item 14exhibits financial statement schedules reports form 8k 1financial statements following consolidated financial statements independent auditors report included companys 1993 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1993 1992 1991 statements consolidated retained earnings years ended december 31 1993 1992 1991 statements consolidated cash flows years ended december 31 1993 1992 1991 consolidated balance sheets december 31 1993 1992 notes consolidated financial statements independent auditors report 2financial statement schedules page form 10k independent auditors report 18 schedule marketable securities investments 19 schedule v property plant equipment 20 schedule vi accumulated depreciation property plant equipment 21 schedule viii valuation qualifying accounts 22 schedule ix shortterm borrowings 23 schedule x supplementary income statement information 24 item 14 continued 2financial statement schedules continued schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit method number description filing 3a complete copy certificate incorporated incorporation amended reference exhibit currently effect 3a companys annual report 1989 form 10k 3b complete copy bylaws incorporated amended currently effect reference exhibit 4b companys form s8 33 19013 4a rights agreement incorporated company bank new york reference exhibit 4 dated july 25 1989 companys quarterly report period ended june 30 1989 form 10q 4b indenture dated november 1 incorporated 1982 company reference exhibit chase manhattan bank na 4a companys trustee registration statement form s3 file 280012 4c supplemental indenture 1 incorporated dated november 1 1991 reference exhibit 41 indenture dated companys report november 1 1982 form 8k dated november 20 1991 4d lynx equity unit agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 item 14 continued 3 exhibits continued exhibit method number description filing 4e lynx equity unit guarantee incorporated agreement reference exhibit 101 companys report form 8k dated october 1 1991 10a companys executive incentive plan incorporated plan amended trust related reference exhibit thereto 10a companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k 10b companys 1983 stock incentive incorporated plan amended reference exhibit 10c companys annual report 1988 form 10k 10c companys 1987 stock incentive incorporated plan amended reference exhibit 10d companys annual report 1990 form 10k 10d companys 1992 stock incentive incorporated plan amended reference exhibit 10d companys annual report 1992 form 10k 10ei employment agreement incorporated company robert p luciano reference exhibit 10ei companys annual report 1989 form 10k 10eii employment agreement incorporated company richard j kogan reference exhibit 10eii companys annual report 1989 form 10k 10eiii employment agreement incorporated company david e collins reference exhibit 10eiv companys annual report 1989 form 10k item 14 continued 3 exhibits continued exhibit method number description filing 10e agreements company incorporated iv certain executive officers related reference exhibit termination payments 10ev companys annual report 1989 form 10k 10f directors deferred compensation plan incorporated plan trust related thereto reference exhibit 10 f companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k 10g pension plan directors plan incorporated trust related thereto reference exhibit 10g companys annual report 1987 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement filed document 10h supplemental executive retirement plan incorporated plan trust related thereto reference exhibit 10h companys annual report 1987 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement filed document 10g 10i directors stock award plan incorporated reference exhibit 10i companys annual report 1988 form 10k 11 computation earnings per filed document common share item 14 continued 3 exhibits continued exhibit method number description filing 12 computation ratio filed document earnings fixed charges 13 financial section filed document companys 1993 annual report shareholders exception portions said annual report specifically incorporated reference form 10k report shall deemed filed part form 10k 22 subsidiaries registrant filed document 24 consents experts counsel filed document 25 power attorney filed document exhibits applicable copies exhibits furnished upon request b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 4 1994 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated robert p luciano regina e herzlinger chairman chief executive director officer director richard j kogan h barclay morley president chief operating director officer director harold r hiser jr richard de j osborne executive vice president finance director principal financial officer thomas h kelly william schreyer vice president controller director principal accounting officer hans w becherer robert f w van oordt director hugh dandrade r j ventres director virginia dwyer james wood director david c garfield director thomas h kelly date march 4 1994 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited consolidated balance sheets scheringplough corporation subsidiaries december 31 1993 1992 related statements consolidated income retained earnings cash flows three years period ended december 31 1993 issued report thereon dated february 15 1994 financial statements report included 1993 annual report shareholders incorporated herein reference audits also included financial statement schedules scheringplough corporation subsidiaries listed item 14 financial statement schedules responsibility companys management responsibility express opinion based audits opinion financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein sdeloitte touche parsippany new jersey february 15 1994 schedule v page schedule vi item 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1994 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1994 1993 1992 statements consolidated retained earnings years ended december 31 1994 1993 1992 statements consolidated cash flows years ended december 31 1994 1993 1992 consolidated balance sheets december 31 1994 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 20 schedule ii valuation qualifying accounts 21 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit method number description filing 3a complete copy certificate incorporated incorporation amended reference exhibit currently effect 3a companys annual report 1989 form 10k 3b complete copy bylaws incorporated amended currently effect reference exhibit 4b companys form s8 3319013 4a rights agreement incorporated company bank new york reference exhibit 4 dated july 25 1989 companys quarterly report period ended june 30 1989 form 10q 4b indenture dated november 1 incorporated 1982 company reference exhibit chase manhattan bank na 4a companys trustee registration statement form s3 file 280012 exhibit method number description filing 4c supplemental indenture 1 incorporated dated november 1 1991 reference exhibit 41 indenture dated companys report november 1 1982 form 8k dated november 20 1991 4d lynx equity unit agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 4e lynx equity unit guarantee incorporated agreement reference exhibit 101 companys report form 8k dated october 1 1991 10a companys executive incentive plan incorporated plan amended trust related reference exhibit thereto 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k 10b companys 1983 stock incentive incorporated plan amended reference exhibit 10c companys annual report 1988 form 10k 10c companys 1987 stock incentive incorporated plan amended reference exhibit 10d companys annual report 1990 form 10k 10d companys 1992 stock incentive incorporated plan amended reference exhibit 10d companys annual report 1992 form 10k exhibit method number description filing 10ei employment agreement incorporated company robert p luciano reference exhibit amended 10ei companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment filed document 10eii employment agreement incorporated company richard j kogan reference exhibit amended 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment filed document 10eiii employment agreement incorporated company hugh dandrade reference exhibit amended 10c companys quarterly report period ended june 30 1994 form 10q first amendment filed document 10eiv form employment agreement filed company document executive officers effective upon change control exhibit method number description filing 10f directors deferred compensation plan incorporated plan trust related thereto reference exhibit 10 f companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k 10g pension plan directors plan incorporated trust related thereto reference exhibit 10g companys annual report 1987 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k 10h supplemental executive retirement plan incorporated plan trust related thereto reference exhibit 10h companys annual report 1987 form 10k amendments plan filed document trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k exhibit method number description filing 10 directors stock award plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1994 form 10q 11 computation earnings per filed document common share 12 computation ratio filed document earnings fixed charges 13 financial section filed document companys 1994 annual report shareholders exception portions said annual report specifically incorporated reference form 10k report shall deemed filed part form 10k 21 subsidiaries registrant filed document 23 consents experts counsel filed document 24 power attorney filed document 27 financial data schedule filed document exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 3 1995 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated robert p luciano regina e herzlinger chairman chief executive director officer director richard j kogan h barclay morley president chief operating director officer director harold r hiser jr richard de j osborne executive vice president finance director principal financial officer thomas h kelly william schreyer vice president controller director principal accounting officer hans w becherer robert f w van oordt director hugh dandrade r j ventres director david c garfield james wood director thomas h kelly date march 3 1995 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited consolidated balance sheets scheringplough corporation subsidiaries december 31 1994 1993 related statements consolidated income retained earnings cash flows three years period ended december 31 1994 issued report thereon dated february 15 1995 financial statements report included 1994 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 15 1995 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1995 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1995 1994 1993 statements consolidated retained earnings years ended december 31 1995 1994 1993 statements consolidated cash flows years ended december 31 1995 1994 1993 consolidated balance sheets december 31 1995 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 19 schedule ii valuation qualifying accounts 20 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit number description 3a complete copy certificate incorporation amended currently effect incorporated reference exhibit 3 companys quarterly report period ended june 30 1995 form 10q file 16571 3b complete copy bylaws amended currently effect incorporated reference exhibit 42 companys registration statement form s3 file 333853 4a rights agreement company bank new york dated july 25 1989 incorporated reference exhibit 4 companys quarterly report period ended june 30 1989 form 10q file 16571 4b indenture dated november 1 1982 company chase manhattan bank na trustee incorporated reference exhibit 4a companys registration statement form s3 file 280012 4c supplemental indenture 1 dated november 1 1991 indenture dated november 1 1982 incorporated reference exhibit 41 companys report form 8k dated november 20 1991 file 16571 exhibit number description 4d lynx equity unit agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 file 16571 4e lynx equity unit guarantee agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 file 16571 4f form participation rights agreement company chase manhattan bank national association trustee incorporated reference exhibit 46 companys registration statement form s4 amendment 1 file 3365107 10a companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k file 16571 10b companys 1983 stock incentive plan amended incorporated reference exhibit 10c companys annual report 1988 form 10k file 16571 10c companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10d companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 filed document 10ei employment agreement company robert p luciano amended incorporated reference exhibit 10e companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated ref erence exhibit 10ei companys annual report 1994 form 10k file 16571 exhibit number description 10eii employment agreement company richard j kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q file 16571 10eiii employment agreement company hugh dandrade amended incorporated reference exhibit 10c companys quarterly report period ended june 30 1994 form 10q first amendment incorporated reference exhibit 10eiii companys annual report 1994 form 10k file 16571 second amendment filed document 10eiv form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k file 16571 10f directors deferred compensation plan trust related thereto plan incorporated reference exhibit 10f companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k file 16571 10g pension plan directors trust related thereto plan incorporated reference exhibit 10g companys annual report 1987 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k file 16571 exhibit number description 10h supplemental executive retirement plan trust related thereto plan incorporated reference exhibit 10h companys annual report 1987 form 10k amendments plan incorporated reference exhibit 10h companys annual report 1994 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k file 16571 10i directors stock award plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1994 form 10q file 16571 10j companys deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q file 16571 11 computation earnings per common share 12 computation ratio earnings fixed charges 13 financial section companys 1995 annual report shareholders exception portions said annual report specifically incorporated reference form 10k report shall deemed filed part form 10k 21 subsidiaries registrant 23 consents experts counsel 24 power attorney 27 financial data schedule 99 forwardlooking statements company exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date february 28 1996 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated robert p luciano h barclay morley chairman director richard j kogan carl e mundy jr president chief executive director officer director jack l wyszomierski richard de j osborne executive vice president director chief financial officer thomas h kelly patricia f russo vice president controller director principal accounting officer hans w becherer william schreyer director hugh dandrade robert f w van oordt director david c garfield r j ventres director regina e herzlinger james wood director thomas h kelly date february 28 1996 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited consolidated balance sheets scheringplough corporation subsidiaries december 31 1995 1994 related statements consolidated income retained earnings cash flows three years period ended december 31 1995 issued report thereon dated february 14 1996 financial statements report included 1995 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 14 1996 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1996 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1996 1995 1994 statements consolidated retained earnings years ended december 31 1996 1995 1994 statements consolidated cash flows years ended december 31 1996 1995 1994 consolidated balance sheets december 31 1996 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 19 schedule ii valuation qualifying accounts 20 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit number description 3a complete copy certificate incorporation amended currently effect incorporated reference exhibit 3 companys quarterly report period ended june 30 1995 form 10q file 16571 3b complete copy bylaws amended currently effect incorporated reference exhibit 42 companys registration statement form s3 file 333853 4a rights agreement company bank new york dated july 25 1989 incorporated reference exhibit 4 companys quarterly report period ended june 30 1989 form 10q file 16571 4b indenture dated november 1 1982 company chase manhattan bank na trustee incorporated reference exhibit 4a companys registration statement form s3 file 280012 4c supplemental indenture 1 dated november 1 1991 indenture dated november 1 1982 incorporated reference exhibit 41 companys report form 8k dated november 20 1991 file 16571 4d lynx equity unit agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 file 16571 4e lynx equity unit guarantee agreement incorporated reference exhibit 101 companys report form 8k dated october 1 1991 file 16571 exhibit number description 4f form participation rights agreement company chase manhattan bank national association trustee incorporated reference exhibit 46 companys registration statement form s4 amendment 1 file 3365107 10a companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k file 16571 10b companys 1983 stock incentive plan amended incorporated reference exhibit 10c companys annual report 1988 form 10k file 16571 10c companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10d companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10d companys annual report 1995 form 10k file 16571 10ei employment agreement company robert p luciano amended incorporated reference exhibit 10e companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10ei companys annual report 1994 form 10k file 16571 10eii employment agreement company richard j kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys exhibit number description annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q file 16571 10eiii employment agreement company hugh dandrade amended incorporated reference exhibit 10c companys quarterly report period ended june 30 1994 form 10q first amendment incorporated reference exhibit 10eiii companys annual report 1994 form 10k file 1 6571 second amendment incorporated reference exhibit 10eiii companys annual report 1995 form 10k file 16571 10eiv form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k file 16571 10f directors deferred compensation plan trust related thereto plan incorporated reference exhibit 10f companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k file 16571 10g pension plan directors trust related thereto plan incorporated reference exhibit 10g companys annual report 1987 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k file 16571 10h supplemental executive retirement plan trust related thereto plan incorporated reference exhibit 10h companys annual report 1987 form 10k amendments plan incorporated reference exhibit 10h companys annual report 1994 form 10k trust agreement incorporated reference exhibit 10g companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10g companys annual report 1993 form 10k file 16571 exhibit number description 10i directors stock award plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1994 form 10q file 16571 amendment january 1 1997 filed document 10j companys deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q file 16571 10k companys directors deferred stock equivalency program filed document 11 computation earnings per common share 12 computation ratio earnings fixed charges 13 financial section companys 1996 annual report shareholders exception portions said annual report specifically incorporated reference form 10k report shall deemed filed part form 10k 21 subsidiaries registrant 23 consents experts counsel 24 power attorney 27 financial data schedule 991 cautionary statements regarding safe harbor provision private securities litigation reform act 1995 992 forwardlooking statements company exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 3 1997 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated robert p luciano h barclay morley chairman director richard jay kogan carl e mundy jr president chief executive director officer director jack l wyszomierski richard de j osborne executive vice president director chief financial officer thomas h kelly patricia f russo vice president controller director principal accounting officer hans w becherer william schreyer director hugh dandrade robert f w van oordt director david c garfield r j ventres director regina e herzlinger james wood director thomas h kelly date march 3 1997 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited consolidated balance sheets schering plough corporation subsidiaries december 31 1996 1995 related statements consolidated income retained earnings cash flows three years period ended december 31 1996 issued report thereon dated february 14 1997 financial statements report included 1996 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 14 1997 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1997 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1997 1996 1995 statements consolidated retained earnings years ended december 31 1997 1996 1995 statements consolidated cash flows years ended december 31 1997 1996 1995 consolidated balance sheets december 31 1997 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 19 schedule ii valuation qualifying accounts 20 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit number description 3a complete copy certificate incorporation amended currently effect incorporated reference exhibit 3 companys quarterly report period ended june 30 1995 form 10 q certificate amendment certificate incorporation incorporated reference exhibit 3 companys quarterly report period ended june 30 1997 form 10q file 16571 3b complete copy bylaws amended currently effect incorporated reference exhibit 42 companys registration statement form s3 file 333853 4a rights agreement company bank new york dated june 24 1997 incorporated reference exhibit 1 form 8a filed company june 30 1997 file 16571 4b indenture dated november 1 1982 company chase manhattan bank na trustee incorporated reference exhibit 4a companys registration statement form s3 file 280012 exhibit number description 4c form participation rights agreement company chase manhattan bank national association trustee incorporated reference exhibit 46 companys registration statement form s4 amendment 1 file 3365107 10a companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q file 16571 10b companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10c companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10d companys annual report 1995 form 10k file 16571 10d companys 1997 stock incentive plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1997 form 10q file 16571 10ei employment agreement company robert p luciano amended incorporated reference exhibit 10ei companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10ei companys annual report 1994 form 10k file 16571 exhibit number description 10eii employment agreement company richard j kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q file 16571 10eiii employment agreement company hugh dandrade amended incorporated reference exhibit 10c companys quarterly report period ended june 30 1994 form 10q first amendment incorporated reference exhibit 10eiii companys annual report 1994 form 10k file 1 6571 second amendment incorporated reference exhibit 10eiii companys annual report 1995 form 10k file 16571 10eiv form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k file 16571 10f directors deferred compensation plan trust related thereto plan incorporated reference exhibit 10f companys annual report 1991 form 10k trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k file 16571 10g supplemental executive retirement plan trust related thereto plan incorporated reference exhibit 10h companys annual report 1987 form 10k amendments plan incorporated reference exhibit 10h companys annual report 1994 form 10k amended restated trust agreement incorporated reference exhibit 10a companys quarterly report period ended march 31 1997 form 10q file 16571 exhibit number description 10h directors stock award plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1994 form 10q file 16571 amendment january 1 1997 incorporated reference exhibit 10i companys annual report 1996 form 10k file 16571 10i companys deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q file 16571 10k companys directors deferred stock equivalency program incorporated reference exhibit 10k companys annual report 1996 form 10k file 16571 10l form split dollar agreement related collateral assignment company executive officers 12 computation ratio earnings fixed charges 13 financial section companys 1997 annual report shareholders exception portions said annual report specifically incorporated reference form 10k report shall deemed filed part form 10k 21 subsidiaries registrant 23 consents experts counsel 24 power attorney 27 financial data schedule 99 cautionary statements regarding safe harbor provision private securities litigation reform act 1995 exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement filed document b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 19 1998 sthomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated