 
180

 
185

 
13

 
338

 
352

 
11

 
350

 
360

Cozaar/Hyzaar
6

 
103

 
109

 
7

 
118

 
125

 
10

 
202

 
213

 
14

 
231

 
245

Nasonex
(1
)
 
73

 
72

 
—

 
81

 
81

 
(2
)
 
170

 
168

 
2

 
201

 
203

Arcoxia
—

 
75

 
75

 
—

 
84

 
84

 
—

 
149

 
149

 
—

 
166

 
166

Follistim AQ
24

 
39

 
63

 
27

 
43

 
70

 
53

 
67

 
121

 
56

 
81

 
138

Other pharmaceutical (1)
401

 
869

 
1,268

 
287

 
902

 
1,189

 
759

 
1,650

 
2,406

 
608

 
1,770

 
2,378

Total Pharmaceutical segment sales
4,758


5,702


10,460


3,841


5,442


9,282


8,933


11,190


20,123


7,557


10,644


18,201

Animal Health:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Livestock
145

 
526

 
671

 
107

 
526

 
633

 
261

 
1,021

 
1,282

 
231

 
1,055

 
1,286

Companion Animals
190

 
263

 
453

 
204

 
253

 
457

 
367

 
500

 
867

 
387

 
482

 
869

Total Animal Health segment sales
335


789


1,124


311


779


1,090


628


1,521


2,149


618


1,537


2,155

Other segment sales (2)
47

 
—

 
48

 
56

 
—

 
56

 
86

 
—

 
87

 
140

 
—

 
140

Total segment sales
5,140


6,491


11,632


4,208


6,221


10,428


9,647


12,711


22,359


8,315


12,181


20,496

Other (3)
4

 
125

 
128

 
54

 
(18
)
 
37

 
12

 
206

 
216

 
80

 
(74
)
 
6

 
$
5,144

 
$
6,616

 
$
11,760

 
$
4,262

 
$
6,203

 
$
10,465

 
$
9,659

 
$
12,917

 
$
22,575

 
$
8,395

 
$
12,107

 
$
20,502

U.S. plus international may not equal total due to rounding.
(1) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(2) 
Represents the non-reportable segments of Healthcare Services and Alliances.
(3) 
Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases through an intermediary wholesale purchaser, and rebates that are owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced U.S. sales by $2.9 billion and $2.8 billion for the three months ended June 30, 2019 and 2018, respectively, and by $5.5 billion and $5.2 billion for the six months ended June 30, 2019 and 2018, respectively.
Consolidated sales by geographic area where derived are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
United States
$
5,144

 
$
4,262

 
$
9,659

 
$
8,395

Europe, Middle East and Africa
3,163

 
3,144

 
6,265

 
6,334

Japan
921

 
855

 
1,720

 
1,592

China
763

 
559

 
1,509

 
1,045

Asia Pacific (other than Japan and China)
716

 
791

 
1,461

 
1,543

Latin America
658

 
594

 
1,219

 
1,126

Other
395

 
260

 
742

 
467

 
$
11,760


$
10,465


$
22,575


$
20,502


A reconciliation of segment profits to Income before taxes is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Segment profits:
 
 
 
 
 
 
 
Pharmaceutical segment
$
7,115

 
$
5,975

 
$
13,690

 
$
11,914

Animal Health segment
405

 
450

 
820

 
864

Other segments
(2
)
 
26

 
—

 
88

Total segment profits
7,518

 
6,451

 
14,510

 
12,866

Other profits (losses)
94

 
(2
)
 
124

 
(89
)
Unallocated:
 
 
 
 
 
 
 
Interest income
75

 
81

 
164

 
165

Interest expense
(233
)
 
(194
)
 
(442
)
 
(379
)
Depreciation and amortization
(427
)
 
(332
)
 
(786
)
 
(682
)
Research and development
(2,093
)
 
(2,190
)
 
(3,935
)
 
(5,307
)
Amortization of purchase accounting adjustments
(378
)
 
(732
)
 
(775
)
 
(1,464
)
Restructuring costs
(59
)
 
(228
)
 
(212
)
 
(323
)
Other unallocated, net
(1,238
)
 
(768
)
 
(2,322
)
 
(1,355
)
 
$
3,259

 
$
2,086

 
$
6,326

 
$
3,432


Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses, nor 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 segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.
Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.
Other unallocated, net includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value of liabilities for contingent consideration, and other miscellaneous income or expense items.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
Business Developments
In April 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt (see Note 2 to the condensed consolidated financial statements).
Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash (see Note 2 to the condensed consolidated financial statements).
In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.05 billion in cash; additionally, former Peloton shareholders will be eligible to receive up to an additional $1.15 billion contingent upon successful achievement of future regulatory and sales-based milestones.
Restructuring Program
Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $800 million to $1.2 billion. The Company expects to record charges of approximately $500 million in 2019 related to the program. The Company anticipates the actions under the 2019 Restructuring Program to result in annual net cost savings of approximately $500 million by the end of 2023.
Pricing
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, pricing pressure continues on many of the Company’s products. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s revenue performance in the first six months of 2019 was negatively affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these actions will continue to negatively affect revenue performance for the remainder of 2019.
Operating Results
Sales
Worldwide sales were $11.8 billion for the second quarter of 2019, an increase of 12% compared with the second quarter of 2018 including a 3% unfavorable effect from foreign exchange. Global sales were $22.6 billion for the first six months of 2019, an increase of 10% compared with the same period of 2018 including a 3% unfavorable effect from foreign exchange. Sales growth in both periods was driven primarily by higher sales in the oncology franchise reflecting strong growth of Keytruda (pembrolizumab), as well as increased alliance revenue from Lynparza (olaparib) and Lenvima (lenvatinib). Higher sales of vaccines, including human papillomavirus (HPV) vaccine Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), and pediatric vaccines ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live) and Varivax (Varicella Virus Vaccine Live) also drove sales growth in the second quarter and first six months of 2019.
Sales growth in both periods was partially offset by the ongoing effects of generic competition for cardiovascular products Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin), hospital acute care product Invanz (ertapenem sodium), and biosimilar competition for immunology product Remicade (infliximab). Lower sales of products within the diversified brands franchise, diabetes products Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) and HIV products Isentress/Isentress HD (raltegravir) also partially offset revenue growth in the quarter and year-to-date period. The diversified brands franchise