robert p luciano donald l miller chairman director richard jay kogan h barclay morley president chief executive director officer director jack l wyszomierski carl e mundy jr executive vice president director chief financial officer thomas h kelly richard de j osborne vice president controller director principal accounting officer hans w becherer patricia f russo director hugh dandrade william schreyer director david c garfield robert f w van oordt director regina e herzlinger james wood director thomas h kelly date march 19 1998 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited consolidated balance sheets schering plough corporation subsidiaries december 31 1997 1996 related statements consolidated income retained earnings cash flows three years period ended december 31 1997 issued report thereon dated february 12 1998 financial statements report included 1997 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 12 1998 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1998 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1998 1997 1996 statements consolidated shareholders equity years ended december 31 1998 1997 1996 statements consolidated cash flows years ended december 31 1998 1997 1996 consolidated balance sheets december 31 1998 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 21 schedule ii valuation qualifying accounts 22 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit number description 3a complete copy certificate incorporation amended currently effect incorporated reference exhibit 3 companys quarterly report period ended june 30 1995 form 10 q certificate amendment certificate incorporation incorporated reference exhibit 3 companys quarterly report period ended june 30 1997 form 10q file 16571 3b complete copy bylaws amended currently effect incorporated reference exhibit 42 companys registration statement form s3 file 333853 amendment bylaws effective september 22 1998 incorporated reference exhibit 4 companys quarterly report period ended september 30 1998 form 10q file 16571 4a rights agreement company bank new york dated june 24 1997 incorporated reference exhibit 1 form 8a filed company june 30 1997 file 16571 4b indenture dated november 1 1982 company chase manhattan bank na trustee incorporated reference exhibit 4ato companys registration statement form s3 file 280012 exhibit number description 4c form participation rights agreement company chase manhattan bank national association trustee incorporated reference exhibit 46 companys registration statement form s4 amendment 1 file 3365107 10a companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q file 16571 10b companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10c companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10dto companys annual report 1995 form 10k file 16571 10d companys 1997 stock incentive plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1997 form 10q file 16571 10ei employment agreement company robert p luciano amended incorporated reference exhibit 10ei companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10ei companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended march 31 1998 form 10q file 16571 exhibit number description 10eii employment agreement company richard j kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q fourth amendment incorporated reference exhibit 10b companys quarterly report period ended march 31 1998 form 10q fifth amendment filed document file 16571 10eiii employment agreement company hugh dandrade amended incorporated reference exhibit 10c companys quarterly report period ended june 30 1994 form 10q first amendment incorporated reference exhibit 10eiii companys annual report 1994 form 10k file 1 6571 second amendment incorporated reference exhibit 10eiii companys annual report 1995 form 10k third amendment incorporated reference exhibit 10c companys quarterly report period ended march 31 1998 form 10q fourth amendment filed document file 16571 10eiv form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k file 16571 10ev agreement company robert p luciano incorporated reference exhibit 10d companys quarterly report period ended march 31 1998 form 10q file 16571 10evi employment agreement company raul e cesan filed document file 16571 10evii agreement company rodolfo c bryce incorporated reference exhibit 10a companys quarterly report period ended june 30 1998 form 10q file 16571 exhibit number description 10f directors deferred compensation plan trust related thereto incorporated reference exhibit 10f companys annual report 1991 form 10k amendment december 7 1998 filed document trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q file 16571 10g supplemental executive retirement plan trust related thereto incorporated reference exhibit 10e companys quarterly report period ended march 31 1998 form 10qamendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1998 form 10q amended restated trust agreement filed document file 16571 10h directors stock award plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1994 form 10q file 16571 amendment january 1 1997 incorporated reference exhibit 10i companys annual report 1996 form 10k amendment april 1 1998 incorporated reference exhibit 10h companys quarterly report period ended march 31 1998 form 10q file 16571 10i companys deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q file 16571 10k companys directors deferred stock equivalency program incorporated reference exhibit 10k companys annual report 1996 form 10k file 16571 10l companys form split dollar agreement related collateral assignment company executive officers incorporated reference exhibit 10l companys annual report 1997 form 10k amendments incorporated reference exhibit 10g companys quarterly report period ended march 31 1998 form 10q file 16571 exhibit number description 10m companys retirement benefits equalization plan incorporated reference exhibit 10f companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10b companys quarterly report period ended september 30 1998 form 10q file 1 6571 12 computation ratio earnings fixed charges filed document 13 financial section companys 1998 annual report shareholders exception portions said annual report specifically incorporated reference form 10k filed document report shall deemed filed part form 10k 21 subsidiaries registrant filed document 23 consents experts counsel filed document 24 power attorney filed document 27 financial data schedule filed document 99 cautionary statements regarding safe harbor provision private securities litigation reform act 1995 filed document exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date february 25 1999 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated richard jay kogan robert p luciano chairman board chief director executive officer director raul e cesan donald l miller president chief operating director officer director jack l wyszomierski h barclay morley executive vice president director chief financial officer thomas h kelly carl e mundy jr vice president controller director principal accounting officer hans w becherer richard de j obsorne director hugh dandrade patricia f russo director david c garfield william schreyer director regina e herzlinger robert f w van oordt director sthomas h kelly thomas h kelly james wood attorneyinfact director date february 251999 independent auditors report scheringplough corporation audited consolidated balance sheets schering plough corporation subsidiaries december 31 1998 1997 related statements consolidated income shareholders equity cash flows three years period ended december 31 1998 issued report thereon dated february 12 1999 financial statements report included 1998 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 12 1999 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 1999 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 1999 1998 1997 statements consolidated shareholders equity years ended december 31 1999 1998 1997 statements consolidated cash flows years ended december 31 1999 1998 1997 consolidated balance sheets december 31 1999 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report 24 schedule ii valuation qualifying accounts 25 schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary 3 exhibits exhibit number description 3a complete copy certificate incorporation amended currently effect incorporated reference exhibit 3 companys quarterly report period ended june 30 1995 form 10q certificate amendment certificate incorporation incorporated reference exhibit 3 companys quarterly report period ended june 30 1997 form 10q certificate amendment certificate incorporation incorporated reference exhibit 3a companys quarterly report period ended march 31 1999 form 10q file 16571 3b complete copy bylaws amended currently effect incorporated reference exhibit 42 companys registration statement form s3 file 333853 amendment bylaws effective september 22 1998 incorporated reference exhibit 4 companys quarterly report period ended september 30 1998 form 10q file 16571 4a rights agreement company bank new york dated june 24 1997 incorporated reference exhibit 1 form 8a filed company june 30 1997 file 16571 4b indenture dated november 1 1982 company chase manhattan bank na trustee incorporated reference exhibit 4ato companys registration statement form s3 file 280012 4c form participation rights agreement company chase manhattan bank national association trustee incorporated reference exhibit 46 companys registration statement form s4 amendment 1 file 3365107 10a companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q file 16571 10b companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10c companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10dto companys annual report 1995 form 10k file 16571 10d companys 1997 stock incentive plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1997 form 10q amendment 1997 stock incentive plan incorporated reference exhibit 10a companys quarterly report period ended march 31 1999 form 10q file 16571 10ei employment agreement company richard j kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q fourth amendment incorporated reference exhibit 10b companys quarterly report period ended march 31 1998 form 10q fifth amendment incorporated reference exhibit 10eii companys annual report 1998 form 10k file 16571 10eii employment agreement company hugh dandrade amended incorporated reference exhibit 10c companys quarterly report period ended june 30 1994 form 10q first amendment incorporated reference exhibit 10eiii companys annual report 1994 form 10k file 16571 second amendment incorporated reference exhibit 10eiii companys annual report 1995 form 10k third amendment incorporated reference exhibit 10c companys quarterly report period ended march 31 1998 form 10q fourth amendment incorporated reference exhibit 10eiii companys annual report 1998 form 10k file 16571 10eiii form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k form amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1999 form 10q file 16571 10eiv employment agreement company raul e cesan incorporated reference exhibit 10evi companys annual report 1998 form 10k file 16571 10ev employment agreement company robert p luciano amended incorporated reference exhibit 10ei companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference 10ei companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended march 31 1998 form 10q file 16571 10evi agreement company robert p luciano incorporated reference exhibit 10d companys quarterly report period ended march 31 1998 form 10q file 16571 10f amended restated directors deferred compensation plan trust related thereto incorporated reference exhibit 10 b companys quarterly report period ended september 30 1999 form 10q trust agreement incorporated reference exhibit 10 companys annual report 1998 form 10k amendment trust agreement incorporated reference exhibit 10 b companys quarterly report period ended march 31 1997 form 10q file 16571 10g supplemental executive retirement plan trust related thereto incorporated reference exhibit 10e companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1998 form 10q amended restated trust agreement incorporated reference exhibit 10gto companys annual report 1998 form 10k file 16571 10h amended restated directors stock award plan incorporated reference exhibit 10 cto companys quarterly report period ended september 30 1999 form 10q file 16571 10i deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q file 16571 10j amended restated directors deferred stock equivalency program incorporated reference exhibit 10d companys quarterly report period ended september 30 1999 form 10q file 16571 10k companys form split dollar agreement related collateral assignment company executive officers incorporated reference exhibit 10l companys annual report 1997 form 10k amendments incorporated reference exhibit 10g companys quarterly report period ended march 31 1998 form 10q file 16571 10l companys retirement benefits equalization plan incorporated reference exhibit 10f companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10b companys quarterly report period ended september 30 1998 form 10q file 16571 12 computation ratio earnings fixed charges filed document 13 financial section companys 1999 annual report shareholders exception portions said annual report specifically incorporated reference form 10k filed documentsuch report shall deemed filed part form 10k 21 subsidiaries registrant filed document 23 consents experts counsel filed document 24 power attorney filed document 27 financial data schedule filed document exhibits applicable copies exhibits furnished upon request compensatory plan contract arrangement b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 2 2000 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated richard jay kogan donald l miller chairman board chief director executive officer director raul e cesan h barclay morley president chief operating director officer director jack l wyszomierski carl e mundy jr executive vice president director chief financial officer thomas h kelly richard de j osborne vice president controller director principal accounting officer hans w becherer patricia f russo director hugh dandrade william schreyer director david c garfield robert f w van oordt director regina e herzlinger arthur f weinbach director robert p luciano james wood director sthomas h kelly date march 2 2000 thomas h kelly attorneyinfact independent auditors report scheringplough corporation audited financial statements schering plough corporation subsidiaries december 31 1999 1998 three years period ended december 31 1999 issued report thereon dated february 11 2000 financial statements report included 1999 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 11 2000 schedule iiitem 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 2001 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 2001 2000 1999 statements consolidated cash flows years ended december 31 2001 2000 1999 consolidated balance sheets december 31 2001 2000 statements consolidated shareholders equity years ended december 31 2001 2000 1999 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report schedule ii valuation qualifying accounts schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary exhibit number description 10 companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q executive incentive plan amended restated october 1 2000 incorporated reference exhibit 10a companys annual report 2000 form 10k file 16571 10 ii trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q amended restated defined contribution trust incorporated reference exhibit 10aii companys annual report 2000 form 10k file 16571 10 b companys 1987 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1990 form 10k file 16571 10 c companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10d companys annual report 1995 form 10k file 16571 10 companys 1997 stock incentive plan incorporated reference exhibit 10 companys quarterly report period ended september 30 1997 form 10q amendment 1997 stock incentive plan incorporated reference exhibit 10a companys quarterly report period ended march 31 1999 form 10q file 16571 exhibit number description 10 e employment agreement company richard jay kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q fourth amendment incorporated reference exhibit 10b companys quarterly report period ended march 31 1998 form 10q fifth amendment incorporated reference exhibit 10eii companys annual report 1998 form 10k file 16571 10 e ii form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k form amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1999 form 10q forms amendment effective january 1 2002 filed document exhibits 10e ii b form employment agreement company executive officers effective upon change control incorporating prior amendments january 1 2002 new agreements effective beginning january 1 2002 filed document exhibit 10e ii c file 16571 10 e iii employment agreement company raul e cesan incorporated reference exhibit 10evi companys annual report 1998 form 10k file 16571 10 e iv employment agreement company robert p luciano amended incorporated reference exhibit 10ei companys annual report 1989 form 10k first amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference 10ei companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended march 31 1998 form 10q file 16571 exhibit number description 10 ev agreement company robert p luciano incorporated reference exhibit 10d companys quarterly report period ended march 31 1998 form 10q file 16571 10evi supplement employment agreement effective upon change control described exhibit 10eii document index company joseph c connors filed document file 16571 10evii supplement employment agreement effective upon change control described exhibit 10eii document index company jack wyszomierski filed document file 16571 10eviii supplement employment agreement effective upon change control described exhibit 10eii document index company richard w zahn filed document file 16571 10 f amended restated directors deferred compensation plan trust related thereto incorporated reference exhibit 10b companys quarterly report period ended september 30 1999 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1998 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q amended restated defined contribution trust incorporated reference exhibit 10aii companys annual report 2000 form 10k file 16571 exhibit number description 10 g supplemental executive retirement plan trust related thereto incorporated reference exhibit 10e companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1998 form 10q second amendment supplemental executive retirement plan effective october 1 2000 incorporated reference exhibit 10g companys annual report 2000 form 10k amended restated trust agreement incorporated reference exhibit 10g companys annual report 1998 form 10k file 16571 10 h amended restated directors stock award plan incorporated reference exhibit 10c companys quarterly report period ended september 30 1999 form 10q file 16571 10 deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q deferred compensation plan amended restated october 1 2000 incorporated reference exhibit 10h companys annual report 2000 form 10k file 16571 10 j amended restated directors deferred stock equivalency program incorporated reference exhibit 10d companys quarterly report period ended september 30 1999 form 10q file 16571 10 k companys form split dollar agreement related collateral assignment company executive officers incorporated reference exhibit 10l companys annual report 1997 form 10k amendments incorporated reference exhibit 10g companys quarterly report period ended march 31 1998 form 10q file 16571 exhibit number description 10 l companys retirement benefits equalization plan second amendment effective october 1 2000 incorporated reference exhibit 10l companys annual report 2000 form 10k incorporated reference exhibit 10f companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10b companys quarterly report period ended september 30 1998 form 10q file 16571 computation ratio earnings fixed charges filed document financial section companys 2001 annual report shareholders exception portions said annual report specifically incorporated reference form 10k filed document report shall deemed filed part form 10k subsidiaries registrant filed document consents experts counsel filed document power attorney filed document press releases dated february 15 2001 april 17 2001 april 24 2001 june 22 2001 june 27 2001 june 28 2001 2 releases july 25 2001 incorporated reference exhibits 99a 99 h companys quarterly report period ended june 30 2001 form 10q file 16571 compensatory plan contract arrangement exhibits applicable copies exhibits furnished upon request b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 29 2002 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated richard jay kogan richard jay kogan h barclay morley chairman chief executive officer director president director jack l wyszomierski jack l wyszomierski carl e mundy jr executive vice president director chief financial officer thomas h kelly thomas h kelly richard de j osborne vice president controller director principal accounting officer patricia f russo hans w becherer director kathryn c turner regina e herzlinger director robert f w van oordt david h komansky director arthur f weinbach eugene r mcgrath director james wood donald l miller director thomas h kelly date march 29 2002 thomas h kelly attorneyinfact independent auditors report scheringplough corporation directors shareholders audited consolidated financial statements scheringplough corporation subsidiaries december 31 2001 2000 three years period ended december 31 2001 issued report thereon dated february 15 2002 financial statements report included 2001 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 15 2002 schedule ii scheringplough corporation subsidiaries valuation qualifying accounts years ended december 31 2001 2000 1999 dollars millions valuation qualifying accounts deducted assets apply allowances accounts receivableitem 14 principal accountant fees services information concerning principal accountant fees services set forth caption “ratification designation independent auditors” company’s proxy statement annual meeting shareholders april 27 2004 incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services set forth caption “proposal two ratification designation independent registered public accountants” company’s proxy statement annual meeting shareholders april 26 2005 incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services incorporated reference “proposal two ratify designation deloitte touche llp audit scheringplough’s books accounts 2006” company’s proxy statement annual meeting shareholders may 19 2006 part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services incorporated reference “proposal two ratify designation deloitte touche llp audit scheringplough’s books accounts 2008” scheringplough’s proxy statement annual meeting shareholders may 16 2008 part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services incorporated reference “proposal two ratify designation deloitte touche llp audit scheringplough’s books accounts 2009” scheringplough’s proxy statement 2009 annual meeting shareholders part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “all fees” company’s proxy statement annual meeting shareholders held may 25 2010 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “all fees” company’s proxy statement annual meeting shareholders held may 24 2011 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “all fees” company’s proxy statement annual meeting shareholders held may 28 2013 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 27 2014 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 26 2015 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion proposal 3 ratification appointment independent registered public accounting firm 2016beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 24 2016 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion proposal 4 ratification appointment independent registered public accounting firm 2017 beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 23 2017 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion proposal 4 ratification appointment independent registered public accounting firm 2018 beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 22 2018 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion proposal 4 ratification appointment independent registered public accounting firm 2019 beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 28 2019 part iv item 15item 14principal accountant fees services information required item incorporated reference discussion proposal 3 ratification appointment independent registered public accounting firm 2021 beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 25 2021 part iv item 15item 14 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 2000 annual report shareholders incorporated herein reference statements consolidated income years ended december 31 2000 1999 1998 statements consolidated cash flows years ended december 31 2000 1999 1998 consolidated balance sheets december 31 2000 1999 statements consolidated shareholders equity years ended december 31 2000 1999 1998 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report schedule ii valuation qualifying accounts schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary compensatory plan contract arrangement exhibits applicable copies exhibits furnished upon request b reports form 8k none signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 12 2001 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated richard jay kogan richard jay kogan donald l miller chairman board chief director executive officer director raul e cesan raul e cesan h barclay morley president chief operating director officer director jack l wyszomierski jack l wyszomierski carl e mundy jr executive vice president director chief financial officer thomas h kelly thomas h kelly richard de j osborne vice president controller director principal accounting officer hans w becherer patricia f russo director regina e herzlinger robert f w van oordt director david h komansky arthur f weinbach director robert p luciano james wood director eugene r mcgrath director thomas h kelly date march 12 2001 thomas h kelly attorneyinfact independent auditors report scheringplough corporation directors shareholders audited financial statements scheringplough corporation subsidiaries december 31 2000 1999 three years period ended december 31 2000 issued report thereon dated february 16 2001 financial statements report included 2000 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 14 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 16 2001 schedule ii scheringplough corporation subsidiaries valuation qualifying accounts years ended december 31 2000 1999 1998 dollars millions valuation qualifying accounts deducted assets apply allowances accounts receivableitem 14 principal accountant fees services information required item incorporated reference discussion “audit committee” beginning caption “preapproval policy services independent registered public accounting firm” “all fees” company’s proxy statement annual meeting shareholders held may 22 2012 part iv item 15item 14 controls procedures management including chief executive officer chief financial officer evaluated companys disclosure controls procedures within period 90 days prior filing date form 10k concluded companys disclosure controls procedures effective ensuring material information relating company consolidated subsidiaries made known also concluded significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services incorporated reference “proposal two ratify designation deloitte touche llp audit scheringplough’s books accounts 2007” scheringplough’s proxy statement annual meeting shareholders may 18 2007 part iv item 15item 14 principal accountant fees services information required item incorporated reference discussion proposal 3 ratification appointment independent registered public accounting firm 2020 beginning caption “preapproval policy services independent registered public accounting firm” “fees services provided independent registered public accounting firm” company’s proxy statement annual meeting shareholders held may 26 2020 part iv item 15 item 7managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1993 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1994 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1995 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1996 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1997 annual report shareholders incorporated herein reference item 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition companys 1997 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1998 annual report shareholders incorporated herein reference item 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition companys 1998 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 1999 annual report shareholders incorporated herein reference item 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition companys 1999 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 2001 annual report shareholders incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operation executive summary company scheringplough worldwide pharmaceutical company committed discovering developing manufacturing marketing new therapies treatments enhance human health company’s primary business strategy continually discover license human pharmaceutical products patent protected extended period time product’s patent expires generic competition occurs resulting substantial decline product’s average selling price scheringplough also leading consumer product brands overthecounter otc foot care sun care markets global animal health business government regulatory agencies throughout world regulate company’s discovery development manufacturing marketing efforts food drug administration united states fda pivotal regulator company’s business united states pricing company’s pharmaceutical products subject competitive pressure managed care organizations seek price discounts also united states company required provide statutorily defined rebates various government agencies order participate medicaid veterans’ health care program governmentfunded programs international markets company operates environment governmentmandated costcontainment programs company ships pharmaceutical products wholesalers distributors markets products health care professionals managed care organizations lesser extent patients key performance indicators kpis company percentage market shares products market shares company’s major products discussed sections follow current state company past three years company experienced confluence negative events summarized follows • since 2001 company working fda resolve issues involving company’s compliance current good manufacturing practices cgmp certain manufacturing sites new jersey puerto rico 2002 company reached formal agreement fda consent decree terms consent decree company agreed make payments totaling 500 million revalidate manufacturing processes sites manufacturing sites remained opened throughout period however consent decree placed significant additional controls production release products sites including review thirdparty certification production variances products review thirdparty certification batch production records thirdparty certifications cgmp improvement projects resulted higher costs well reduced output facilities addition company found necessary discontinue certain older products impact consent decree discussed detail sections follow • certain company’s sales marketing practices investigation us attorney’s offices pennsylvania massachusetts investigations pose significant risks company caused company significantly increase litigation reserves matters discussed detail sections follow • december 2002 company switched formulations claritin united states prescription otc status switch followed loss marketing exclusivity product average unit selling price otc product much lower price prescription market loss marketing exclusivity company faces additional competition comparable brands generics otc marketplace claritin united states company’s leading product terms sales even terms profit result company experienced rapid sharp material decline earnings cash flow beginning 2003 company expect earnings recover loss sales claritin time company introduces new products recovery may take several years • company’s leading franchise combination pegylated interferon pegintron ribavirin rebetol treat hepatitis c late 2002 competitor entered hepatitis c marketplace versions pegylated interferon ribavirin prior introduction competing products company held leading position hepatitis c market introduction competitor company’s market shares fallen significantly decline sales exacerbated overall earnings cash flow decline addition generic forms rebetol may approved time important us market occur company’s market shares sales would decline matters resulted following • cash flow declined significantly particularly united states majority research conducted dividends paid also payments arising investigations conducted us attorney’s offices could reduce cash flow united states addition company’s credit ratings reduced impact lower credit ratings company’s overall liquidity discussed detail sections follow • company’s manufacturing sites operate well optimum levels due sales declines reduction output related consent decree time overall costs operating manufacturing sites increased due consent decree activities impact facts reduction profit margins time major investments manufacturing capacity impaired however company continues review carrying value assets indications impairment future events decisions may lead asset impairment losses accelerated depreciation due shortened asset lives response company initiated following actions • new management team appointed implemented many changes described following sections • quarterly dividend reduced 55 cents 17 cents per common share • program entitled value enhancement initiative vei commenced vei tool designed enable company save spend wisely key costcutting initiatives implemented include ø eliminating employee bonuses 2003 company’s standard plans ø eliminating payout company’s profit sharing plan ø eliminating routine merit increases throughout 2004 exceptions local contracts practices prevent action customercontact employees dedicated fulfillment company’s fda consent decree obligations businesscritical employees ø targeting overall reduction payroll related expenses least 10 percent excluding payroll expense associated customercontact employees dedicated fulfilling company’s fda consent decree obligations first step toward achieving target voluntary early retirement program verp united states approximately 900 employees elected retire program ø installing global procurement programs ø exercising tight controls new hires cutting back travel costs reducing meeting expenses positive side company entering cholesterolreduction market launch zetia ezetimibe us marketing application ezetimibesimvastatin combination submitted filing september 2003 cholesterolreduction market single largest pharmaceutical market world management believes products potential enabling company move beyond loss claritin build long term financial strength addition company believes several potentially valuable pharmaceutical compounds earlier stage research pipeline company also aggressively pursuing licensing opportunities researchbased pharmaceutical companies outlook yearoveryear comparisons 2004 2003 negatively impacted number factors including following ability company rebuild financial strength highly dependent upon success cholesterol joint venture merck co inc merck joint venture highly successful company may able rebuild financial strength turn around operating performance beginning 2005 joint venture highly successful company must rely success earlystage pipeline drugs licensing opportunities significant change corporate strategy combination reader note significant uncertainty inherent factors could enable company rebuild financial strength net sales consolidated net sales 2003 totaled 83 billion decrease 18 billion 18 percent compared period 2002 consolidated net sales reflected volume decline 22 percent favorable foreign exchange rate impact 5 percent unfavorable price impact 1 percent net sales united states decreased 38 percent versus 2002 net sales internationally advanced 8 percent international sales included favorable foreign exchange rate impact 11 percent consolidated 2002 net sales 102 billion increased 418 million 4 percent versus 2001 reflecting price increase impact 3 percent favorable foreign exchange rate impact 1 percent sales volume 2002 unchanged versus 2001 net sales major therapeutic category years ended december 31 2003 2002 2001 follows dollars millions nm meaningful percentage certain prior year amounts reclassified conform current year presentation net sales global antiinfective anticancer products decreased 17 percent compared 2002 sales intron franchise used primarily treatment hepatitis c decreased 32 percent 19 billion due market share declines changes us trade inventory levels lower sales japan market share intron franchise declining reflecting entrance competitor’s new products hepatitis c market 2003 also previously reported company anticipates potential generic competition united states rebetol 2004 us sales rebetol 306 million 2003 intron franchise includes anticancerantiviral agent intron injection monotherapy combination rebetol capsules treating hepatitis c pegintron powder injection longeracting form intron monotherapy combination rebetol treating hepatitis c net sales antiinfective anticancer therapeutic category benefited international sales remicade treatment rheumatoid arthritis crohn’s disease ankylosing spondylitis net sales remicade 203 million 60 percent 540 million primarily europe due increased patient utilization global sales temodar capsules treating certain types brain tumors increased 16 percent 324 million due increased market penetration international sales caelyx longcirculating pegylated liposomal formulation doxorubicin hydrochloride increased 55 percent 111 million due increased patient utilization coupled ongoing launch new indication treatment metastatic breast cancer patients increased cardiac risk 2002 net sales global antiinfective anticancer products rose 64 percent compared 2001 led october 2001 market introduction pegintron combination rebetol hepatitis c united states continued rollout combination therapy european markets december 2001 launch rebetol combination intron japan sales antiinfective anticancer category 2002 also benefited higher international sales remicade global sales temodar reflecting increased market penetration global net sales allergy respiratory products decreased 39 percent 2003 22 percent 2002 category sales negatively impacted rapid decline sales prescription claritin resulting loss market exclusivity united states along conversion prescription otc status december 2002 2003 global sales prescription claritin 370 million compared 18 billion 2002 32 billion 2001 us sales prescription claritin recognized 2003 25 million versus sales 14 billion 2002 27 billion 2001 global net sales clarinex treatment seasonal outdoor allergies yearround indoor allergies 694 million 2003 increase 16 percent reflecting continued conversion patients prescription claritin clarinex coupled launch clarinex several international markets factors tempered contraction us prescription antihistamine market following launch otc claritin well changes us trade inventory levels clarinex continues experience intense competition us allergy market global sales clarinex 598 million 2002 clarinex launched united states january 2002 net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies decreased 4 percent 500 million 2003 due changes us trade inventory levels market share declines united states nasonex experiencing intense competition us allergy market international sales nasonex grew 21 percent 199 million due market share gains net sales nasonex 2002 essentially flat versus 2001 due market share declines united states tempered market share gains international markets global net sales cardiovascular products increased 8 percent 2003 sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndromes increased 1 percent 306 million due increased patient utilization united states tempered decline us trade inventory levels 2002 global net sales cardiovascular products decreased 30 percent due lower sales kdur sustainedrelease potassium chloride supplement subject generic competition partially offsetting decline higher sales integrilin due increased patient utilization increased market penetration net sales consumer health care products include otc foot care sun care products increased 250 million 35 percent 2003 increased 68 million 2002 otc product net sales increased 294 million 2003 91 million 2002 due launch otc claritin december 2002 sales otc claritin 415 million 2003 105 million 2002 third quarter 2003 company began face additional privatelabel competition otc claritin initial 180day period exclusivity expired first otc generic competitor comparison 2002 versus 2001 negatively impacted manufacturing issues otc products net sales foot care products decreased 4 million 1 percent 2003 due nonrecurrence 2002 launch lotrimin ultra topical antifungal foot care sales decreased 4 percent 2002 due increasing competition tempered launch lotrimin ultra net sales sun care products decreased 40 million 24 percent 2003 primarily due unfavorable weather conditions united states sun care sales decreased 5 percent 2002 due lower sales bain de soleil products global net sales animal health products increased 3 percent 2003 697 million sales favorably impacted foreign exchange 7 percent offset continued manufacturing supply issues described “additional factors influencing operations” global net sales animal health products decreased 2 percent 2002 due challenging global market conditions coupled manufacturing issues summary costs expenses equity income dollars millions nm meaningful percentage certain prior year amounts reclassified conform current year presentation cost sales percentage net sales 2003 increased 2002 primarily due change product sales mix resulting loss us sales prescription claritin increase also result higher unit manufacturing costs including effect lower production volumes coupled increased spending company’s cgmp compliance efforts cost sales percentage net sales 2002 increased 2001 primarily due shift sales towards products royalties paid higher costs associated manufacturing issues selling general administrative expenses decreased 6 percent 35 billion 2003 versus 37 billion 2002 decrease mostly due lower marketing expenses global pharmaceutical business including zero payout profit sharing routine bonuses addition field force incentives also declined decreases tempered higher promotion otc claritin foreign exchange ratio net sales 417 percent 2003 higher ratio 362 percent 2002 primarily due lower overall sales reported 2003 selling general administrative expenses increased 7 percent 2002 ratio net sales increased 362 percent 353 percent 2001 due increased spending support continued rollout new recently introduced products international markets research development spending increased 3 percent 15 billion representing 176 percent net sales 2003 research development expenses increased 9 percent 14 billion represented 140 percent net sales 2002 changes spending years reflect timing company’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products change 2003 also reflects presentation research development costs related cholesterol collaboration merck equity method accounting discussed 2003 income expense net included higher net interest expense income expense net 2002 included 80 million income related sale company’s us marketing rights suboxone subutex sublingual tablets treatment opioid dependence see “other income expense net” footnote additional information special charges components special charges follows dollars millions employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative verp united states program eligible employees united states december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program approximately 750 employees retired near yearend 2003 approximately 150 employees staggered retirement dates future total cost program estimated 190 million comprised increased pension costs 107 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million employees staggered retirement dates future amounts recognized special charge employees’ remaining service periods delayed expense recognition follows guidance statement financial accounting standards sfas 146 “accounting costs associated exit disposal activities” amounts recognized 2003 program 164 million amounts expected recognized 2004 2005 19 million 7 million respectively expected cash expenditures associated program 25 million 7 million 2004 2005 respectively also included employee termination costs table 15 million employee severance costs december 2003 company announced targeting overall reduction payroll related expenses least 10 percent excluding payroll expenses associated customercontact employees dedicated fulfilling company’s fda consent decree obligation target includes savings realized verp company expects incur additional employee termination costs 2004 associated achieving goal reducing payroll related expenses savings expected realized actions approximate 150 million annually company expects reinvest significant portion savings expanding sales forces maximize zetia ezetimibesimvastatin opportunities support nasonex remicade intron franchise asset impairment losses asset impairment losses recognized accordance sfas 142 “goodwill intangible assets” sfas 144 “accounting impairment disposal longlived assets” asset impairment losses related following • company ceased production certain products produced one manufacturing sites operating fda consent decree company also announced closure manufacturing site england manufacturing site england substantially ceased sales affected products material asset impairment loss 26 million based discounted cash flows recognized related facilities equipment two sites • company ceased marketing licensed cancer therapy drug sold countries outside united states sales product declined material introduction competing products resulted decline market share company’s drug point management concluded longer practical continue participate marketplace asset impairment loss 27 million based discounted cash flows recognized related intangible asset • one company’s sun care brands competes “highend” segment overall sun care market two large cosmetics companies entered market segment sales company’s brand declined company acquired brand portion purchase price allocated trade name based upon fair value time company performs periodic reviews values assigned intangible assets connection reviews impairment loss 17 million related trade name recognized based discounted cash flows reflects change market conditions since brand acquired sales sun care brand material litigation charges 2003 2002 litigation reserves increased 350 million 150 million respectively primarily result investigations company’s sales marketing practices see “legal environmental regulatory matters” footnote additional information consent decree charge 2001 provision 500 million recognized payments federal government consent decree see “consent decree” footnote additional information summary selected special charges following summarizes activity accounts related employee termination costs asset impairment losses amounts millions balance december 31 2003 employee termination costs represents value stock grants 22 million distributed yearend 2003 severance accrued vacation payments paid 2004 7 million equity income cholesterol joint venture effective 2003 company presenting collaboration merck jointly develop market zetia ezetimibesimvastatin combination following equity method accounting method company records share operating profits less share research development costs equity income cholesterol joint venture included line full year 2003 company’s share operating profits 113 million 20 million milestone receipt less share research development costs 79 million noted company incurs substantial costs selling costs reflected equity income cholesterol joint venture borne entirely company zetia launched united states several international markets november 2002 several additional market launches occurred date global sales zetia 471 million 2003 prior 2003 venture research development phase company’s share research development expense 2002 2001 69 million 86 million respectively reported “research development” statements consolidated operations net lossincome net lossincome loss 92 million 2003 versus income 20 billion 19 billion 2002 2001 respectively net lossincome 2003 includes special charges 599 million described net income 2002 includes 150 million pretax provision increase litigation reserves 2001 includes 500 million pretax provision consent decree payments provisions included special charges effective tax rate full year 2003 effective tax rate 15 percent excluding 350 million nontax deductible provision increase litigation reserves effective tax rate 23 percent 2002 2001 company reduced effective tax rate 2003 due decrease profits primarily united states additional information see “income taxes” footnote notes consolidated financial statements impact potential early termination swaps discussed “liquidity financial resources” may result higher effective tax rate 2004 beyond lossearnings per common share diluted lossearnings per common share decreased loss 006 2003 increased 2 percent earnings 134 2002 weakening us dollar foreign currencies increased growth earnings per common share 2003 2002 diluted earnings per share 2003 2002 reflect favorable exchange impacts 005 001 respectively company advises trend earnings viewed without aforementioned special charges impact yeartoyear changes foreign exchange rates liquidity financial resources background following background information may useful reader understanding current state company’s liquidity financial resources december 31 2003 approximately 86 percent cash equivalents shortterm investments shown accompanying balance sheet held wholly owned foreignbased subsidiaries time substantially debt shown accompanying balance sheet owed parent company wholly owned usbased subsidiaries years prior 2003 geographic disparity location funds location debt pivotal issue company however material decline earnings following loss marketing exclusivity claritin united states geographic disparity taken importance cash equivalents plus shortterm investments exceeded total debt december 31 2003 14 billion however using funds held foreignbased subsidiaries cash needs usbased subsidiaries may result us income tax payments amount us income tax payments would depend upon number factors including amount funds used whether