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includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed markets.
International sales represented 56% and 57% of total sales in the second quarter and first six months of 2019, respectively. Performance in international markets was led by China, which had total sales of $763 million and $1.5 billion in the second quarter and first six months of 2019, respectively, representing growth rates of 37% and 44%, respectively, compared with the same prior year periods. Foreign exchange unfavorably affected sales performance in China by 9% and 10% in the second quarter and first six months of 2019, respectively.
Pharmaceutical Segment
Oncology
Keytruda is an anti-PD-1 therapy that has been approved for the treatment of multiple malignancies including non-small-cell lung cancer (NSCLC), melanoma, classical Hodgkin lymphoma (cHL), head and neck squamous cell carcinoma (HNSCC), urothelial carcinoma, cervical cancer, primary mediastinal large B-cell lymphoma (PMBCL), hepatocellular carcinoma, Merkel cell carcinoma, gastric or gastroesophageal junction adenocarcinoma and microsatellite instability-high (MSI-H) or mismatch repair deficient cancer. Keytruda was also recently approved in the United States for the treatment of certain patients with esophageal cancer, renal cell carcinoma and small-cell lung cancer (SCLC) (see below). The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).
In July 2019, the U.S. Food and Drug Administration (FDA) approved Keytruda as monotherapy for the treatment of patients with recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus whose tumors express PD-L1 (Combined Positive Score [CPS] ≥10) as determined by an FDA-approved test, with disease progression after one or more prior lines of systemic therapy.
In June 2019, the FDA approved Keytruda as monotherapy or in combination with chemotherapy for the first-line treatment of patients with metastatic or unresectable, recurrent HNSCC based on results from the pivotal Phase 3 KEYNOTE-048 trial. Keytruda was initially approved for the treatment of certain patients with recurrent or metastatic HNSCC under the FDA’s accelerated approval process based on data from the Phase 1b KEYNOTE-012 trial. In accordance with the accelerated approval process, continued approval was contingent upon verification and description of clinical benefit, which has now been demonstrated in KEYNOTE-048 and has resulted in the FDA converting the accelerated approval to a full (regular) approval.
Also in June 2019, the FDA approved Keytruda as monotherapy for the treatment of patients with metastatic SCLC with disease progression on or after platinum-based chemotherapy and at least one other prior line of therapy based on pooled data from the KEYNOTE-158 (cohort G) and KEYNOTE-028 (cohort C1) clinical trials.
In April 2019, the FDA approved Keytruda in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma, the most common type of kidney cancer, based on findings from the pivotal Phase 3 KEYNOTE-426 trial.
Also in April 2019, the FDA approved an expanded label for Keytruda as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (tumor proportion score [TPS] ≥1%) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations. The approval is based on results from the Phase 3 KEYNOTE-042 trial.
Additionally, in April 2019, Merck announced that Keytruda was approved by China’s National Medical Products Administration in combination with pemetrexed and platinum chemotherapy for the first-line treatment of patients with metastatic nonsquamous NSCLC, with no EGFR or ALK genomic tumor aberrations, based on data from the pivotal Phase 3 KEYNOTE-189 trial.
In March 2019, the European Commission (EC) approved Keytruda in combination with carboplatin and either paclitaxel or nab-paclitaxel for the first-line treatment of adults with metastatic squamous NSCLC based on data from the Phase 3 KEYNOTE-407 trial. Keytruda was approved for this indication in the United States in October 2018.
In April 2019, the EC approved a new extended dosing schedule of 400 mg every six weeks (Q6W) delivered as an intravenous infusion over 30 minutes for all approved monotherapy indications in the European Union (EU). The Q6W dose is available in addition to the formerly approved dose of Keytruda 200 mg every three weeks (Q3W) infused over 30 minutes.
Global sales of Keytruda were $2.6 billion in the second quarter of 2019 and $4.9 billion in the first six months of 2019, representing growth of 58% and 57%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 5% in both the second quarter and first six months of 2019. Sales growth in both periods was driven by volume growth as the Company continues to launch Keytruda with multiple new indications globally. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of NSCLC both as monotherapy, and combination with chemotherapy for either nonsquamous or squamous NSCLC. Other indications contributing to U.S. sales growth include HNSCC, bladder cancer, melanoma, and MSI-H cancer, along with uptake in the recently launched