us operations generating taxable profits losses 2003 us operations generated tax losses primarily due decline claritin sales continued investment research development 2003 entire amount us tax losses used recoup taxes paid previous years carryback benefit 2004 management expects us operations generate tax losses however portion losses expected used recoup taxes paid previous years current law carryback benefit exhausted amount expected 2004 loss excess used recoup taxes paid previous years becomes available reduce taxable income future carryforward benefit us operations generate losses cannot used recoup taxes paid previous years company choice either use carryforward benefits future years utilize losses absorb taxable distributions us cash assets held foreignbased subsidiaries absorbing us operating losses manner allows portion assets held foreignbased subsidiaries become available use us operations without make us income tax payments discussed company expects finance portion cash needs 2004 possibly beyond accessing funds held foreignbased subsidiaries funds company expects access represent foreign earnings generated 2004 beyond company expect incur additional us income taxes accessing funds taxable distributions absorbed expected us operating losses described company may make additional taxable distributions funds held foreignbased subsidiaries us operations company triggered credit rating downgrade provisions certain financing arrangements company may incur additional us income taxes additional distributions foreignbased subsidiaries may exceed us operating losses discussion cash flow cash provided operating activities totaled 601 million 2003 1980 million 2002 2512 million 2001 cash provided operating activities declined 2003 due lower sales claritin lower sales products within intron franchise higher manufacturing costs portion cash flow impact lower sales mitigated collection accounts receivable followed decline sales cash provided operating activities 2003 also includes second payment 250 million relating fda consent decree previous filings company reported 2003 possibly beyond cash provided operating activities would sufficient fund working capital expenditures dividends items remained thencurrent levels response decline sales earnings 2003 well likelihood declines 2004 company announced august 21 2003 reduction quarterly dividend 17 cents 55 cents per common share action saves approximately 170 million per quarter beginning fourth quarter 2003 day company also announced accelerated intensified costcutting actions including global workforce reduction effort shown statements consolidated cash flows 2003 cash needs working capital expenditures dividends exceeded cash operations excess cash needs cash generation occurred entirely within us operations deficit approximately 1400 million foreign operations generated cash excess cash needs 2003 company borrowed additional funds united states finance us operations continuing accumulate cash foreignbased subsidiaries 2004 management expects foreign operations generate cash us operations cash needs however excluding potential payments arising litigation investigations discussed us deficit 2004 expected decline 2004 dividend payments approximately 500 million less 2003 company expects receive tax refund excess 400 million carryback benefit described approximately 600 million cash available us december 31 2003 pay commercial paper balances fund us operations discussion take consideration payments may arise matters described “legal environmental regulatory matters” footnote included financial statements report particular company accrued material amounts respect investigations conducted us attorney’s offices pennsylvania massachusetts respect dispute irs time management cannot estimate ultimate amounts timing potential payments certainty payments would increase cash needs us operations may necessitate additional financing repatriation funds held foreignbased subsidiaries combination two matters may also affect company’s credit ratings ability access commercial paper company’s current cash management strategy capital structure remain unchanged beyond 2004 management expects cash held foreignbased subsidiaries debt owed usbased subsidiaries increase management process evaluating whether present strategies structure appropriate light increasing debt levels well changing portfolio company’s products management believes company possesses sufficient financial resources meet financial needs company excess 4 billion cash equivalents shortterm investments albeit held foreignbased subsidiaries well sizable lines credit commercial banks described management believes company continuing access capital markets borrowings credit facilities november 26 2003 company issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 proceeds offering 24 billion used general corporate purposes including repay commercial paper outstanding united states upon issuance notes rated a3 moody’s investors’ service moody’s creditwatch negative implications standard poor’s sp interest rates payable notes subject adjustment rating assigned notes either moody’s sp downgraded “a3” “a” respectively interest rate payable series notes increase see “financial instruments commitments” footnote included financial statements report additional information company three revolving credit facilities totaling 2 billion recently negotiated facility september 2003 1 billion 364day credit facility three major financial institutions drawn united states facility matures september 2004 facilities syndicate financial institutions provide 500 million drawn united states may 2004 repayment due may 2005 second multicurrency facility 500 million drawn united states internationally maturity date may 2006 december 31 2003 funds drawn facilities december 31 2003 shortterm borrowings totaled 1023 million approximately 92 percent outstanding commercial paper commercial paper ratings discussed significantly affected company’s ability issue roll outstanding commercial paper borrowings time however ability commercial paper issuers company one shortterm credit ratings “p2” moody’s “a2” sp andor “f2” fitch ratings fitch issue roll outstanding commercial paper times less companies higher shortterm credit ratings addition total amount commercial paper capacity available issuers typically less higher rated companies company maintains sizable lines credit commercial banks well cash shortterm investments held foreignbased subsidiaries serve alternative sources liquidity support commercial paper program credit ratings december 17 2003 sp lowered company’s corporate credit longterm debt ratings “a” “a” said outlook ratings negative noting weakening company’s intron franchise expected declines earnings cash flows change company’s shortterm corporate credit commercial paper rating lowered “a1” “a1” july 29 2003 january 26 2004 sp placed company’s corporate credit rating shortterm credit rating senior unsecured debt rating creditwatch negative implications february 18 2004 sp downgraded company’s senior unsecured debt ratings “a” “a” time sp also lowered company’s shortterm corporate credit commercial paper rating “a2” “a1” sp removed company creditwatch however outlook remains negative october 9 2003 moody’s lowered company’s corporate credit rating “a3” “a1” lowered commercial paper rating “p2” “p1” following rating action moody’s removed company watchlist revised rating outlook stable negative moody’s also stated credit rating assumed modest outflows settle outstanding litigation acquisitions large payment associated litigation proceedings acquisition activity could place pressure rating andor outlook november 20 2003 fitch downgraded company’s senior unsecured bank loan ratings “a” “a” commercial paper rating “f2” “f1” company’s rating outlook remained negative announcing downgrade fitch noted sales decline company’s leading product franchise intron franchise greater anticipated concerned total company growth reliant performance two key growth drivers zetia remicade near term financial arrangements containing credit rating downgrade triggers company two separate arrangements enable manage cash flows us subsidiaries foreignbased subsidiaries arrangements employ interest rate swaps arrangements similar credit rating downgrade triggers allow counterparty call early termination credit rating downgrade triggers require company maintain longterm debt rating least “a2” moody’s “a” sp’s moody’s current credit ratings specified minimum result counterparty interest rate swaps elect early termination following specified period described one arrangements utilizes two longterm interest rate swap contracts one foreignbased subsidiary bank us subsidiary bank two contracts equal offsetting terms covered master netting arrangement contract involving foreignbased subsidiary permits subsidiary prepay portion future obligation bank contract involving us subsidiary permits bank prepay portion future obligation us subsidiary interest paid prepaid balances parties market rates prepayments totaling 19 billion made contracts december 31 2003 prepaid amounts netted preparation consolidated balance sheet accordance financial accounting standards board fasb interpretation 39 “offsetting amounts related certain contracts” arrangement provides event company fails maintain required minimum credit ratings counterparty may terminate transaction designating early termination date earlier 36 months following date notice terminate however notice given early termination consequences discussed would occur end threeyear period early termination requires repayment prepaid amounts repayment must occur original tax jurisdiction prepaid amounts made accordingly early termination would require company’s us subsidiary repay 19 billion bank repay 19 billion company’s foreignbased subsidiary financial impact early termination depends manner extent company decides finance us repayment obligation company could finance entire obligation obtaining short longterm financing united states case cash debt would increase equal amounts consolidated balance sheet however company’s ability finance obligation swaps depend company’s credit ratings business operations well market conditions time financing contemplated alternatively company could repatriate united states funds received foreignbased subsidiary repatriating funds could us income tax consequences depending primarily profitability us operations tax would accrued future earnings may result company reporting higher effective tax rate currently us operations generating tax losses however future tax losses may insufficient absorb potential tax company repatriate funds received foreignbased subsidiary stated termination transaction cannot occur earlier 36 months following date company receives termination notice counterparty accordingly early termination imminent due fact well alternative courses action available company event early termination potential early termination impact current liquidity financial resources second arrangement utilizes longterm interest rate swap contracts one entered 1991 notional principal 650 million second entered 1992 notional principal 950 million terms contracts enable company sell right receive payments retaining obligation make payments 1991 1992 us parent company sold rights receive payments contracts foreignbased subsidiary return approximately 700 million fair value intercompany transaction eliminated preparation consolidated financial statements internal revenue service asserted transactions sale loan additional us income taxes due company expects litigate matter described “legal environmental regulatory matters” footnote financial statements contracts allow counterparty effectively terminate transaction company fails maintain required minimum credit ratings within 60 days restore least one required minimum credit ratings company’s credit rating fell required minimum credit rating february 18 2004 unlikely company restore least one credit ratings allotted time early termination contracts due credit rating downgrade would likely result us parent company reacquiring right receive payments foreignbased subsidiary terminating transaction counterparty net basis reacquisition rights receive payments swap contracts would occur either us parent company buying back rights fair market value foreignbased subsidiary dividend rights back us parent company buying back rights would necessitate funding united states company currently estimates would approximately 450 million case cash debt would increase equal amounts consolidated balance sheet alternatively foreignbased subsidiary dividend rights back us parent company could result additional us income taxes presently us operations company generating tax losses expected exceed value intercompany dividend necessary reacquire rights result event early termination management alternative reacquiring rights terminating transaction counterparty without materially impacting liquidity financial resources accordingly management view early termination arrangement material event impacting current liquidity financial resources contractual obligations payments due period company’s known contractual obligations december 31 2003 follows dollars millions 1 longterm debt obligations include 1250 million aggregate principal amount 53 percent senior unsecured notes due 2013 1150 million aggregate principal amount 65 percent senior unsecured notes due 2033 see “financial instruments commitments” footnote notes consolidated financial statements additional information 2 research contracts include potential milestone payments made since payments contingent occurrence certain events table also excludes research contracts cancelable company without penalty 3 open purchase orders consist cancelable noncancelable inventory expense items 4 caption includes obligations based undiscounted amounts estimated payments certain company’s pension plans hold qualified assets estimated payments company’s deferred compensation plans environmental matters company responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund environmental expenditures based information currently available anticipated material impact company additional information see “legal environmental regulatory matters” footnote notes consolidated financial statements additional factors influencing operations united states many company’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts international markets company operates environment governmentmandated costcontainment programs us market company pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans health care program governmentfunded programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs since company unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals united states effect operations cash flows cannot reasonably estimated similarly effect operations cash flows decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated company cannot predict net effect medicare prescription drug benefit markets sales program go effect 2006 many company’s leading drugs already covered medicare part b eg temodar integrilin intron others relatively small portion sales medicare population eg clarinex hepatitis c franchise company could experience expanded utilization zetia new drugs company’s rd pipeline greater consequence company may legislation’s impact pricing rebates discounts significant portion net sales made major pharmaceutical health care products distributors major retail chains united states consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors market pharmaceutical products competitive company’s operations may affected technological advances competitors industry consolidation patents granted competitors new products competitors generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted noted “legal environmental regulatory matters” footnote included financial statements report company sued drug manufacturers marketing seeking market certain forms generic loratadine prior expiration company’s compound patent desloratadine case company filed suit federal court seeking ruling applicable abbreviated new drug application anda “paper” new drug application submission proposed marketing generic prescription otc product constitute infringement company’s patents challenge patents without merit compound patent loratadine expired june 19 2002 us market exclusivity claritin expired december 19 2002 patent covering compound desloratadine formulations thereof methods treatment desloratadine relates claritin set expire april 21 2004 six months’ us market exclusivity would attach end desloratadine patent relates claritin would expire october 21 2004 sixmonth period exclusivity granted company conducted pediatric clinical trials request fda august 8 2002 federal district court new jersey ruled motions summary judgment finding certain desloratadine compound patent claims company believes protect claritin anticipated prior patent thus valid august 1 2003 district court’s decision sustained appellate court october 28 2003 appellate court denied company’s petition rehearing rulings actions defendants infringement desloratadine compound patent manufacturers loratadine proceed company also asserted andas filed two manufacturers generic versions claritind 24 hour infringe company’s patent covering claritind 24 hour company settled litigation impax andrx october 2003 licensed patent november 27 2002 company announced five formulations claritin brand nondrowsy allergy products approved original prescription strengths fda otc medicines treatment allergies company also informed fda new drug applications ndas claritin formulations well indications allergies hives transferred fda’s pulmonary division office drug evaluation ii division overthecounter drug products office drug evaluation v company launched otc claritin united states december 2002 also december 2002 competing otc loratadine product launched united states third quarter 2003 company began face additional privatelabel competition otc claritin line nonsedating antihistamines initial 180day period exclusivity expired first otc generic competitor company continues market clarinex desloratadine 5 mg tablets treatment allergic rhinitis combines indication seasonal allergic rhinitis indication perennial allergic rhinitis well treatment chronic idiopathic urticaria hives unknown cause ability company capture maintain market share clarinex otc claritin us market depend number factors including additional entrants market allergy treatments clinical differentiation clarinex allergy treatments perception extent differentiation marketplace pricing differentials among otc claritin clarinex allergy treatments generic otc loratadine erosion rate otc claritin clarinex sales upon entry additional generic otc loratadine products whether one branded secondgeneration antihistamines switched prescription otc status clarinex experiencing intense competition prescription us allergy market prescription allergy market shrinking since otc switch claritin december 2002 company implementing new marketing efforts address market share performance clarinex switch claritin otc status introduction competing otc loratadine resulted rapid sharp material decline claritin sales united states company’s results operations us sales prescription claritin products 25 million 03 percent company’s consolidated global sales 2003 14 billion 14 percent 2002 sales clarinex united states abroad also materially adversely affected presence generic otc loratadine otc claritin light factors described management believes company’s december 2002 introduction otc claritin well introduction competing otc loratadine product december 2002 additional entrants generic otc loratadine products market rapid sharp material adverse effect company’s results operations likely continue indeterminate period time disclosed filings us securities exchange commission sec noted “legal environmental regulatory matters” footnote included financial statements report three drug manufacturers submitted andas fda seeking market generic forms rebetol ribavirin capsules united states expiration company’s patents covering ribavirin formulations company sued manufacturers federal court infringement 2003 company entered separate licensing agreements three rivers pharmaceuticals llc three rivers geneva pharmaceuticals inc geneva teva pharmaceuticals usa inc teva settled patent litigation company three rivers geneva teva granted three companies nonexclusive nonsublicensable license company’s us ribavirin patents settlements affect three rivers’ geneva’s teva’s reported patent litigation ribapharm inc subsidiary valeant pharmaceuticals international ribapharm relating ribavirin patents litigation dismissed upon defendants’ motion summary judgment july 16 2003 ribapharm appealed summary judgment decision ribapharm also petitioned fda deny approval three rivers geneva teva products fda acted ribapharm petition generic forms ribavirin expected enter us market 2004 assuming fda’s approval generic ribavirin rebetol patents material company’s business us sales rebetol 2003 306 million pegintron rebetol combination therapy hepatitis c contributed substantially sales 2003 2002 fourth quarter 2002 competing pegylated interferonbased combination product including brand ribavirin received regulatory approval major markets including united states overall market share intron franchise declined sharply reflecting new market competition management believes ability pegintron rebetol combination therapy maintain market share continue adversely affected new competition hepatitis c marketplace october 2002 merckscheringplough pharmaceuticals announced fda approved zetia ezetimibe 10 mg use either together statins treatment elevated cholesterol levels march 2003 company announced ezetimibe ezetrol marketed europe successfully completed european union eu mutual recognition procedure mrp completion mrp process 15 eu member states well iceland norway grant national marketing authorization unified labeling ezetrol launched many international markets merckscheringplough partnership also pursuing development marketing oncedaily tablet combining ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect company’s operations effect regulatory approval processes operations cannot predicted company subject jurisdiction various national state local regulatory agencies therefore subject potential administrative actions particular importance fda united states jurisdiction company’s businesses administers requirements covering testing safety effectiveness approval manufacturing labeling marketing company’s products time agencies including fda may require company address various manufacturing advertising labeling regulatory issues noted relating company’s current manufacturing issues failure comply governmental regulations result delays release products seizure recall products suspension revocation authority necessary production sale products discontinuance products fines civil criminal sanctions result could material adverse effect company’s financial position results operations additional information regarding government regulation may affect future results provided part item “business” company’s annual report form 10k fiscal year ended december 31 2003 additional information cautionary factors may affect future results provided caption “cautionary factors may affect future results cautionary statements private securities litigation reform act 1995” management’s discussion analysis operations financial condition noted “consent decree” footnote included financial statements report may 17 2002 company announced reached agreement fda consent decree resolve issues involving company’s compliance current good manufacturing practices certain manufacturing facilities new jersey puerto rico us district court district new jersey approved entered consent decree may 20 2002 terms consent decree company agreed pay total 500 million us government two equal installments 250 million first installment paid may 2002 second installment paid second quarter 2003 previously reported company accrued 500 million provision consent decree fourth quarter 2001 consent decree requires company complete number actions event certain actions agreed upon consent decree satisfactorily completed time fda may assess payments deadline missed consent decree required company develop submit fda’s concurrence comprehensive cgmp work plans company’s manufacturing facilities new jersey puerto rico covered decree company received fda concurrence proposed cgmp work plans may 14 2003 cgmp work plans contain number significant steps whose timely satisfactory completion subject payments 15000 per business day deadline missed payments may exceed 25 million 2002 50 million years 2003 2004 2005 payments subject overall cap 175 million connection discussions fda regarding company’s cgmp work plans pursuant terms decree company fda entered letter agreement dated april 14 2003 letter agreement company fda agreed extend six months time period company may incur payments described respect certain significant steps whose proposed due dates december 31 2005 letter agreement increase yearly overall caps payments described addition decree requires company complete programs revalidation finished drug products bulk active pharmaceutical ingredients manufactured covered manufacturing facilities company required consent decree complete revalidation programs bulk active pharmaceutical ingredients september 30 2005 finished drugs december 31 2005 general timely satisfactory completion revalidations subject payments 15000 per business day deadline missed subject caps described however product scheduled revalidation certified validated last date validation schedule fda may assess payment 246 percent net domestic sales uncertified product validation certified general product scheduled revalidation consent decree certified within six months scheduled date company must cease production product certification obtained completion significant steps work plans completion revalidation programs subject thirdparty expert certification must accepted fda consent decree provides company believes may able meet deadline company right upon showing good cause request extensions deadlines connection cgmp work plans revalidation programs however guarantee fda grant requests although company believes made significant progress meeting obligations consent decree possible 1 company may fail complete significant step revalidation prescribed deadline 2 third party expert may certify completion significant step revalidation 3 fda may disagree expert’s certification significant step revalidation case possible fda may assess payments described company would expense payments assessed decree incurred addition failure meet terms consent decree could result delays approval new products seizure recall products suspension revocation authority necessary production sale products fines civil criminal sanctions april 2003 company received notice false claims act complaint brought individual purporting act behalf us government approximately 25 pharmaceutical companies us district court northern district texas complaint alleges pharmaceutical companies including company defrauded united states made sales various federal governmental agencies drugs allegedly manufactured manner comply current good manufacturing practices company defendants filed motion dismiss action july 23 2003 company subject pharmacovigilance reporting requirements many countries jurisdictions including united states european union eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert manufacturer drug governmental agency potential problems pharmacovigilance inspections officials british french medicines agencies conducted request european agency evaluation medicinal products emea serious deficiencies reporting processes identified company taking urgent actions rectify deficiencies quickly possible company know action emea national authorities take response findings possible actions include inspections demands improvements reporting systems criminal sanctions company andor responsible individuals changes conditions marketing authorizations company’s products described specifically “legal environmental regulatory matters” footnote included financial statements report reader report directed pricing sales marketing programs arrangements related business practices company participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda federal trade commission ftc various state attorneys general offices many health care laws certain governmental entities operate including federal state “antikickback” statutes statutory common law “false claims” laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject company substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs company also cannot predict whether investigations affect marketing practices sales result could material adverse effect company financial condition results operations critical accounting policies following accounting policies considered significant changes certain judgments assumptions inherent policies could affect company’s financial statements accrual rebates sales pharmaceuticals united states provision income taxes undistributed foreign earnings intercompany pricing matters impairment intangible assets accounting legal regulatory matters pharmaceutical products sold direct purchasers eg wholesalers retailers certain health maintenance organizations company invoices entities products shipped addition company commercial rebate discount arrangements certain indirect purchasers market participants eg managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers based upon purchase utilization company products company also governmental rebate obligations certain federal state programs purposes revenue recognition company end quarter estimates applicable commercial governmental rebates paid products sold quarter nets estimated amounts total direct sales rebates estimated based terms historical experience trend analysis projected market conditions various markets served case governmental rebate programs company’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy company’s obligations additional information governmental inquiries focused part calculation rebates contained “legal environmental regulatory matters” footnote notes consolidated financial statements report addition possible result governmental challenges changes interpretive guidance actual rebates could materially exceed amounts accrued december 31 2003 taxes provided approximately 111 billion undistributed earnings foreign subsidiaries management determined assets associated earnings permanently reinvested company’s overseas operations future events require certain assets associated earnings repatriated united states additional tax provisions may necessary also regard income taxes certain company’s consolidated subsidiaries manufacture pharmaceutical ingredients facilities located lowtax jurisdictions manufacturing subsidiaries sell pharmaceutical ingredients consolidated subsidiaries manufacturing final sale customers taxing authorities throughout world challenge prices charged manufacturing subsidiaries management believes pricing based upon sound economic facts circumstances however successful challenge taxing authority management believes unlikely could result additional income tax payments materially excess amounts accrued intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 619 million december 31 2003 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment discussed “special charges” section company recognized asset impairment losses 2003 intangible assets asset impairment losses recognized intangible asset related cancer therapy drug due scientific advancements intangible asset relating trade name sun care product due marketplace competition management judgments estimates also required accounting legal regulatory matters particular company recognized estimated minimum liabilities connection certain government investigations sales marketing activities see “legal environmental regulatory matters” footnote notes consolidated financial statements market risk disclosures company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk company subsidiaries 40 countries 2003 sales outside united states accounted approximately 57 percent global sales virtually sales denominated currencies local country company’s reported profits cash flows exposed changing exchange rates 2003 changes foreign exchange rates increased sales 5 percent increased 2003 diluted earnings per common share 005 date management deemed cost effective engage formulabased program hedging profits cash flows foreign operations using derivative financial instruments company’s foreign subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provides level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact company’s foreign operations widespread addition point time company’s foreign subsidiaries hold financial assets liabilities denominated currencies us dollars financial assets liabilities consist primarily shortterm thirdparty intercompany receivables payables changes exchange rates affect financial assets liabilities part however gains losses arise translation significantly affect net income occasion company used derivatives hedge specific shortterm risk situations involving foreign currency exposures however derivative transactions material interest rate equity price risk financial assets exposed changes interest rates andor equity prices debt equity securities held nonqualified trusts employee benefits assets totaled 177 million december 31 2003 due longterm nature liabilities trust assets fund company’s exposure market risk deemed low financial obligations exposed variability interest expense shortterm borrowings company maintains cash equivalent portfolio well excess amount shortterm borrowings accordingly company net exposure changes interest rates relating financial obligations company longterm debt outstanding 10 percent decrease interest rates would change fair value debt 130 million however company expect refund debt interest rate swaps 1991 1992 company utilized interest rate swaps part international cash management strategy additional information see “financial instruments commitments” footnote notes consolidated financial statements swaps subject company moderate degree market risk company accounts swaps using fair value accounting changes fair value recorded earnings fair value swaps liability 1 million december 31 2003 liability 1 million december 31 2002 estimated 10 percent change interest rate structure could change fair value swaps less 1 million cautionary factors may affect future results cautionary statements private securities litigation reform act 1995 management’s discussion analysis financial condition results operations sections report written reports oral statements made time company may contain “forwardlooking statements” within meaning securities litigation reform act 1995 forwardlooking statements relate expectations forecasts future events use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” words terms similar meaning connection discussion potential future events circumstances future operating financial performance also identify forwardlooking statements fact relate strictly historical current facts particular forwardlooking statements include statements relating future actions ability access capital markets prospective products status product approvals future performance results current anticipated products sales efforts development programs expenses programs reduce expenses cost savings verp outcome contingencies litigation investigations growth strategy financial results forwardlooking statements publications may turn wrong actual results may vary materially guarantees performance scheringplough stock scheringplough assume obligation update forwardlooking statement many factors could cause actual results differ scheringplough’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors may include following • significant portion net sales made major pharmaceutical health care products distributors major retail chains united states consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors • competitive factors including technological advances attained competitors patents granted competitors new products competitors coming market new indications competitive products generic prescription otc competition scheringplough’s products mature patents expire products • increased pricing pressure united states abroad managed care organizations institutions government agencies programs united states among developments consolidation among customers may increase pricing pressures may result various customers greater influence prescription decisions formulary decisions policies • government laws regulations changes laws regulations affecting domestic international operations including health care reform initiatives drug importation legislation united states state federal level countries well laws regulations relating trade antitrust monetary fiscal policies taxes price controls possible nationalization • patent positions highly uncertain patent disputes unusual adverse result patent dispute preclude commercialization products negatively impact sales existing products result injunctive relief payment financial remedies • uncertainties fda approval process regulatory approval review processes countries including without limitation delays approval new products • failure meet good manufacturing practices established fda governmental authorities result delays approval products release products seizure recall products suspension revocation authority necessary production sale products fines civil criminal sanctions resolution manufacturing issues fda discussed scheringplough’s 10ks 10qs 8ks subject substantial risks uncertainties risks uncertainties including timing scope duration resolution manufacturing issues depend ability scheringplough assure fda quality reliability manufacturing systems controls extent remedial prospective obligations undertaken scheringplough • difficulties product development pharmaceutical product development highly uncertain products appear promising development may fail reach market numerous reasons may found ineffective harmful side effects clinical preclinical testing may fail receive necessary regulatory approvals may turn economically feasible manufacturing costs factors may precluded commercialization proprietary rights others • efficacy safety concerns respect marketed products whether scientifically justified leading recalls withdrawals declining sales • major products claritin clarinex intron pegintron rebetol capsules remicade nasonex accounted material portion scheringplough’s 2003 revenues major product become subject problem loss patent protection otc availability company’s product competitive product disclosed claritin current potential otc competition previously unknown side effects new effective treatment introduced generic availability competitive products product discontinued reason impact revenues could significant information important new products zetia important products pipeline may impact future revenues • unfavorable outcomes government local federal domestic international investigations litigation product pricing product liability claims litigation environmental concerns could preclude commercialization products negatively affect profitability existing products materially adversely impact scheringplough’s financial condition results operations contain conditions impact business operations exclusion government reimbursement programs • economic factors scheringplough control including changes inflation interest rates foreign currency exchange rates • instability disruption destruction significant geographic region due location manufacturing facilities distribution facilities customers regardless cause including war terrorism riot civil insurrection social unrest natural manmade disasters including famine flood fire earthquake storm diseases • changes tax laws including changes related taxation foreign earnings • changes accounting standards promulgated american institute certified public accountants financial accounting standards board sec public company accounting oversight board would require significant change scheringplough’s accounting practices details discussion risks uncertainties see scheringplough’s past future sec filings item 7aitem 7 management’s discussion analysis financial condition results operations executive summary overview company scheringplough company discovers develops manufactures markets medical therapies treatments enhance human health company also markets leading consumer brands overthecounter otc foot care sun care markets operates global animal health business researchbased pharmaceutical company scheringplough’s core strategy invest substantial amounts funds scientific research goal creating important medical commercial value research development activities focus mechanisms treat serious diseases high rate failure inherent research result high risk funds invested research programs generate financial returns risk profile compounded fact research long investment cycle bring pharmaceutical compound discovery phase commercial phase may take decade highrisk nature research investments financial resources typically must come internal sources operations cash reserves equitytype capital two sources new products acquired acquisition licensing arrangements products company’s latestage research pipeline respect acquisitions licensing limited opportunities obtaining licensing critical latestage products limited opportunities typically require substantial amounts funding company competes opportunities companies often far greater financial resources company due present financial situation may challenging company acquire license critical latestage products positive material financial impact past three years company experienced number negative events strained continue strain company’s financial resources negative events included limited following matters • entered formal consent decree us food drug administration fda 2002 agreed revalidate manufacturing processes certain manufacturing sites us puerto rico significant increased spending associated manufacturing compliance efforts continue completion fda consent decree obligation addition company found necessary discontinue certain older profitable products outsource products • switch claritin us beginning december 2002 prescription otc status switch coupled private label competition resulted much lower average unit selling price product ongoing intense competition company’s exposure powerful retail purchasers also increased • market shares sales levels certain company products fallen significantly experienced increased competition many products compete declining volatile markets • investigations certain company’s sales marketing practices us attorney’s offices massachusetts pennsylvania 2004 company made payments totaling 294 million us attorney’s office eastern district pennsylvania settlement investigation massachusetts investigation continuing poses significant financial commercial risks company response matters beginning april 2003 company appointed new management team formulated begun implement six eightyear action agenda stabilize repair turn around company intends avail foreign earnings repatriation provisions american jobs creation act 2004 act company intends repatriate 94 billion unremitted foreign earnings reduced tax rate repatriation funds provide company greater financial stability current state business past two years company’s earnings cash flow declined significantly overriding cause loss marketing exclusivity two company’s major pharmaceutical products claritin rebetol well increased competition hepatitis c market sales marketing costs increased due need reinvest functions launch new products well need stabilize market shares company’s remaining pharmaceutical products many company’s manufacturing sites operate well optimum production levels due sales declines reduction output related fda consent decree time overall costs operating manufacturing sites significantly increased due consent decree compliance activities company continues review carrying value assets indications impairment future events decisions may lead asset impairments andor related costs company continues pursue core strategy supporting marketed new products research development pipeline plans invest sales marketing scientific research historical levels however level investment sustainable without significant increase profits cash flow operations ability company generate profits significant operating cash flow directly predominantly dependent upon increasing profitability company’s cholesterol franchise includes vytorin zetia much lesser extent growing sales profitability base pharmaceutical business products developing acquiring new products controlling expenses company cannot generate significant operating cash flow ability invest sales marketing research efforts historical levels may negatively impacted zetia company’s novel cholesterol absorption inhibitor vytorin combination zetia zocor merck’s statin medication two products launched joint venture company merck cholesterolreduction market single largest pharmaceutical market world vytorin zetia well positioned market products compete well established cholesterol management products marketed companies financial resources much greater company financial commitment compete market shared merck profits sales vytorin zetia also shared merck management cannot provide assurance profits nearterm sufficient company maintain core marketing research strategies sufficient level profit cash flow cannot achieved company would need evaluate strategic alternatives regard examination strategic alternatives contracts merck vytorin zetia contract centocor inc remicade exhibits 10 r 10 u respectively company’s 2003 form 10k contain provisions related change control defined contracts provisions could result aforementioned products acquired merck reverting back centocor inc regulatory environment company operates government regulatory agencies throughout world regulate company’s discovery development manufacturing marketing efforts fda central regulator company’s business since 2001 company working fda resolve issues involving company’s compliance current good manufacturing practices cgmp certain manufacturing sites new jersey puerto rico 2002 company reached formal agreement fda enter consent decree terms consent decree company made payments totaling 500 million agreed revalidate manufacturing processes sites manufacturing sites remained open throughout period however consent decree placed significant additional controls production release products sites including review thirdparty certification production activities thirdparty certifications cgmp improvement projects resulted higher costs well reduced output facilities addition company found necessary discontinue certain profitable older products company’s research development operations also negatively impacted decree operations share common facilities manufacturing operations us pricing company’s pharmaceutical products subject competitive pressure managed care organizations seek price discounts also us company required provide statutorily defined rebates various government agencies order participate medicaid veterans’ health care program governmentfunded programs international markets company operates environment governmentmandated costcontainment programs recently clinical trials postmarketing surveillance certain marketed drugs within industry raised safety concerns led recalls withdrawals adverse labeling marketed products addition situations raised concerns among prescribers patients relating safety efficacy pharmaceutical products general company continues maintain robust process monitoring adverse events related products around world company personnel regular open dialogue fda regulators review product labels materials regular basis new information becomes known july 30 2004 scheringplough corporation us department justice us attorney’s office eastern district pennsylvania announced settlement related certain company’s sales marketing practices investigation terms settlement subsidiary scheringplough corporation pled guilty single federal criminal charge concerning payment managed care customer addition settlement scheringplough corporation also entered fiveyear corporate integrity agreement cia failure comply cia result financial penalties settlement affect ability scheringplough corporation participate federal healthcare programs discussion operating results net sales consolidated net sales 2004 totaled 83 billion decrease 62 million 1 percent compared 2003 consolidated net sales reflected primarily volume declines offset favorable foreign exchange rate impact 4 percent consolidated 2003 net sales 83 billion decreased 18 billion 18 percent versus 2002 reflecting primarily volume declines offset favorable foreign exchange rate impact 5 percent net sales years ended december 31 2004 2003 2002 follows certain prior year amounts reclassified conform current year presentation n meaningful percentage amounts shown 2004 2003 include international sales claritin rx b includes otc claritin 419 432 105 2004 2003 2002 respectively international net sales remicade treatment rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis 206 million 38 percent 2004 746 million due greater medical use expanded indications european markets sales remicade 2003 540 million 203 million 60 percent compared 2002 primarily europe due increased patient utilization global net sales clarinex marketed aerius many countries outside us treatment seasonal outdoor allergies yearround indoor allergies 692 million 2004 essentially flat versus 2003 sales outside us increased 39 percent 272 million 2004 due market share gains continued conversion prescription claritin us sales decreased 16 percent 420 million 2004 due continued contraction us prescription antihistamine market following launch otc claritin branded nonbranded nonsedating antihistamines coupled market share declines global net sales clarinex 694 million 2003 increase 16 percent compared 598 million 2002 reflecting continued conversion patients prescription claritin coupled launch clarinex several international markets global net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies rose 19 percent 594 million 2004 primarily due international sales growth favorable prior year trade inventory comparisons us tempered decline us market share 2003 sales nasonex decreased 4 percent versus 2002 500 million due changes us trade inventory levels market share declines us global net sales pegintron powder injection pegylated interferon product treating hepatitis c decreased 30 percent 563 million compared 2003 due ongoing market competition contracting market share pegintron declining reflecting entrance competitor’s new products hepatitis c market 2003 sales pegintron decreased 213 million 21 percent 802 million 2003 compared 2002 due primarily loss market share global net sales intron injection chronic hepatitis b c antiviral anticancer indications decreased 22 percent 2004 318 million due primarily lower demand sales intron 409 million 2003 decline 23 percent 2002 due primarily loss market share global net sales rebetol capsules