- 32 -



renal cell carcinoma and adjuvant melanoma indications. Keytruda sales growth in international markets was driven primarily by use in the treatment of NSCLC as monotherapy, as well as in combination with chemotherapy as that indication continues launching in multiple markets, including in Europe. The launch of multiple new indications in Japan and China also drove growth in the second quarter and first six months of 2019.
Global sales of Emend (aprepitant), for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $121 million in the second quarter of 2019 and $237 million for the first six months of 2019, declines of 18% and 13%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 3% in both the second quarter and first six months of 2019. The sales declines primarily reflect lower demand in the United States due to competition. The patent that provided U.S. market exclusivity for Emend expired in 2015 and the patent that provided market exclusivity in most major European markets expired in May 2019. The patent that provides U.S. market exclusivity for Emend for Injection expires in September 2019 and the patent that provides market exclusivity in major European markets expires in February 2020 (although six-month pediatric exclusivity may extend this date). The Company anticipates that sales of Emend in these markets will decline significantly after these patent expiries.
Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 3 to the condensed consolidated financial statements), is currently approved for certain types of ovarian and breast cancer. Merck recorded alliance revenue related to Lynparza of $111 million in the second quarter of 2019 compared with $44 million in the second quarter of 2018 and $190 million for the first six months of 2019 compared with $76 million for the first six months of 2018. The increase in alliance revenue reflects, in part, uptake in the treatment of ovarian cancer following U.S. approval in December 2018 based on the Phase 3 SOLO-1 trial. In April 2019, the EC approved Lynparza as a monotherapy for the treatment of certain adult patients with germline BRCA1/2-mutations, and who have human epidermal growth factor receptor 2 (HER2)-negative locally advanced or metastatic breast cancer, triggering a $30 million milestone payment from Merck to AstraZeneca. The approval was based on the results of the Phase 3 OlympiAD trial. In June 2019, the EC approved Lynparza as monotherapy for the maintenance treatment of certain adult patients with BRCA-mutated advanced ovarian, fallopian tube or primary peritoneal cancer based on data from the SOLO-1 trial, triggering a $30 million milestone payment from Merck to AstraZeneca.
Lenvima, an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai entered into in March 2018 (see Note 3 to the condensed consolidated financial statements), is approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell carcinoma. Merck recorded alliance revenue of $97 million and $35 million in the second quarter of 2019 and 2018, respectively, related to Lenvima. Alliance revenue for Lenvima was $171 million for the first six months of 2019. Lenvima sales in 2019 reflect strong performance in hepatocellular carcinoma following recent worldwide launches.
Vaccines
Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of HPV, were $886 million in the second quarter of 2019, an increase of 46% compared with the second quarter of 2018 including a 4% unfavorable effect from foreign exchange. Growth was driven primarily by public sector buying patterns, higher demand and pricing in the United States and the ongoing launch in China. Higher demand in Europe reflecting increased vaccination rates for both boys and girls also contributed to sales growth in the quarter. Global sales of Gardasil/Gardasil 9 were $1.7 billion for the first six months of 2019, an increase of 36% compared with the same period of 2018 including a 4% unfavorable effect from foreign exchange. Sales growth in the first six months of 2019 primarily reflects higher volumes in China, the United States and Europe.
Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $204 million in the second quarter of 2019, an increase of 40% compared with $146 million in the second quarter of 2018. Worldwide sales of ProQuad were $356 million in the first six months of 2019, an increase of 33% compared with $269 million in the first six months of 2018. Foreign exchange unfavorably affected global sales performance by 2% and 1% in the second quarter and first six months of 2019, respectively. Sales growth in both periods was driven primarily by higher volumes and pricing in the United States and volume growth in certain European markets.
Worldwide sales of M‑M‑R II, a vaccine to help protect against measles, mumps and rubella, were $199 million for the second quarter of 2019 compared with $95 million for the second quarter of 2018 and were $322 million in the first six months of 2019 compared with $188 million in the first six months of 2018. Growth in both periods was driven primarily by higher sales in the United Sates reflecting increased demand due to measles outbreaks, including private-sector buy-in, as well as higher pricing. Government tenders in Latin America also contributed to sales growth in the year-to-date period.
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $271 million for the second quarter of 2019, an increase of 46% compared with $186 million for the second quarter of 2018. Worldwide sales of Varivax were $492 million in the first six months of 2019, an increase of 36% compared with $361 million in the first six months of 2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the second quarter and first six months of 2019,

- 33 -



respectively. Sales growth in both periods was driven primarily by government tenders in Brazil, as well as volume growth and pricing in the United States.
Worldwide sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $172 million in the second quarter of 2019 and were $383 million for the first six months of 2019, increases of 10% compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 3% and 2% in the second quarter and first six months of 2019, respectively. Sales growth in both periods was driven primarily by continued uptake from the launch in China.
Hospital Acute Care
Worldwide sales of Bridion (sugammadex) Injection, for the reversal of two types of neuromuscular blocking agents used during surgery, were $278 million in the second quarter of 2019 and $533 million for the first six months of 2019, increases of 16% and 20%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the second quarter and first six months of 2019, respectively. Sales growth in both periods was driven primarily by volume growth in the United States.
Worldwide sales of Noxafil (posaconazole), for the prevention of invasive fungal infections, were $193 million in the second quarter of 2019 and $383 million for the first six months of 2019, increases of 3% and 5%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% and 5% in the second quarter and first six months of 2019, respectively. The patent that provided U.S. market exclusivity for Noxafil expired in July 2019; accordingly, the Company anticipates declines in U.S. sales of Noxafil in future periods. Additionally, the patent for Noxafil will expire in a number of major European markets in December 2019. The Company anticipates sales of Noxafil in these markets will decline significantly thereafter.
Global sales of Invanz, for the treatment of certain infections, were $78 million in the second quarter of 2019 and $150 million for the first six months of 2019, declines of 48% and 50%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of 2019. The sales decline in both periods was driven by generic competition in the United States. The patent that provided U.S. market exclusivity for Invanz expired in November 2017. Accordingly, the Company is experiencing a significant decline in U.S. Invanz sales and expects the decline to continue.
In June 2019, the FDA approved a supplemental New Drug Application for the use of Zerbaxa (ceftolozane and tazobactam) for the treatment of patients 18 years and older with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by certain susceptible Gram-negative microorganisms based on the results of the pivotal Phase 3 ASPECT-NP trial. In July 2019, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending Zerbaxa for the treatment of hospital-acquired pneumonia, including ventilator-associated pneumonia in adults based on the results of the ASPECT-NP trial. Zerbaxa was previously approved in the United States and EU for the treatment of certain adult patients with complicated urinary tract infections, including pyelonephritis, and complicated intra-abdominal infections.
In July 2019, the FDA approved Recarbrio (imipenem, cilastatin, and relebactam) for injection, a new combination antibacterial for the treatment of complicated urinary tract infections, including pyelonephritis, caused by certain Gram-negative microorganisms in patients 18 years of age and older who have limited or no alternative treatment options. Merck anticipates making Recarbrio available later in 2019.
Immunology
Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $214 million in the second quarter of 2019 and $422 million for the first six months of 2019, declines of 8% and 9%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected sales performance by 7% in both the second quarter and first six months of 2019. The Company anticipates sales of Simponi will be unfavorably affected in future periods by the recent launch of biosimilars for a competing product.
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $98 million in the second quarter of 2019 and $221 million for the first six months of 2019, declines of 37% and 32%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected sales performance by 5% and 6% in the second quarter and first six months of 2019, respectively. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.
Virology
Global combined sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $247 million in the second quarter of 2019 and $502 million for

- 34 -



the first six months of 2019, declines of 19% and 14%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 6% in both the second quarter and first six months of 2019. The sales declines were driven primarily by lower demand in the United States due to competitive pressure.
Cardiovascular
Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), Vytorin (marketed outside the United States as Inegy), as well as Atozet (ezetimibe and atorvastatin) and Rosuzet (ezetimibe and rosuvastatin) (both marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $376 million in the second quarter of 2019 and $721 million for the first six months of 2019, declines of 25% and 32%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of 2019. The sales declines were driven primarily by lower sales in Europe. The EU patents for Ezetrol and Inegy expired in April 2018 and April 2019, respectively. Accordingly, the Company is experiencing sales declines in these markets as a result of generic competition and expects the declines to continue. Merck lost market exclusivity in the United States for Zetia in 2016 and Vytorin in 2017 and has lost nearly all U.S. sales of these products as a result of generic competition. The sales declines were also attributable to loss of exclusivity in Australia. These declines were partially offset by the launch of Rosuzet in Japan.
Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension, is part of a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 3 to the condensed consolidated financial statements). Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories. Merck recorded revenue related to Adempas of $104 million in the second quarter of 2019 and $194 million for the first six months of 2019, increases of 39% and 36%, respectively, compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 4% in both the second quarter and first six months of 2019. Sales growth in both periods was driven by higher profit sharing from Bayer.
Diabetes
Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $1.4 billion in the second quarter of 2019 and $2.8 billion for the first six months of 2019, declines of 6% compared with the same periods of 2018. Foreign exchange unfavorably affected global sales performance by 3% and 4% in the second quarter and first six months of 2019, respectively. The sales decline in both periods reflects continued pricing pressure in the United States, partially offset by higher demand globally. The Company expects U.S. pricing pressure to continue.
Women’s Health 
Worldwide sales of NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, were $240 million in the second quarter of 2019 and $459 million for the first six months of 2019, increases of 2% compared with the same periods of 2018 including a 1% unfavorable effect from foreign exchange in both periods. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales in future periods as a result of generic competition.
Animal Health Segment
Global sales of Animal Health products totaled $1.1 billion for the second quarter of 2019, growth of 3% compared with the second quarter of 2018 including a 6% unfavorable effect from foreign exchange. Growth in the second quarter was primarily driven by higher sales of livestock products, predominantly due to products obtained in the Antelliq acquisition. Companion animal sales performance in the second quarter reflects volume growth in vaccine and insulin products, partially offset by the timing of customer purchases in the prior year for the Bravecto (fluralaner) line of products for parasitic control. Worldwide sales of Animal Health products totaled $2.1 billion for the first six months of 2019, essentially flat compared with the first six months of 2018 including a 6% unfavorable effect from foreign exchange. Sales performance in the year-to-date period was driven by livestock products, due to the Antelliq acquisition and higher demand for poultry products, as well as higher demand for companion animal products, primarily the Bravecto line of products.
In April 2019, Merck acquired Antelliq, a leader in digital animal identification, traceability and monitoring solutions (see Note 2 to the condensed consolidated financial statements).
Costs, Expenses and Other
Cost of Sales
Cost of sales were $3.4 billion for the second quarter of 2019, essentially flat compared with the second quarter of 2018, and were $6.5 billion for the first six months of 2019, a decline of 2% compared with the same period of 2018. Costs in the second quarter of 2019 and 2018 include $371 million and $732 million, respectively, and for the first six months of 2019 and 2018 include $768 million and $1.5 billion, respectively, of expenses for the amortization of intangible assets recorded in connection

- 35 -



with business acquisitions. Cost of sales also include expenses for the amortization of amounts capitalized in connection with collaborations of $124 million and $157 million in the second quarter of 2019 and 2018, respectively, and $222 million and $195 million for the first six months of 2019 and 2018, respectively. These amounts include catch-up amortization from the accrual of sales-based milestones that were deemed by the Company to be probable in each period (see Note 3 to the condensed consolidated financial statements). In addition, cost of sales in the second quarter and first six months of 2019 include $69 million and $81 million, respectively, of intangible asset impairment charges related to marketed products and other intangibles recorded in connection with business acquisitions. The Company may recognize additional non-cash impairment charges in the future related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material. Also included in cost of sales are expenses associated with restructuring activities which amounted to $65 million and $3 million in the second quarter of 2019 and 2018, respectively, and $99 million and $9 million for the first six months of 2019 and 2018, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 71.1% in the second quarter of 2019 compared with 67.3% in the second quarter of 2018 and was 71.4% in the first six months of 2019 compared with 67.8% for the first six months of 2018. The gross margin improvement in both periods largely reflects a lower aggregate impact from the amortization of intangible assets related to business acquisitions and restructuring costs as noted above, which unfavorably affected gross margin by 4.3 percentage points in the second quarter of 2019 compared with 7.1 percentage points in the second quarter of 2018 and by 4.3 percentage points in the first six months of 2019 compared with 7.2 percentage points in the first six months of 2018. The gross margin improvement in both periods also reflects the favorable effects of product mix and lower amortization of capitalized milestone payments related to collaborations as noted above.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $2.7 billion in the second quarter of 2019, an increase of 8% compared with the second quarter of 2018, reflecting higher administrative costs, acquisition and divestiture-related costs (primarily related to the acquisition of Antelliq), restructuring costs, and promotional costs, partially offset by the favorable effect of foreign exchange. SG&A expenses were $5.1 billion for the first six months of 2019, an increase of 2% compared with the same period of 2018, driven by higher administrative costs, restructuring costs, and acquisition and divestiture-related costs, partially offset by the favorable effect of foreign exchange and lower selling and promotional costs. SG&A expenses in the second quarter and first six months of 2019 include restructuring costs of $32 million related primarily to accelerated depreciation for facilities to be closed or divested.
Research and Development
Research and development (R&D) expenses declined 4% in the second quarter of 2019 to $2.2 billion driven primarily by lower expenses for business development transactions, reflecting a $344 million charge in the second quarter of 2018 related to the acquisition of Viralytics Limited (Viralytics). The decline was partially offset by higher expenses related to clinical development and increased investment in discovery research and early drug development. R&D expenses were $4.1 billion in the first six months of 2019, a decline of 25% compared with the same period of 2018. The decline was driven primarily by a $1.4 billion charge recorded in 2018 related to the formation of an oncology collaboration with Eisai (see Note 3 to the condensed consolidated financial statements) and lower expenses related to business development transactions. The year-to-date decline also reflects the favorable effect of foreign exchange and a reduction in expenses related to a decrease in the estimated fair value measurement of liabilities for contingent consideration. Partially offsetting the decline were higher expenses related to clinical development and increased investment in discovery research and early drug development.
R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $1.5 billion and $1.4 billion in the second quarter of 2019 and 2018, respectively, and were $2.9 billion and $2.7 billion in the first six months of 2019 and 2018, respectively. Also included in R&D expenses are Animal Health research costs, licensing costs and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, which in the aggregate were approximately $715 million and $525 million for the second quarter of 2019 and 2018, respectively, and were $1.3 billion and $1.0 billion in the first six months of 2019 and 2018, respectively. In addition, R&D expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration recorded in connection with business acquisitions. During the first six months of 2019, the Company recorded a net reduction in expenses of $38 million to decrease the estimated fair value of liabilities for contingent consideration related to the discontinuation or delay of certain programs.
Restructuring Costs
Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring

- 36 -



programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $800 million to $1.2 billion. The Company expects to record charges of approximately $500 million in 2019 related to the program. The Company anticipates the actions under the 2019 Restructuring Program to result in annual net cost savings of approximately $500 million by the end of 2023. Actions under previous global restructuring programs have been substantially completed.
Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $59 million and $228 million for the second quarter of 2019 and 2018, respectively, and $212 million and $323 million for the first six months of 2019 and 2018, respectively. Separation costs incurred were associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Company’s restructuring activities are included in Cost of sales, Selling, general and administrative expenses and Research and development costs. The Company recorded aggregate pretax costs of $159 million and $235 million in the second quarter of 2019 and 2018, respectively, and $346 million and $339 million for the first six months of 2019 and 2018, respectively, related to restructuring program activities (see Note 4 to the condensed consolidated financial statements).
Other (Income) Expense, Net
Other (income) expense, net was $140 million of expense in the second quarter of 2019 compared with $48 million of income in the second quarter of 2018 and was $327 million of expense in the first six months of 2019 compared with $340 million of income for the first six months of 2018. For details on the components of Other (income) expense, net, see Note 12 to the condensed consolidated financial statements.
Segment Profits
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Pharmaceutical segment profits
$
7,115

 
$
5,975

 
$
13,690

 
$
11,914

Animal Health segment profits
405

 
450

 
820

 
864

Other non-reportable segment profits
(2
)
 
26

 
—

 
88

Other
(4,259
)

(4,365
)

(8,184
)

(9,434
)
Income before taxes
$
3,259

 
$
2,086

 
$
6,326

 
$
3,432

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in MRL, or general and administrative expenses, nor 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 segment profits. Also excluded from the determination of segment profits are acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments, intangible asset impairment charges and changes in the estimated fair value measurement of liabilities for contingent consideration, and restructuring costs. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales.
Pharmaceutical segment profits grew 19% in the second quarter of 2019 and 15% in the first six months of 2019 compared with the same periods of 2018 driven primarily by higher sales and lower selling costs and, for the year-to-date period, also lower promotional costs. Animal Health segment profits declined 10% in the second quarter of 2019 compared with the second quarter of 2018 reflecting the unfavorable effect of foreign exchange and higher selling and administrative costs, partially offset by higher sales. Animal Health segment profits declined 5% in the first six months of 2019 compared with the corresponding period of 2018 largely reflecting the unfavorable effect of foreign exchange and higher selling costs.

- 37 -



Taxes on Income
The effective income tax rates of 18.9% and 17.8% for the second quarter of 2019 and 2018, respectively, and 13.0% and 28.4% for the first six months of 2019 and 2018, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rate for the first six months of 2019 reflects the favorable impact of a $360 million net tax benefit related to the settlement of certain federal income tax matters (discussed below). The effective income tax rate for the first six months of 2018 reflects the unfavorable impact of a $1.4 billion pretax charge recorded in connection with the formation of a collaboration with Eisai for which no tax benefit was recognized.
In the first quarter of 2019, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of $107 million. The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $360 million net tax benefit in the first six months of 2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for.
Net (Loss) Income Attributable to Noncontrolling Interests
Net (loss) income attributable to noncontrolling interests was $(26) million for the second quarter of 2019 compared with $9 million for the second quarter of 2018 and was $(79) million for the first six months of 2019 compared with $14 million for the first six months of 2018. The losses in 2019 primarily reflect the portion of goodwill impairment charges related to certain businesses in the Healthcare Services segment that are attributable to noncontrolling interests.
Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $2.7 billion for the second quarter of 2019 compared with $1.7 billion for the second quarter of 2018 and was $5.6 billion for the first six months of 2019 compared with $2.4 billion for the first six months of 2018. Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (EPS) for the second quarter of 2019 were $1.03 compared with $0.63 in the second quarter of 2018 and were $2.15 for the first six months of 2019 compared with $0.90 for the first six months of 2018.
Non-GAAP Income and Non-GAAP EPS
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP).

- 38 -



A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
($ in millions except per share amounts)
2019
 
2018
 
2019
 
2018
Income before taxes as reported under GAAP
$
3,259

 
$
2,086

 
$
6,326

 
$
3,432

Increase (decrease) for excluded items:
 
 
 
 
 
 
 
Acquisition and divestiture-related costs
660

 
855

 
1,208

 
1,588

Restructuring costs
159

 
235

 
346

 
339

Other items:
 
 
 
 
 
 
 
Charge for the acquisition of Viralytics
—

 
344

 
—

 
344

Charge related to the formation of a collaboration with Eisai
—

 
—

 
—

 
1,400

Other
48

 
(32
)
 
48

 
(54
)
Non-GAAP income before taxes
4,126

 
3,488

 
7,928

 
7,049

Taxes on income as reported under GAAP
615

 
370

 
820

 
975

Estimated tax benefit on excluded items (1)
145

 
255

 
274

 
362

Net tax benefit from the settlement of certain federal income tax matters
—

 
—

 
360

 
—

Tax charge related to finalization of treasury regulations for the Tax Cuts and Job Act of 2017
—