use combination intron pegintron treating hepatitis c decreased 55 percent 287 million due launch generic versions rebetol us april 2004 increased price competition outside us sales rebetol 639 million 2003 decline 48 percent 12 billion 2002 due primarily loss market share resulting new branded competition global net sales temodar capsules treating certain types brain tumors increased 135 million 42 percent 459 million 2004 due increased market penetration sales temodar 324 million 2003 increase 16 percent compared 278 million 2002 due increased market penetration global net sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndrome sold scheringplough primarily us increased 19 million 6 percent 325 million 2004 due increased patient utilization sales integrilin 306 million 304 million 2003 2002 respectively millennium pharmaceuticals inc “millennium” company copromotion agreement integrilin millennium notified company intends exercise right agreement assume responsibilities consumer service managed care contracting government reporting physical distribution integrilin result based final assumption agreement early fourth quarter 2005 company may required cease recording sales integrilin record share copromotion profits alliance revenue currently company anticipates change recording sales integrilin would impact earnings international net sales prescription claritin decreased 2 percent 328 million 2003 321 million 2004 due continued conversion clarinex 2002 global sales prescription claritin 18 billion reflecting 14 billion sales us prior conversion otc status international net sales subutex tablets treatment opiate addiction increased 29 percent 185 million due increased market penetration sales subutex 144 million 2003 103 million 2002 subutex may vulnerable generic competition future global net sales elocon cream mediumpotency topical steroid increased 9 percent 168 million sales elocon 154 million 2003 165 million 2002 generic competition expected affect sales product international sales caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma increased 35 percent 150 million reflecting adoption metastatic breast cancer indication patients increased cardiac risk sales caelyx 2003 increased 55 percent versus 2002 111 million due increased patient utilization coupled launch metastatic breast cancer indication pharmaceutical net sales include large number lower sales volume prescription pharmaceutical products several products sold limited markets outside us many multiple source products longer protected patents products include treatments respiratory cardiovascular dermatological infectious oncological diseases global net sales consumer health care products include otc foot care sun care products increased 59 million 6 percent 2004 11 billion net sales foot care products increased 39 million 13 percent 2004 due primarily strong performance dr scholl’s freeze away new wart remover product net sales sun care products increased 30 million 20 percent 2004 primarily due timing orders shipments sales otc claritin 419 million 2004 decrease 13 million 3 percent 2003 due competition branded private label loratadine net sales consumer health care products 2003 increased 268 million 35 percent compared 2002 due primarily increased sales otc claritin following launch december 2002 global net sales animal health products increased 10 percent 2004 770 million sales favorably impacted foreign exchange 6 percent global net sales animal health products increased 3 percent 2003 favorably impacted foreign exchange 7 percent costs expenses equity income summary costs expenses equity income years ended december 31 2004 2003 2002 follows n meaningful percentage certain prior year amounts reclassified conform current year presentation cost sales percentage net sales 2004 increased 2003 primarily due lower production volumes coupled increased spending related fda consent decree manufacturing compliance spending efforts upgrade company’s global infrastructure absence european losec revenues change product sales mix including sales bayer licensed products contributed unfavorable comparison well company’s base pharmaceutical business competing many declining volatile markets sales cost sales base business products direct impact gross margin cost sales percentage net sales 2003 increased 2002 due change product sales mix resulting loss us sales prescription claritin well lower production volumes increased spending company’s cgmp compliance efforts substantially sales cholesterol products included company’s net sales results operations joint venture reflected equity income impact company’s gross operating margins selling general administrative expenses sga increased 10 percent 38 billion 2004 versus 35 billion 2003 primarily due expansion sales field force higher employee related costs unfavorable impact foreign exchange partially offset lower promotional spending ratio sga net sales 461 percent 2004 higher ratio 417 percent 2003 sga expenses decreased 6 percent 35 billion 2003 37 billion 2002 due lower pharmaceutical business marketing spending lower employee related costs ratio sga net sales 417 percent 2003 higher ratio 362 percent 2002 primarily due lower overall sales reported 2003 research development rd spending increased 9 percent 16 billion representing 194 percent net sales 2004 includes 80 million charge conjunction license toyama chemical company ltd toyama garenoxacin quinolone antibiotic currently development generally changes rd spending reflect timing company’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products 2004 2003 increase expense income net primarily result higher net interest expense income net 2002 included 80 million income related sale company’s us marketing rights suboxone subutex sublingual tablets treatment opioid dependence special charges components special charges follows litigation charges 2003 2002 litigation reserves increased 350 million 150 million respectively primarily result investigations company’s sales marketing practices employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program approximately 850 employees retired yearend 2004 approximately 50 employees staggered retirement dates 2005 total cost program approximately 191 million comprised increased pension costs 108 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million employees staggered retirement dates 2005 amounts recognized charge employees’ remaining service periods amounts recognized 2004 2003 program 20 million 164 million respectively amount expected recognized 2005 7 million termination costs associated verp totaled 99 million 15 million 2004 2003 respectively asset impairment related charges company recorded asset impairment related charges 34 million 70 million 2004 2003 respectively charge 2004 relates primarily shutdown small european researchanddevelopment facility asset impairment related charges 2003 related closure manufacturing facility united kingdom writedown production equipment related products longer produced manufacturing site operating fda consent decree writedown drug license sun care trade name expected cash flows support carrying value summary selected special charges following summarizes activity accounts related employee termination costs asset impairment related charges equity income cholesterol joint venture global cholesterol franchise sales include sales made company cholesterol joint venture merck vytorin zetia totaled 12 billion 471 million 2004 2003 respectively vytorin approved 25 countries launched several countries including us july 2004 zetia approved 72 countries launched us 40 international markets since november 2002 company utilizes equity method accounting joint venture sharing net income based upon percentages vary product sales level country scheringplough’s allocation joint venture income increased milestones earned partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico joint venture reimburses partner predefined amount physician details set annual basis scheringplough reports receipt reimbursement part equity income us gaap amount represent reimbursement specific incremental identifiable costs company’s detailing cholesterol products markets addition reimbursement amount per physician detail reflective scheringplough’s joint venture sales force effort scheringplough’s sales forcerelated infrastructure costs per physician detail generally estimated higher costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directto consumer advertising direct identifiable outofpocket promotion agreedupon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners equity income cholesterol joint venture defined totaled 347 million 54 million 2004 2003 respectively 2004 2003 company recognized milestones merck 7 million 20 million respectively relating approval ezetimibesimvastatin mexico 2004 certain european approvals zetia 2003 amounts included equity income certain conditions specified merck agreements merck could pay additional milestones company totaling 125 million noted company incurs substantial costs selling costs reflected equity income cholesterol joint venture borne entirely company prior 2003 venture research development phase company’s share research development expense 2002 69 million reported research development statements consolidated operations 2003 2004 research development costs related joint venture included equity income provision income taxes tax expense 779 million 46 million 589 million 2004 2003 2002 respectively tax provision 2004 includes charge approximately 417 million tax charge 494 million less 77 million foreign tax credits related intended repatriation previously unremitted foreign earnings american jobs creation act 2004 act 174 million foreign state taxes valuation allowance approximately 240 million provided certain deferred tax assets resulting changes company tax planning strategies triggered opportunity take full advantage act see discussion overall impacts act company 2004 tax provision also includes us net operating loss us nol carryback benefit approximately 52 million net loss income net loss 947 million 2004 versus loss 92 million 2003 net income 20 billion 2002 net loss 2004 includes tax expense 779 million primarily intended repatriation unremitted foreign earnings valuation reserve net deferred tax assets us net loss 2004 also reflects higher selling general administrative expenses associated buildup us sales force vytorin launch addition sales representatives result bayer licensing agreement well pretax special charges 153 million described 2004 results also include pretax research development charge 80 million license garenoxacin toyama chemical company ltd net loss 2003 includes special charges 599 million described net income 2002 includes special charges 150 million increase litigation reserves net loss available common shareholders 2004 net loss available common shareholders includes deduction preferred stock dividends 34 million related issuance mandatory convertible preferred stock august 2004 impact american jobs creation act american jobs creation act 2004 act enacted law october 2004 one provision act effectively reduces tax rate qualifying repatriation funds held foreignbased subsidiaries 525 percent normally repatriations would taxed rate 35 percent qualify reduced tax rate funds must repatriated oneyear period fund qualifying expenditures us amount funds repatriated reduced tax rate limited amount unremitted foreign earnings reported company’s 2002 annual report 2005 company intends repatriate approximately 94 billion act maximum amount funds qualifying reduced tax rate repatriation funds trigger us income tax payment 2005 approximately 417 million net available tax credits financial reporting purposes tax payment recognized expense 2004 repatriating funds act benefit company following ways • discussed detail liquidity financial resources section company’s us operations incur significant negative cash flow expected repatriations made 2005 act provide company greater financial stability ability fund us cash needs intermediate term • disclosed prior 10k 10q filings company intended fund future us cash flow deficits repatriating funds amounts us nol’s strategy would minimized taxes repatriations funds would also utilized us nol’s potential benefit able carry forward us nol’s reduce us taxable income future act qualifying repatriations reduce us tax losses result act company cash necessary fund us cash needs well maintaining potential benefit able carry forward us nol’s reduce us taxable income future potential future benefit could significant dependent company achieving profitability us gaap companies must review provide valuation allowance deferred tax assets may future benefit company generally established valuation reserve net deferred tax assets fourth quarter 2004 due changes tax planning strategies triggered opportunity take full advantage act december 31 2004 company approximately 1 billion us nol’s tax purposes available offset future us taxable income 2024 company general recorded valuation allowance net deferred tax assets us company expects additional us nol’s generated 2005 congress legislate certain technical corrections related act 2005 company’s us nol’s could reduced approximately 675 million stated company intends repatriate approximately 94 billion 2005 december 31 2004 company’s foreignbased subsidiaries held cash shortterm investments totaling approximately 58 billion amount excludes 19 billion cash foreignbased subsidiaries receive counterparty upon termination interest rate swap arrangement company terminate 2005 additionally foreignbased subsidiaries expected generate substantial cash flow 2005 available fund planned repatriation liquidity financial resources discussion cash flow 2004 operating activities used 154 million cash amount includes receipt 404 million us tax refund related carryback 2003 us nol’s payment 473 million us government tax deficiency relating certain transactions entered 1991 1992 payment 294 million settlement agreement us attorney’s office eastern district pennsylvania 2003 operating activities provided approximately 601 million cash amount includes cash flow benefit reduction accounts receivable following end sales claritin prescription product us amount also includes 250 million payment relating fda consent decree 2004 2003 operating activities worldwide basis generated insufficient cash fund capital expenditures dividends cash flow deficit particularly pronounced disaggregated geographic basis foreign operations generate cash excess local cash needs however us operations cash needs well excess cash generated us operations must fund dividend payments vast majority research development costs us capital expenditures years prior 2003 overall us cash needs funded primarily operations following loss marketing exclusivity claritin december 2002 us profits cash generation declined materially cash requirements 2004 us including operating cash needs capital expenditures litigation tax charges dividends common preferred shares approximated 22 billion company borrowed funds issued equity securities 2004 discussed finance us operations continued accumulate cash foreignbased subsidiaries 2005 management expects dividends capital expenditures worldwide basis exceed cash generated operating activities us operations continue generate negative cash flow payments regarding litigation investigations could increase cash needs management expects fund overall 2005 us cash flow deficit using cash investments currently held foreign subsidiaries american jobs creation act 2004 discussed provide company greater financial stability ability fund us cash needs intermediate term total cash equivalents shortterm investments less total debt approximately 19 billion december 31 2004 company anticipates amount decline 2005 remain positive august 2004 company issued 6 mandatory convertible preferred stock see note 10 “shareholders equity” consolidated financial statements received net proceeds 14 billion deducting commissions discounts underwriting expenses proceeds used reduce shortterm commercial paper borrowings pay settlement amounts litigation costs fund operating expenses shareholder dividends capital expenditures preferred stock issued company’s 20 billion shelf registration december 31 2004 563 million remains registered unissued shelf registration borrowings credit facilities november 26 2003 company issued 125 billion aggregate principal amount 53 senior unsecured notes due 2013 115 billion aggregate principal amount 65 senior unsecured notes due 2033 proceeds offering 24 billion used general corporate purposes including repaying commercial paper outstanding us upon issuance notes rated a3 moody’s investors service moody’s credit watch negative implications standard poor’s sp interest rates payable notes subject adjustment rating assigned notes either moody’s sp downgraded a3 respectively interest rate payable series notes would increase see note 8 “shortterm borrowings longterm debt commitments” consolidated financial statements additional information july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 therefore december 1 2004 interest rate payable notes due 2013 increased 53 555 interest rate payable notes due 2033 increased 65 675 adjustment interest rate payable notes increase company’s interest expense approximately 6 million annually company two revolving credit facilities totaling 15 billion facilities syndicate major financial institutions recently negotiated facility may 2004 125 billion fiveyear credit facility matures may 2009 requires company maintain total debt total capital ratio 60 percent second credit facility provides 250 million line credit maturity date may 2006 requires company maintain total debt total capital ratio 60 percent time company rated baa3 moody’s bbb sp facilities available general corporate purposes considered support company’s commercial paper borrowings facilities require compensating balances however nominal commitment fee paid december 31 2004 funds drawn either facilities december 31 2004 shortterm borrowings totaled 16 billion approximately 93 percent outstanding commercial paper commercial paper ratings discussed significantly affected company’s ability issue rollover outstanding commercial paper borrowings time however company believes ability commercial paper issuers company one shortterm credit ratings p2 moody’s a2 sp andor fitch ratings fitch issue rollover outstanding commercial paper times less companies higher shortterm credit ratings addition total amount commercial paper capacity available issuers typically less higherrated companies company maintains sizable lines credit commercial banks well cash shortterm investments held foreignbased subsidiaries serve alternative sources liquidity support commercial paper program credit ratings february 18 2004 sp downgraded company’s senior unsecured debt ratings time sp also lowered company’s shortterm corporate credit commercial paper rating a2 a1 company’s sp rating outlook remains negative may 11 2004 shelf registration amended allowed company issue 2 billion various debt equity securities declared effective sec march 3 2004 sp assigned shelf registration preliminary rating senior unsecured debt preliminary subordinated debt rating bbb september 30 2004 563 million remains registered unissued shelf registration april 29 2004 moody’s placed company’s senior unsecured credit rating a3 watchlist possible downgrade based upon concerns related market share declines litigation risks high degree reliance success vytorin july 14 2004 moody’s lowered company’s senior unsecured credit rating a3 baa1 lowered company’s senior unsecured shelf registration rating pa3 pbaa1 lowered company’s subordinated shelf registration rating pbaa1 pbaa2 lowered company’s cumulative noncumulative preferred stock shelf registration rating pbaa2 pbaa3 confirmed company’s p2 commercial paper rating removed company watchlist moody’s rating outlook company negative see borrowings credit facilities section discussion impact moody’s rating downgrade interest rates payable company’s longterm debt november 20 2003 fitch downgraded company’s senior unsecured bank loan ratings commercial paper rating company’s rating outlook remained negative announcing downgrade fitch noted sales decline company’s leading product franchise time intron franchise greater anticipated concerned total company growth reliant performance two key growth drivers zetia remicade near term august 4 2004 fitch affirmed company’s asenior unsecured rating bank loan rating commercial paper rating reiterated negative outlook company’s credit rating could decline impact decline could reduce availability commercial paper borrowing would increase interest rate company’s longterm debt discussed company believes repatriation funds american jobs creation act 2004 allow company fund us cash needs intermediate term financial arrangements containing credit rating downgrade triggers company interest rate swap arrangement effect counterparty bank subject credit rating triggers arrangement utilizes two longterm interest rate swap contracts one foreignbased subsidiary company bank us subsidiary company bank two contracts equal offsetting terms covered master netting arrangement contract involving foreignbased subsidiary permits subsidiary prepay portion future obligation bank contract involving us subsidiary permits bank prepay portion future obligation us subsidiary interest paid prepaid balances parties market rates prepayments totaling 19 billion made contracts december 31 2004 arrangement originally provided event company failed maintain required minimum credit ratings counterparty may terminate transaction designating early termination date earlier 36months following date notice terminate sp’s moody’s current credit ratings specified minimum date 10k counterparty given company notice terminate december 1 2004 company counterparty mutually agreed amend swap contracts company counterparty agreed phased termination arrangement including repayment prepaid amounts based agreed schedule scheduled terminations associated repayment prepaid amounts begin later march 30 2005 end later january 15 2009 addition amended agreement 36month grace period previously applied event counterparty gives notice termination result company’s failure maintain required minimum credit ratings extended january 15 2009 event counterparty gives company termination notice provision scheduled terminations associated payments continue according agreed repayment schedule time delivery termination notice january 15 2009 provisions original arrangement also allowed counterparty give 12month notice terminate transaction 10th anniversary transaction november 17 2007 company’s credit ratings least a2 moody’s sp eliminated place company accepted new credit trigger provides counterparty may terminate transaction company fail maintain longterm us dollar denominated senior unsecured indebtedness rating least bbb sp baa2 moody’s termination provision would later november 16 2007 60 days date company receives notice terminate company fail meet minimum credit requirement resulting early termination provision scheduled swap terminations associated payments continue termination date company may option accelerate scheduled terminations associated payments nominal fee february 28 2005 company’s foreignbased subsidiary us subsidiary gave notice counterparty terminate arrangement accordingly prepaid amounts repaid respective obligor company repay us obligation funds repatriated american jobs creation act 2004 see section entitled “impact american jobs creation act” contractual obligations payments due period company’s known contractual obligations december 31 2004 follows 1 longterm debt obligations include 1250 million aggregate principal amount 555 percent senior unsecured notes due 2013 1150 million aggregate principal amount 675 percent senior unsecured notes due 2033 see note 8 “shortterm borrowings longterm debt commitments” consolidated financial statements additional information 2 research contracts include potential milestone payments made since payments contingent occurrence certain events table also excludes research contracts cancelable company without penalty 3 open purchase orders consist cancelable noncancelable inventory expense items 4 caption includes obligations based undiscounted amounts estimated payments certain company’s pension plans hold qualified assets estimated payments company’s deferred compensation plans environmental matters company responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund environmental expenditures based information currently available anticipated material impact company see note 16 “legal environmental regulatory matters” consolidated financial statements additional information additional factors influencing operations us many company’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts international markets company operates environment governmentmandated costcontainment programs us market company pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans’ health care program governmentfunded programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs since company unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals us effect operations cash flows cannot reasonably estimated similarly effect operations cash flows decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated company cannot predict net effect medicare prescription drug benefit markets sales new medicare drug benefit medicare part take effect january 1 2006 offer voluntary prescription drug coverage subsidized medicare 40 million medicare beneficiaries competing private prescription drug plans pdps medicare advantage plans many