 
—

 
(67
)
 
—

Non-GAAP taxes on income
760


625


1,387


1,337

Non-GAAP net income
3,366

 
2,863

 
6,541

 
5,712

Net (loss) income attributable to noncontrolling interests as reported under GAAP
(26
)
 
9

 
(79
)
 
14

Acquisition and divestiture-related costs attributable to noncontrolling interests
36

 
—

 
89

 
—

Non-GAAP net income attributable to noncontrolling interests
10


9


10


14

Non-GAAP net income attributable to Merck & Co., Inc.
$
3,356


$
2,854


$
6,531


$
5,698

EPS assuming dilution as reported under GAAP
$
1.03

 
$
0.63

 
$
2.15

 
$
0.90

EPS difference (2)
0.27

 
0.43

 
0.37

 
1.21

Non-GAAP EPS assuming dilution
$
1.30


$
1.06


$
2.52


$
2.11

(1) 
The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.
(2) 
Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable period.
Acquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with business acquisitions and divestitures. These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Also excluded are integration, transaction, and certain other costs associated with business acquisitions and divestitures.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 4 to the condensed consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.
Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects, and typically consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in 2019 is a net tax benefit related to the settlement of certain federal income tax matters (see Note 13 to the condensed consolidated financial statements) and a tax charge related to the finalization of U.S. treasury regulations related to the Tax Cuts and Jobs Act of 2017. Excluded from non-GAAP income and non-GAAP EPS in 2018 is a charge for the acquisition of Viralytics (see Note 2 to the condensed consolidated financial statements) and a charge related to the formation of a collaboration with Eisai (see Note 3 to the condensed consolidated financial statements).


- 39 -



Research and Development Update
Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers. These approvals were the result of a broad clinical development program that currently consists of more than 1,000 clinical trials, including more than 600 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, cervical, colorectal, cutaneous squamous cell, gastric, HNSCC, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
In July 2019, the CHMP of the EMA adopted a positive opinion recommending approval of Keytruda, in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma based on findings from the pivotal Phase 3 KEYNOTE-426 trial, which demonstrated significant improvements in overall survival (OS), progression-free survival (PFS) and objective response rate (ORR) for Keytruda in combination with axitinib compared to sunitinib. The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected in the third quarter of 2019. Keytruda was approved for this indication by the FDA in April 2019.
Keytruda is also under review in the EU as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (TPS ≥1%) with no EGFR or ALK genomic tumor aberrations. Keytruda was approved for this indication by the FDA in April 2019 based on results from the Phase 3 KEYNOTE-042 trial, in which Keytruda monotherapy demonstrated a statistically significant improvement in OS compared with chemotherapy alone in patients whose tumors expressed PD-L1 with a TPS ≥50%, with a TPS ≥20%, and then in the entire study population (TPS ≥1%).
In addition, Keytruda is under review in the EU as monotherapy or in combination with chemotherapy for the first-line treatment of patients with recurrent or metastatic HNSCC. This application is based in part on data from the pivotal Phase 3 KEYNOTE-048 trial where Keytruda demonstrated a significant improvement in OS compared with the standard of care, as monotherapy in patients whose tumors expressed PD-L1 with CPS≥20 and CPS≥1 and in combination with chemotherapy. Keytruda was approved for these indications by the FDA in June 2019.
Additionally, Keytruda is under review in the EU as monotherapy for the second-line treatment of advanced or metastatic esophageal or esophagogastric junction carcinoma, based on the results of the Phase 3 KEYNOTE-181 trial. In July 2019, the FDA approved Keytruda as monotherapy for the treatment of patients with recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus with disease progression after one or more prior lines of systemic therapy and whose tumor express PD-L1 (CPS≥10).
In July 2019, the FDA accepted for review six supplemental Biologics License Applications (sBLAs) to update the dosing frequency for Keytruda to include an every-six-weeks (Q6W) dosing schedule option for certain monotherapy indications. Merck is seeking FDA approval of a 400 mg Q6W dose infused over 30 minutes for Keytruda monotherapy indications in melanoma, cHL, PMBCL, gastric cancer, hepatocellular carcinoma, and Merkel cell carcinoma. If approved by the FDA, the Q6W dose would be available for use in adults in addition to the currently approved dose of Keytruda 200 mg every three weeks (Q3W) infused over 30 minutes. The FDA set a PDUFA date of February 18, 2020. In the EU, 400 mg Q6W dosing for all approved Keytruda monotherapy indications was approved by the EC in March 2019.
In June 2019, Merck announced full results from the pivotal Phase 3 KEYNOTE-062 trial evaluating Keytruda as monotherapy and in combination with chemotherapy for the first-line treatment of advanced gastric or gastroesophageal junction adenocarcinoma. In the monotherapy arm of the study, Keytruda met a primary endpoint by demonstrating noninferiority to chemotherapy, the current standard of care, for OS in patients whose tumors expressed PD-L1 (CPS ≥1). In the combination arm of KEYNOTE-062, Keytruda plus chemotherapy was not found to be statistically superior for OS (CPS ≥1 or CPS ≥10) or PFS (CPS ≥1) compared with chemotherapy alone. Results were presented at the 2019 American Society of Clinical Oncology (ASCO) Annual Meeting and will be discussed with regulatory authorities. In September 2017, the FDA approved Keytruda as a third-line treatment for previously treated patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction cancer whose tumors express PD-L1 (CPS ≥1) as determined by an FDA-approved test. KEYNOTE-062 was a potential confirmatory trial for this accelerated, third-line approval. In addition to KEYNOTE-062, additional first-line, Phase 3 studies in Merck’s gastric clinical program include KEYNOTE-811 and KEYNOTE-859, as well as KEYNOTE-585 in the neoadjuvant and adjuvant treatment setting.
In addition, Keytruda has received Breakthrough Therapy designation from the FDA for the treatment of high-risk, early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Additionally, the FDA recently granted Breakthrough Therapy designation for Keytruda in combination with Lenvima for the potential first-line treatment of

- 40 -



patients with advanced unresectable hepatocellular carcinoma not amenable to locoregional treatment. Lenvima is being developed as part of a collaboration with Eisai (see Note 3 to the condensed consolidated financial statements).
In July 2019, Merck announced that the Phase 3 KEYNOTE-522 trial investigating Keytruda in combination with chemotherapy met one of the dual-primary endpoints of pathologic complete response (pCR) following the neoadjuvant part of the neoadjuvant/adjuvant study regimen in patients with triple-negative breast cancer. Based on an interim analysis conducted by the independent Data Monitoring Committee (DMC), Keytruda, in combination with chemotherapy, demonstrated a statistically significant improvement in pCR rates compared with chemotherapy alone, regardless of PD-L1 status. A pCR is defined as a lack of cancer cells in tissue samples analyzed following completion of neoadjuvant therapy and definitive surgery. Based on the recommendation of the DMC, the trial will continue without changes to evaluate the other dual-primary endpoint of event-free survival, per the trial design.
In May 2019, Merck announced that the Phase 3 KEYNOTE-119 trial evaluating Keytruda as monotherapy for the second- or third-line treatment of patients with metastatic triple-negative breast cancer did not meet its pre-specified primary endpoint of superior OS compared to chemotherapy. Other endpoints were not formally tested per the study protocol because the primary endpoint of OS was not met. Results will be presented at an upcoming medical meeting. The Keytruda breast cancer clinical development program encompasses several internal and external collaborative studies, including three ongoing registration-enabling studies in triple-negative breast cancer: KEYNOTE-355, KEYNOTE-242, and KEYNOTE-522 (discussed above).
Lynparza is an oral PARP inhibitor currently approved for certain types of ovarian and breast cancer being co-developed for multiple cancer types as part of a collaboration with AstraZeneca (see Note 3 to the condensed consolidated financial statements).
In June 2019, Merck and AstraZeneca announced detailed results from the Phase 3 POLO trial evaluating Lynparza tablets as a first-line maintenance monotherapy for patients with germline BRCA-mutated metastatic pancreatic cancer whose disease had not progressed following platinum-based chemotherapy. Results from the trial showed a statistically-significant and clinically-meaningful improvement in PFS for Lynparza compared to placebo, reducing the risk of disease progression or death by 47%. The results of the trial were presented at the 2019 ASCO Annual Meeting and published online simultaneously in the New England Journal of Medicine.
Also in June 2019, Merck and AstraZeneca presented full results from the Phase 3 SOLO-3 trial which evaluated Lynparza, compared to chemotherapy, for the treatment of platinum-sensitive relapsed patients with germline BRCA1/2-mutated (gBRCAm) advanced ovarian cancer, who have received two or more prior lines of chemotherapy. The results from the trial showed a statistically-significant and clinically-meaningful improvement in ORR in the Lynparza arm compared to the chemotherapy arm. The key secondary endpoint of PFS was also significantly increased in the Lynparza arm compared to the chemotherapy arm. The results were presented at the 2019 ASCO Annual Meeting.
In July 2019, the CHMP of the EMA adopted a positive opinion recommending Zerbaxa for an additional indication for the treatment of hospital-acquired pneumonia (HAP), including ventilator-associated pneumonia (VAP), in adults based on results of the pivotal Phase 3 ASPECT-NP trial that evaluated the efficacy and safety of Zerbaxa for the treatment of adult patients with HAP, including VAP. The CHMP positive opinion will now be considered by the EC. Zerbaxa is currently approved in the EU for use as indicated in adult patients with complicated urinary tract infections, acute pyelonephritis, and complicated intra-abdominal infections.
The chart below reflects the Company’s research pipeline as of July 31, 2019. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to cancer and certain other indications) and additional claims, line extensions or formulations for in-line products are not shown.

- 41 -



Phase 2
Phase 3 (Phase 3 entry date)
Under Review
Cancer
MK-3475 Keytruda
Advanced Solid Tumors
MK-6482
Renal Cell
MK-7123(1)
Solid Tumors
MK-7339 Lynparza(2)
Advanced Solid Tumors
MK-7690(1)
Colorectal
MK-7902 Lenvima(2)
Biliary Tract
V937 Cavatak
Melanoma
Cytomegalovirus
V160
HIV-1 Infection
MK-8591 (islatravir)
Pediatric Neurofibromatosis Type 1
MK-5618 (selumetinib)(2)(3)
Respiratory Syncytial Virus
MK-1654
Schizophrenia
MK-8189

Cancer
MK-3475 Keytruda 
Breast (October 2015)
Cervical (October 2018) (EU)
Colorectal (November 2015)
Cutaneous Squamous Cell (April 2019)
Gastric (May 2015) (EU)
Hepatocellular (May 2016) (EU)
Mesothelioma (May 2018)
Nasopharyngeal (April 2016)
Ovarian (December 2018)
Prostate (May 2019)
Small-Cell Lung (May 2017) (EU)
MK-7339 Lynparza(2)
Non-Small-Cell Lung (June 2019)
Pancreatic (December 2014)
Prostate (April 2017)
MK-7902 Lenvima(1)(2)
Bladder (May 2019)
Endometrial (June 2018)
Melanoma (March 2019)
Non-Small-Cell Lung (March 2019)
Cough
MK-7264 (gefapixant) (March 2018)
Heart Failure
MK-1242 (vericiguat) (September 2016)(2)
Pneumoconjugate Vaccine
V114 (June 2018)
New Molecular Entities/Vaccines
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin) (EU)
Ebola Vaccine
V920 (U.S.)(4)(EU)

Certain Supplemental Filings
Cancer
MK-3475 Keytruda
• First-Line Advanced Renal Cell Carcinoma (KEYNOTE-426) (EU)
• First-Line Metastatic Non-Small-Cell Lung Cancer (KEYNOTE-042) (EU)
• First-Line Head and Neck Cancer (KEYNOTE-048) (EU)
• Recurrent Locally Advanced or Metastatic Esophageal Cancer (KEYNOTE-180/KEYNOTE-181) (EU)
• Alternative Dosing Regimen (Q6W) (U.S.)
HAP/VAP(5)
MK-7625A Zerbaxa (EU)
Footnotes:
(1)  Being developed in combination with Keytruda.
(2)  Being developed in a collaboration.
(3)  This is a registrational study.
(4)  Rolling submission.
(5)  HAP - Hospital-Acquired Pneumonia / VAP - Ventilator-Associated Pneumonia