company’s leading drugs already covered medicare part b eg temodar integrilin intron medicare part b provides payment physician services include prescription drugs administered incident physician’s services beginning 2005 medicare part b drugs reimbursed manner may limit scheringplough’s ability offer larger price concessions make large price increases drugs scheringplough drugs relatively small portion sales medicare population eg clarinex hepatitis c franchise company could experience expanded utilization vytorin zetia new drugs company’s rd pipeline greater consequence company may legislation’s impact pricing rebates discounts significant portion net sales made major pharmaceutical health care products distributors major retail chains us consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors market pharmaceutical products competitive company’s operations may affected technological advances competitors industry consolidation patents granted competitors new products competitors new information clinical trials marketed products postmarketing surveillance generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted company launched otc claritin us december 2002 also december 2002 competing otc loratadine product launched us privatelabel competition introduced company continues market clarinex desloratadine 5 mg tablets treatment allergic rhinitis combines indication seasonal allergic rhinitis indication perennial allergic rhinitis well treatment chronic idiopathic urticaria hives unknown cause ability company capture maintain market share clarinex otc claritin us market depend number factors including additional entrants market allergy treatments clinical differentiation clarinex allergy treatments perception extent differentiation marketplace pricing differentials among otc claritin clarinex allergy treatments generic otc loratadine erosion rate otc claritin clarinex sales upon entry additional generic otc loratadine products whether one branded secondgeneration antihistamines switched prescription otc status clarinex experiencing intense competition prescription us allergy market prescription allergy market shrinking since otc switch claritin december 2002 additionally company implementing new marketing efforts address market share performance clarinex switch claritin otc status introduction competing otc loratadine resulted rapid sharp material decline claritin sales us company’s results operations us sales prescription claritin products 25 million 03 percent company’s consolidated global sales 2003 14 billion 14 percent 2002 sales clarinex us abroad also materially adversely affected presence generic otc loratadine otc claritin light factors described management believes company’s december 2002 introduction otc claritin well introduction competing otc loratadine product december 2002 additional entrants generic otc loratadine products market rapid sharp material adverse effect company’s results operations 2003 2004 pegintron rebetol combination therapy hepatitis c contributed substantially sales 2003 2002 lesser extent 2004 fourth quarter 2002 competing pegylated interferonbased combination product including brand ribavirin received regulatory approval major markets including us overall market share hepatitis c franchise declined sharply reflecting new market competition addition overall market value contracted management believes ability pegintron rebetol combination therapy maintain market share continue adversely affected competition hepatitis c marketplace generic forms ribavirin entered us market april 2004 october 2004 another generic ribavirin approved fda generic forms ribavirin compete company’s rebetol ribavirin capsules us prior second half 2004 rebetol patents material company’s business result introduction competitor pegylated interferon introduction generic ribavirin value important company product franchise severely diminished earnings cash flow materially negatively impacted october 2002 merck scheringplough pharmaceuticals announced fda approved zetia ezetimibe 10 mg use either together statins treatment elevated cholesterol levels march 2003 company announced ezetimibe ezetrol marketed europe successfully completed european union eu mutual recognition procedure mrp completion mrp process 15 eu member states well iceland norway grant national marketing authorization unified labeling ezetrol launched many international markets merck scheringplough partnership also developed oncedaily tablet combining ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine product marketed vytorin us inegy many international markets ezetimibesimvastatin approved marketing several countries including germany april 2004 mexico march 2004 july 23 2004 merck scheringplough pharmaceuticals announced fda approved vytorin inegy completed mrp europe october 1 2004 september 2004 company announced entered agreement bayer intended enhance companies’ pharmaceutical resources agreement entered company primarily strategic purposes commencing october 2004 us puerto rico company began marketing selling distributing bayer’s primary care products including avelox cipro exclusive license agreement company pay bayer royalties excess 50 percent products based sales unfavorable impact company’s gross margin percentage also commencing october 2004 company assumed bayer’s responsibilities us commercialization activities related erectile dysfunction medicine levitra bayer’s copromotion agreement glaxosmithkline plc company reports share levitra results alliance revenue additionally terms agreement bayer supports promotion certain company’s oncology products us key european markets defined period time japan upon regulatory approval bayer comarket company’s cholesterol absorption inhibitor zetia arrangement include rights future cholesterol combination product zetia filed regulatory authorities japan fourth quarter 2003 agreement bayer potentially restricts company marketing products us would compete products strategic alliance result company expects may need sublicense rights garenoxacin quinolone antibacterial agent company licensed toyama company exploring options regard garenoxacin continue fulfill commitments toyama arrangement including taking product regulatory approval uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect company’s operations effect regulatory approval processes operations cannot predicted company subject jurisdiction various national state local regulatory agencies therefore subject potential administrative actions particular importance fda us jurisdiction company’s businesses administers requirements covering testing safety effectiveness approval manufacturing labeling marketing company’s products time agencies including fda may require company address various manufacturing advertising labeling regulatory issues noted relating company’s current manufacturing issues failure comply governmental regulations result delays release products seizure recall products suspension revocation authority necessary production sale products discontinuance products fines civil criminal sanctions result could material adverse effect company’s financial position results operations additional information regarding government regulation may affect future results provided part item business annual report form 10k additional information cautionary factors may affect future results provided caption cautionary factors may affect future results cautionary statements private securities litigation reform act 1995 management’s discussion analysis operations financial condition included note 14 “consent decree” consolidated financial statements may 17 2002 company announced reached agreement fda consent decree resolve issues involving company’s compliance current good manufacturing practices certain manufacturing facilities new jersey puerto rico us district court district new jersey approved entered consent decree may 20 2002 terms consent decree company agreed pay total 500 million us government two equal installments 250 million first installment paid may 2002 second installment paid may 2003 previously reported company accrued 500 million provision consent decree fourth quarter 2001 consent decree requires company complete number actions event certain actions agreed upon consent decree satisfactorily completed time fda may assess payments deadline missed consent decree required company develop submit fda’s concurrence comprehensive cgmp work plans company’s manufacturing facilities new jersey puerto rico covered decree company received fda concurrence proposed cgmp work plans may 14 2003 cgmp work plans contain number significant steps whose timely satisfactory completion subject payments 15000 per business day deadline missed payments may exceed 25 million 2002 50 million years 2003 2004 2005 payments subject overall cap 175 million connection discussions fda regarding company’s cgmp work plans pursuant terms decree company fda entered letter agreement dated april 14 2003 letter agreement company fda agreed extend six months time period company may incur payments described respect certain significant steps whose due dates december 31 2005 letter agreement increase yearly overall caps payments described addition decree requires company complete programs revalidation finished drug products bulk active pharmaceutical ingredients manufactured covered manufacturing facilities company required consent decree complete revalidation programs bulk active pharmaceutical ingredients september 30 2005 finished drugs december 31 2005 general timely satisfactory completions revalidations subject payments 15000 per business day deadline missed subject caps described however product scheduled revalidation certified validated last date validation schedule fda may assess payment 246 percent net domestic sales uncertified product validation certified payment would subject caps described general product scheduled revalidation consent decree certified within six months scheduled date company must cease production product certification obtained completion significant steps work plans completion revalidation programs subject thirdparty expert certification well fda’s acceptance certification consent decree provides company believes may able meet deadline company right upon showing good cause request extensions deadlines connection cgmp work plans revalidation programs however guarantee fda grant requests although company believes made significant progress meeting obligations consent decree possible 1 company may fail complete significant step revalidation prescribed deadline 2 thirdparty expert may certify completion significant step revalidation 3 fda may disagree expert’s certification significant step revalidation case possible fda may assess payments described company would expense payments assessed decree incurred addition failure meet terms consent decree could result delays approval new products seizure recall products suspension revocation authority necessary production sale products fines civil criminal sanctions april 2003 company received notice false claims act complaint brought individual purporting act behalf us government approximately 25 pharmaceutical companies us district court northern district texas complaint alleges pharmaceutical companies including company defrauded us made sales various federal governmental agencies drugs allegedly manufactured manner comply current good manufacturing practices company defendants filed motion dismiss second amended complaint action april 12 2004 company subject pharmacovigilance reporting requirements many countries jurisdictions including us european union eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert manufacturer drug governmental agency potential problems 2003 pharmacovigilance inspections officials british french medicines agencies conducted request european agency evaluation medicinal products emea serious deficiencies reporting processes identified company taking urgent actions rectify deficiencies quickly possible company know action emea national authorities take response findings possible actions include inspections demands improvements reporting systems criminal sanctions company andor responsible individuals changes conditions marketing authorizations company’s products company sells numerous upper respiratory products contain pseudoephedrine pse fdaapproved ingredient relief nasal congestion company’s annual sales upper respiratory products contain pse totaled approximately 195 million 2004 approximately 160 million 2003 products include claritind products well drixoral coricidin chlortrimeton products company understands pse used illicit manufacture methamphetamine dangerous addictive drug february 2005 12 states canada enacted regulations concerning sale pse including limiting amount products purchased one time requiring products located behind pharmacist’s counter stated goal deterring illicitillegal manufacture methamphetamine additional eight states enacted limits quantity pse person possess date regulations material impact company’s operations financial results described specifically note 16 “legal environmental regulatory matters” consolidated financial statements pricing sales marketing programs arrangements related business practices company participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda federal trade commission ftc various state attorneys general offices many health care laws certain governmental entities operate including federal state antikickback statutes statutory common law false claims laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject company substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs company also cannot predict whether investigations affect marketing practices sales result could material adverse impact company financial condition cash flows results operations impact recently issued accounting standards november 2004 fasb issued statement financial accounting standard sfas 151 inventory costs sfas requires abnormal spoilage expensed period incurred opposed inventoried amortized income inventory usage fixed production facility overhead costs allocated normal production level facility sfas effective inventory costs incurred annual periods beginning june 15 2005 company anticipate material impact implementation accounting standard december 2004 fasb issued sfas 123r revised 2004 share based payment statement 123r requires companies recognize compensation expense amount equal fair value sharebased payments granted employees companies required implement sfas july 2005 recognizing compensation sharebased grants made july 1 2005 unvested portion sharebased grants made prior july 1 2005 restatement previously issued statements allowed required company currently evaluating various implementation options available related financial impacts sfas 123r critical accounting policies following accounting policies considered significant changes certain judgments assumptions inherent policies could affect company’s financial statements • revenue recognition • rebates discounts returns • provision income taxes • impairment intangible assets property • accounting legal regulatory matters revenue recognition company’s pharmaceutical products sold direct purchasers eg wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies well indirect purchasers market participants eg managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers company recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue company estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period estimates recorded prior periods reevaluated part process reliable estimates items cannot made company defers recognition revenue recognition new products based specific facts circumstances including estimated acceptance rates established products similar marketing characteristics absent ability make reliable estimates rebates discounts returns company would defer revenue recognition product discounts granted based terms arrangements direct indirect market participants well market conditions including prices charged competitors rebates estimated based sales terms historical experience trend analysis projected market conditions various markets served company evaluates market conditions products groups products primarily analysis wholesaler thirdparty sellthrough market research data well internally generated information data information provided purchasers obtained third parties subject inherent limitations accuracy validity sales returns generally estimated recorded based historical sales returns information analysis recent wholesale purchase information consideration stocking levels wholesalers forecasted demand amounts products exhibit unusual sales return patterns due dating competition marketing matters specifically investigated analyzed part formulation accruals 2004 company entered agreements major us pharmaceutical wholesalers agreements deal number commercial issues product returns timing payment processing chargebacks quantity inventory held wholesalers respect quantity inventory held wholesalers agreements provide financial disincentive wholesalers acquire quantities product excess necessary meet current patient demand use monitoring noted agreements company expects avoid situations company’s shipments product reflective current demand rebates discounts returns rebate accruals federal state governmental programs 155 million december 31 2004 127 million december 31 2003 commercial discounts rebate accruals 123 million december 31 2004 211 million december 31 2003 respectively rebate accruals established period related revenue recognized resulting reduction sales establishment liability included accrued liabilities case governmental rebate programs company’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy company’s obligations additional information governmental inquiries focused part calculation rebates contained note 16 “legal environmental regulatory matters” consolidated financial statements addition possible result governmental challenges changes interpretive guidance actual rebates could materially exceed amounts accrued following summarizes activity accounts related accrued rebates sales returns discounts management makes estimates uses assumptions recording accruals actual amounts paid current period consistent previously estimated provision income taxes december 31 2004 taxes provided approximately 22 billion undistributed earnings foreign subsidiaries considering impact american jobs creation act 2004 certain assets associated earnings repatriated us additional tax provisions may necessary tax contingencies recorded address potential exposures involving tax positions taken could challenged taxing authorities potential exposures result varying application statutes rules regulations interpretations including 1 intercompany terms crossborder agreements affiliates management believes intercompany terms based sound economic facts circumstances 2 utilization cash held foreign subsidiaries investment us property company’s estimate accrual tax contingencies contains assumptions based past experiences judgments potential actions taxing jurisdictions reasonably possible ultimate resolution tax matters may materially greater less amounts accrued company records tax valuation allowance reduce deferred tax assets amount likely realized company considered ongoing prudent feasible tax planning strategies assessing need valuation allowance event company determine would able realize portion net deferred tax assets adjustment deferred tax asset would increase income period determination would made likewise company subsequently determine would able realize portion net deferred tax asset future adjustment deferred tax asset would charged income period determination made impairment intangible assets property intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 580 million december 31 2004 annual amortization expense next five years estimated approximately 50 million per year based intangible assets recorded december 31 2004 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment company’s manufacturing sites operate well optimum levels due sales declines reduction output related fda consent decree time overall costs operating manufacturing sites increased due consent decree compliance activities impact material increase manufacturing costs company continues review carrying value assets indications impairment future events decisions may lead asset impairments andor related costs accounting legal regulatory matters management judgments estimates also required accounting legal regulatory matters particular company recognized estimated minimum liabilities connection certain government investigations sales marketing activities ultimate resolution matter could involve amounts materially excess amounts accrued could material adverse impact company’s financial condition cash flows operations see note 16 “legal environmental regulatory matters” consolidated financial statements market risk disclosure company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk company subsidiaries 50 countries 2004 sales outside us accounted approximately 61 percent global sales virtually sales denominated currencies local country company’s reported profits cash flows exposed changing exchange rates date management deemed cost effective engage formulabased program hedging profits cash flows foreign operations using derivative financial instruments company’s foreign subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provides level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact company’s foreign operations widespread addition point time company’s foreign subsidiaries hold financial assets liabilities denominated currencies us dollars financial assets liabilities consist primarily shortterm thirdparty intercompany receivables payables changes exchange rates affect financial assets liabilities gains losses arise translation affect net income occasion company used derivatives hedge specific shortterm risk situations involving foreign currency exposures however derivative transactions material interest rate equity price risk financial assets exposed changes interest rates andor equity prices debt equity securities held nonqualified trusts employee benefits assets totaled 153 million december 31 2004 due longterm nature liabilities trust assets fund company’s exposure market risk deemed low financial obligations exposed variability interest expense longterm shortterm borrowings company maintains cash equivalent portfolio excess amount borrowings accordingly company mitigated exposure changes interest rates relating financial obligations company longterm debt outstanding 10 percent decrease interest rates would change fair value debt 127 million however company expect refund debt disclosure notice cautionary factors may affect future results cautionary statements private securities litigation reform act 1995 management’s discussion analysis financial condition results operations sections report written reports oral statements made time company may contain forwardlooking statements within meaning securities litigation reform act 1995 forwardlooking statements relate expectations forecasts future events use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” words terms similar meaning connection discussion potential future events circumstances future operating financial performance also identify forwardlooking statements fact relate strictly historical current facts particular forwardlooking statements include statements relating future actions ability access capital markets prospective products status product approvals future performance results current anticipated products sales efforts development programs estimates rebates discounts returns expenses programs reduce expenses cost savings reductions work force outcome contingencies litigation investigations growth strategy financial results forwardlooking statements publications may turn wrong actual results may vary materially guarantees scheringplough’s financial operational performance scheringplough stock scheringplough assume obligation update forwardlooking statement many factors could cause actual results differ scheringplough’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors may include following • significant portion net sales made major pharmaceutical health care products distributors major retail chains us consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors • competitive factors including technological advances attained competitors patents granted competitors new products competitors coming market new indications competitive products new existing generic prescription andor otc products compete products scheringplough merck scheringplough pharmaceuticals joint venture competition otc statins like one approved use uk impact cholesterol reduction market yet known • increased pricing pressure us abroad managed care organizations institutions government agencies programs us among developments consolidation among customers may increase pricing pressures may result various customers greater influence prescription decisions formulary decisions policies • potential impact medicare prescription drug improvement modernization act 2003 possible us legislation regulatory action affecting among things pharmaceutical pricing reimbursement including medicaid medicare involuntary approval prescription medicines overthe counter use health care reform initiatives drug importation legislation regulations markets outside us affecting product pricing reimbursement access laws regulations relating trade antitrust monetary fiscal policies taxes price controls possible nationalization • patent positions highly uncertain patent disputes unusual