Liquidity and Capital Resources
($ in millions)
June 30, 2019
 
December 31, 2018
Cash and investments
$
10,884

 
$
15,097

Working capital
4,213

 
3,669

Total debt to total liabilities and equity
31.7
%
 
30.4
%
Cash provided by operating activities was $4.4 billion in the first six months of 2019 compared with $4.5 billion in the first six months of 2018. Cash provided by operating activities in the first six months of 2019 reflects the receipt of $424 million from AstraZeneca related to the conclusion of the Company’s relationship with AstraZeneca LP, as well as $1.4 billion of tax payments and a $325 million option payment to Eisai (see Note 3 to the condensed consolidated financial statements). Cash provided by operating activities in the first six months of 2018 reflects $750 million of upfront payments made by the Company related to the formation of a collaboration with Eisai (see Note 3 to the condensed consolidated financial statements). Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.
Cash used in investing activities was $2.1 billion in the first six months of 2019 compared with cash provided by investing activities of $476 million in the first six months of 2018. The change was driven primarily by the acquisition of Antelliq, lower proceeds from the sales of securities and other investments and higher capital expenditures, partially offset by lower purchases of securities and other investments, as well as a $350 million milestone payment in 2018 related to a collaboration with Bayer (see Note 3 to the condensed consolidated financial statements).
Cash used in financing activities was $3.7 billion in the first six months of 2019 compared with $5.7 billion in the first six months of 2018. The lower use of cash in financing activities was driven primarily by proceeds from the issuance of debt (see below) and lower payments on debt, partially offset by the repayment of short-term borrowings, higher dividends paid to shareholders and higher purchases of treasury stock.

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Capital expenditures totaled $1.4 billion and $1.0 billion for the first six months of 2019 and 2018, respectively.
Dividends paid to stockholders were $2.9 billion and $2.6 billion for the first six months of 2019 and 2018, respectively. In May 2019, the Board of Directors declared a quarterly dividend of $0.55 per share on the Company’s common stock for the third quarter that was paid in July 2019. In July 2019, the Board of Directors declared a quarterly dividend of $0.55 per share on the Company’s common stock for the fourth quarter that will be paid in October 2019.
In March 2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings.
In October 2018, Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. During the first six months of 2019, the Company purchased $2.3 billion (30 million shares) for its treasury under this and a previously authorized share repurchase program. In addition, the Company received 7.7 million shares in settlement of accelerated share repurchase (ASR) agreements as discussed below. As of June 30, 2019, the Company’s remaining share repurchase authorization was $9.6 billion.
On October 25, 2018, the Company entered into ASR agreements with two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of $5 billion made by Merck to the Dealers on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. Upon settlement of the ASR agreements in April 2019, Merck received an additional 7.7 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to 64.4 million.
The Company has a $6.0 billion credit facility that matures in June 2024. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
Critical Accounting Policies
The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, 2018 included in Merck’s Form 10‑K filed on February 27, 2019. Certain of these accounting policies are considered critical as disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no significant changes in the Company’s critical accounting policies since December 31, 2018. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2019.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures over financial reporting. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2019, the Company’s disclosure controls and procedures are effective. For the second quarter of 2019, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
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 based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning, or negative variations of any of the foregoing. 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 development, product approvals, product potential and development programs. One must carefully consider any

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such statement and should understand that many factors could cause actual results to differ materially 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, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018, as filed on February 27, 2019, the Company discusses in more detail various important risk 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. 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.
PART II - Other Information
Item 1. Legal Proceedings
The information called for by this Item is incorporated herein by reference to Note 8 included in Part I, Item 1, Financial Statements (unaudited) — Notes to Condensed Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities for the three months ended June 30, 2019 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
 
 
($ in millions)
Period
Total Number
of Shares
Purchased (1)
 
Average Price
Paid Per
Share
 
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs (1)
April 1 - April 30
9,300,182

(2) 
$74.95
 
$10,741
May 1 - May 31
7,834,108

 
$78.88
 
$10,123
June 1 - June 30
6,025,248

 
82.74

 
$9,640
Total
23,159,538

 
$79.98
 
$9,640
(1) 
Shares purchased during the period were made as part of plans approved by the Board of Directors in November 2017 and October 2018 each to purchase up to $10 billion of Merck’s common stock for its treasury.
(2) Includes 7.7 million shares received in April upon settlement of accelerated share repurchase agreements for which no cash was paid during the period.

Item 6. Exhibits
Number
  
Description
 
 
3.1

—
Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) – Incorporated by reference to Current Report on Form 8-K filed on November 4, 2009 (No. 1-6571)
 
 
3.2

—
By-Laws of Merck & Co., Inc. (effective July 22, 2015) – Incorporated by reference to Current Report on Form 8-K filed on July 28, 2015 (No. 1-6571) 
 
 
 
31.1

—
Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer
 
 
31.2

—
Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer
 
 
32.1

—
Section 1350 Certification of Chief Executive Officer
 
 
32.2

—
Section 1350 Certification of Chief Financial Officer
 
 
101

—
The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.



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Signatures
Pursuant to the requirements 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.
 
 
 
Date: August 6, 2019
 
/s/ Jennifer Zachary
 
 
JENNIFER ZACHARY
 
 
Executive Vice President and General Counsel
 
 
 
Date: August 6, 2019
 
/s/ Rita A. Karachun
 
 
RITA A. KARACHUN
 
 
Senior Vice President Finance - Global Controller

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EXHIBIT INDEX
Number
 
Description
 
 
3.1

—
Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) – Incorporated by reference to Current Report on Form 8-K filed on November 4, 2009 (No. 1-6571)
 
 
3.2

—
By-Laws of Merck & Co., Inc. (effective July 22, 2015) – Incorporated by reference to Current Report on Form 8-K filed on July 28, 2015 (No. 1-6571) 
 
 
 
31.1

—
Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer
 
 
31.2

—
Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer
 
 
32.1

—
Section 1350 Certification of Chief Executive Officer
 
 
32.2

—
Section 1350 Certification of Chief Financial Officer
 
 
101

—
The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

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