adverse result patent dispute preclude commercialization products negatively impact sales existing products result injunctive relief payment financial remedies • uncertainties fda approval process regulatory approval review processes countries including without limitation delays approval new products • failure meet current good manufacturing practices established fda governmental authorities result delays approval products release products seizure recall products suspension revocation authority necessary production sale products fines civil criminal sanctions resolution manufacturing issues fda discussed scheringplough’s 10ks 10qs 8ks subject substantial risks uncertainties risks uncertainties including timing scope duration resolution manufacturing issues depend ability schering plough assure fda quality reliability manufacturing systems controls extent remedial prospective obligations undertaken scheringplough • difficulties product development pharmaceutical product development highly uncertain products appear promising development may fail reach market numerous reasons may found ineffective harmful side effects clinical preclinical testing may fail receive necessary regulatory approvals may turn economically feasible manufacturing costs factors may precluded commercialization proprietary rights others • postmarketing issues product approved marketed clinical trials marketed products postmarketing surveillance may raise efficacy safety concerns whether scientifically justified new information could lead recalls withdrawals adverse labeling marketed products may negatively impact sales concerns prescribers patients relating safety efficacy scheringplough products companies’ products pharmaceutical products generally may also negatively impact sales • major products claritin clarinex intron pegintron rebetol capsules remicade temodar nasonex accounted material portion scheringplough’s 2004 revenues major product become subject problem loss patent protection otc availability company’s product competitive product disclosed claritin current potential otc competition previously unknown side effects new effective treatment introduced generic availability competitive products product discontinued reason impact revenues could significant also information important new products zetia vytorin important products pipeline may impact future revenues sales vytorin may negatively impact sales zetia • unfavorable outcomes government local federal domestic international investigations litigation product pricing product liability claims litigation environmental concerns could preclude commercialization products negatively affect profitability existing products materially adversely impact scheringplough’s financial condition results operations contain conditions impact business operations exclusion government reimbursement programs • economic factors scheringplough control including changes inflation interest rates foreign currency exchange rates • instability disruption destruction significant geographic region due location manufacturing facilities distribution facilities customers regardless cause including war terrorism riot civil insurrection social unrest natural manmade disasters including famine flood fire earthquake storm disease • changes tax laws including changes related taxation foreign earnings • changes accounting auditing standards promulgated american institute certified public accountants financial accounting standards board sec public company accounting oversight board would require significant change scheringplough’s accounting practices • details discussion risks uncertainties see scheringplough’s past future sec reports filings item 7aitem 7 management’s discussion analysis financial condition results operations executive summary overview company scheringplough company discovers develops manufactures markets medical therapies treatments enhance human health company also markets leading consumer brands overthecounter otc foot care sun care markets operates global animal health business researchbased pharmaceutical company core strategy scheringplough invest substantial funds scientific research goal creating therapies treatments important medical commercial value consistent core strategy company increasing investment research development trend expected continue historic levels greater research development activities focus mechanisms treat serious diseases high rate failure inherent research result high risk funds invested research programs generate financial returns risk profile compounded fact research long investment cycle bring pharmaceutical compound discovery phase commercial phase may take decade two sources new products acquired acquisition licensing arrangements products company’s latestage research pipeline respect acquisitions licensing limited opportunities obtaining licensing critical latestage products limited opportunities typically require substantial amounts funding company competes opportunities companies often greater financial resources accordingly may challenging company acquire license critical latestage products positive material financial impact company supports commercialized products manufacturing sales marketing efforts company also moving forward additional investments enhance infrastructure business including capital expenditures development process products moved drug discovery pipeline markets information technology systems postmarketing studies monitoring company’s financial situation continues improve discussed company’s cholesterol franchise products vytorin zetia primary drivers improvement zetia company’s novel cholesterol absorption inhibitor vytorin combination zetia zocor merck co inc’s merck statin medication two products launched joint venture company merck zetia ezetimibe marketed europe ezetrol marketed use either together statins treatment elevated cholesterol levels zetia ezetrol launched 60 countries vytorin ezetimibesimvastatin marketed inegy internationally launched 20 countries including united states company currently expects cholesterol franchise continue grow financial commitment compete cholesterol reduction market shared merck profits sales vytorin zetia also shared merck operating results joint venture merck recorded using equity method accounting outside joint venture merck japanese market bayer healthcare comarket company’s cholesterolabsorption inhibitor zetia upon approval due backlog new drug applications japan company cannot precisely predict timing approval cholesterolreduction market single largest pharmaceutical category world vytorin zetia competing market combined basis products continued grow terms market share 2005 franchise two products together captured 14 percent new prescriptions us cholesterol management market based january 2006 ims data vytorin currently ranks thirdleading prescription product treating patients high cholesterol based new prescriptions date physicians written 11 million total prescriptions vytorin us zetia sales continue grow even vytorin grows market share 2005 company’s results operations cash flows driven significantly performance vytorin zetia result company’s ability generate profits predominantly dependent upon performance vytorin zetia cholesterol franchise dependence expected continue time 2005 equity income cholesterol joint venture 873 million net income available common shareholders 183 million additional information regarding joint venture merck also included note 3 “equity income cholesterol joint venture” item 8 financial statements supplementary data 10k although expected operating cash flow existing cash investments including funds repatriated american jobs creation act 2004 ajca fund company’s operations near intermediate term discussed detail future cash flows also dependent upon performance vytorin zetia company must generate profits cash flows maintain enhance infrastructure business discussed sales products may impacted introduction new innovative competing treatments generic versions existing products regard company expects generic forms pravachol zocor two existing wellestablished cholesterolmanagement products introduced us lose patent protection beginning 2006 generics introduced 2005 international markets company cannot reasonably predict effect introduction generic forms cholesterol management products may vytorin zetia although decisions government entities managed care groups concerning formularies reimbursement policies could potentially negatively impact dollar size andor growth cholesterol management market including vytorin zetia material change sales market share vytorin zetia would significant impact company’s operations cash flow remicade prescribed treatment rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis recently gained approval europe psoriasis remicade company’s second largest marketed pharmaceutical product line cholesterol franchise product licensed manufactured centocor inc johnson company exclusive marketing rights product outside us japan china including hong kong taiwan indonesia third quarter 2005 company exercised option contract centocor license rights develop commercialize golimumab fully human monoclonal antibody territories remicade golimumab currently phase iii trials centocor believes rights golimumab expire 2014 company believes rights extend beyond 2014 parties working together move forward collaboration golimumab steps taken resolve difference opinion expiration date typical pharmaceutical industry company licenses manufacturing marketing andor distribution rights certain products others also manufactures markets andor distributes products owned others pursuant licensing joint venture arrangements time third parties involved additional factors relating third party outside control company may create positive negative impacts company vytorin zetia remicade subject arrangements key company’s current business financial performance addition potential strategic alternatives may impacted change control provisions arrangements could result vytorin zetia acquired merck remicade reverting back centocor change control provision relating vytorin zetia included contract merck filed exhibit 10q company’s 10k change control provision relating remicade contained contract centocor filed exhibit 10u company’s 10k period 2002 2004 company experienced number negative events strained continue strain company’s financial resources explained company’s overall financial situation began improve 2005 negative events remain relevant understand company’s current challenges negative events included limited following matters • entered formal consent decree fda 2002 agreed implement cgmp work plan revalidate manufacturing processes certain manufacturing sites us puerto rico company completed significant steps cgmp work plan validation actions required december 31 2005 consent decree subject certification external third party review approval fda terms decree provided fda notified company significant violation fda law regulations decree five year period since decree’s entry may 2002 may 2007 company may petition court decree dissolved fda oppose company’s petition company incurred significant costs associated manufacturing compliance efforts part consent decree incremental compliance costs incurred completion third party certification fda review approval process addition company found necessary discontinue certain older profitable products outsource products • switch claritin us beginning december 2002 prescription otc status switch coupled private label competition resulted substantially lower overall sales product starting 2003 well lower average unit selling price product ongoing intense competition company’s exposure powerful retail purchasers also increased • market shares sales levels certain company products fell significantly experienced increased competition products continue compete declining volatile markets • investigations certain company’s sales marketing practices us attorney’s offices massachusetts pennsylvania 2004 company made payments totaling 294 million us attorney’s office eastern district pennsylvania settlement investigation response matters beginning april 2003 board directors named fred hassan new chairman board chief executive officer scheringplough corporation leadership new leadership team recruited six eightyear fivephase action agenda formulated goal stabilizing repairing turning around company october 2005 company announced entered third turnaround phase action agenda beginning turnaround phase defined achieving three consecutive quarters sales earnings growth excluding special items current state business net sales 2005 95 billion increase 12 billion 15 percent 2004 period increase driven primarily growth remicade pegintron nasonex temodar animal health business us sales contribution antibiotics avelox cipro products agreement bayer became effective october 2004 foreign exchange contributed 1 percent sales increase sales marketing costs increased due addition bayer sales representatives increased selling expenses europe support continued launches vytorin zetia increased promotional spending primarily nasonex asmanex products agreement bayer company net income available common shareholders 183 million 2005 compared net loss available common shareholders 981 million 2004 net income available common shareholders 2005 included charge increase litigation reserves 250 million resulting total reserve 500 million representing company’s current estimate resolve massachusetts investigation well investigations disclosed “awp investigations” state litigation disclosed “awp litigation” note 19 “legal environmental regulatory matters” item 8 financial statements supplementary data addition net income available common shareholders also included research development expense approximately 124 million 118 million net tax license rights develop commercialize golimumab net loss available common shareholders 2004 included pretax research development charge 80 million license garenoxacin toyama chemical company ltd tax expense 779 million included provision taxes related planned repatriation unremitted foreign earnings 2005 american jobs creation act valuation reserve net deferred tax assets us many company’s manufacturing sites operate capacity company’s manufacturing sites subject consent decree remained open company performing revalidation cgmp work plan obligations decree however consent decree work placed significant additional controls production release products sites increased costs slowed production led reduction product mix sites company’s research development operations negatively impacted consent decree operations share common facilities manufacturing operations although certain costs associated third party certifications decrease completion work plan certified financial impacts continue costs new processes continue used reduced product mix volumes sites company’s manufacturing cost base relatively fixed actions part management significantly reduce company’s manufacturing infrastructure involve complex issues cases shifting products manufacturing plants take many years due construction revalidation registration requirements management continues review carrying value certain manufacturing assets indications impairment future events decisions may lead asset impairments andor related costs 2005 company repatriated approximately 94 billion previously unremitted foreign earnings reduced tax rate provided american jobs creation act ajca repatriating funds ajca benefits company following ways • company’s us operations currently incur significant negative cash flow operating cash flows existing cash investments including repatriations made 2005 ajca expected provide company ability fund us cash needs near intermediate term company continue use repatriated funds ajca qualified spending • us operations 2005 2004 produced us tax net operating loss us nol carryforwards approximately 15 billion ajca qualifying repatriations reduce us tax losses company cash necessary fund us cash needs potential benefit able carry forward us nols reduce future us taxable income potential future benefit could significant dependent company achieving profitability us discussion operating results net sales significant portion net sales made major pharmaceutical health care product distributors major retail chains us consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors consolidated net sales 2005 totaled 95 billion increase 12 billion 15 percent compared 2004 consolidated net sales reflected higher volumes remicade pegintron nasonex temodar inclusion full year sales avelox cipro addition foreign exchange favorable impact 1 percent consolidated 2004 net sales 83 billion decreased 62 million 1 percent compared 2003 primarily reflecting volume declines offset favorable foreign exchange rate impact 4 percent net sales years ended december 31 2005 2004 2003 follows certain prior year amounts reclassified conform current year presentation n meaningful percentage amounts shown include international sales claritin rx b includes otc claritin 394 419 432 2005 2004 2003 respectively international net sales remicade treatment immunemediated inflammatory disorders rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis 196 million 26 percent 2005 942 million due greater demand expanded indications continued market growth sales remicade 2004 746 million 206 million 38 percent compared 2003 due greater medical use expanded indications european markets near future additional competitive products indications referred likely introduced global net sales pegintron powder injection pegylated interferon product treating hepatitis c increased 188 million 33 percent 751 million compared 2004 due december 2004 launch pegintron rebetol combination therapy japan sales japan benefited significant number patients waiting approval pegintron beginning treatment patient warehousing comparisons 2006 unfavorably impacted absence patient warehousing anticipated government mandated price reductions japan result factors sales may decline materially sales pegintron us 2005 decreased primarily reflecting decline overall market sales pegintron decreased 239 million 30 percent 563 million 2004 due primarily loss market share reflecting entrance competitor’s new products hepatitis c market 2003 global net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies rose 24 percent 737 million 2005 product captured greater us international market share versus 2004 period us sales benefited increased promotional effort introduction beginning january 2005 new scentfree alcoholfree formulation nasonex nasal spray 2004 sales nasonex increased 19 percent versus 2003 594 million primarily due international sales growth favorable prior year trade inventory comparisons us tempered decline us market share generic flonase fluticasone propionate approved 2006 may unfavorably impact corticosteroid nasal spray market global net sales clarinex marketed aerius many countries outside us treatment seasonal outdoor allergies yearround indoor allergies decreased 46 million 7 percent versus 2004 sales us decreased 95 million 23 percent versus 2004 due reduced market share declining market september 2005 generic allegra fexofenadine introduced us continue negatively affect antihistamine market including clarinex sales outside us increased 49 million 18 percent 321 million 2005 due primarily market share gains global net sales clarinex 692 million 2004 essentially flat versus 2003 sales outside us increased 39 percent 272 million 2004 due market share gains continued conversion prescription claritin us sales decreased 16 percent 420 million 2004 due continued contraction us prescription antihistamine market following launch otc claritin branded nonbranded nonsedating antihistamines coupled market share declines global net sales temodar capsules treatment certain types brain tumors increased 129 million 28 percent 588 million 2005 due increased utilization treating newly diagnosed glioblastoma multiforme gbm prevalent form brain cancer new indication granted us fda approval march 2005 rapidly adopted us physicians june 2005 temodar received approval european commission use combination radiotherapy gbm patients 25 member states well iceland norway japan temodar granted priority review regulatory application treat malignant glioma 2005 fourth quarter sales temodar increased 135 million 42 percent 459 million 2004 due increased market penetration growth rates temodar may moderate going forward significant market penetration already achieved treatment gbm especially us international net sales prescription claritin increased 50 million 16 percent 371 million 2005 due launch claritin reditabs japan coupled unusually severe japanese allergy season may recur 2006 2004 international sales prescription claritin 321 million decrease 2 percent compared 2003 due continued conversion clarinex global net sales rebetol capsules use combination intron pegintron treating hepatitis c increased 44 million 15 percent 331 million 2005 due primarily launch pegintron rebetol combination therapy japan december 2004 sales japan benefited significant number patients waiting approval pegintron beginning treatment patient warehousing comparisons 2006 unfavorably impacted absence patient warehousing result sales may decline materially rebetol may also subject larger average government mandated price reductions japan sales rebetol 2004 decreased 55 percent 287 million due launch generic versions rebetol us april 2004 increased price competition outside us global net sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndrome sold primarily us company 315 million 2005 compared 325 million 2004 sales integrilin us essentially flat versus 2004 sales outside us decreased 8 million reflecting return european marketing rights millennium pharmaceuticals inc millennium sales integrilin 2004 increased 19 million 6 percent versus 2003 due increased patient utilization effective september 1 2005 company restructured integrilin copromotion agreement millennium terms restructured agreement company acquired exclusive us development commercialization rights integrilin exchange upfront payment 36 million royalties integrilin sales restructured agreement calls minimum royalty payments 85 million per year millennium 2006 2007 global net sales intron injection chronic hepatitis b c antiviral anticancer indications decreased 10 percent 2005 287 million due conversion pegintron japan sales intron decreased 22 percent 2004 318 million due primarily lower demand net sales avelox fluoroquinolone antibiotic treatment certain respiratory skin infections sold primarily us scheringplough result company’s license agreement bayer 228 million 2005 sales avelox 2004 represented initial three months sales agreement bayer effective october 1 2004 international net sales subutex tablets treatment opiate addiction increased 6 percent 197 million 2005 due increased market penetration sales subutex 185 million 2004 increase 29 percent 2003 due increased market penetration expected subutex encounter generic competition near future international sales caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma increased 21 percent 181 million reflecting adoption ovarian cancer metastatic breast cancer indications sales caelyx 2004 increased 35 percent versus 2003 150 million reflecting initial adoption metastatic breast cancer indication net sales cipro fluoroquinolone antibiotic treatment certain respiratory skin urinary tract infections sold primarily us scheringplough result company’s license agreement bayer 146 million 2005 sales cipro 2004 represented initial three months sales agreement bayer global net sales elocon cream mediumpotency topical steroid decreased 14 percent 144 million reflecting generic competition introduced us first quarter 2005 generic competition expected continue adversely affect sales product pharmaceutical net sales include large number lower sales volume prescription pharmaceutical products several products sold limited markets outside us many multiple source products longer protected patents products include treatments respiratory cardiovascular dermatological infectious oncological diseases global net sales consumer health care products include otc foot care sun care products 11 billion 2005 2004 sales otc claritin 394 million 2005 decrease 25 million 6 percent 2004 reflecting adverse impact sales claritind due restrictions retail sale otc products containing pseudoephedrine pse came effect 2005 sales claritind may continue adversely affected recent future restrictions retail sale products addition otc claritin continues face competition private label branded loratadine net sales sun care products increased 28 million 16 percent 2005 primarily due launch new coppertone continuous spray products coupled stronger overall suncare season us net sales foot care products increased 2 million 1 percent 2005 due primarily new memory fit insoles insole products net sales consumer health care products 2004 increased 59 million 6 percent compared 2003 due primarily strong performance dr scholl’s freeze away foot care products company sells numerous nonprescription upper respiratory products contain pse fdaapproved ingredient relief nasal congestion company’s annual north american sales nonprescription upper respiratory products contain pse totaled approximately 277 million 2005 305 million 2004 approximately 160 million 2003 products include claritind products well drixoral coricidin chlortrimeton products company understands pse used illicit manufacture methamphetamine dangerous addictive drug december 31 2005 26 states canada mexico enacted regulations concerning nonprescription sale products containing pse including limiting amount products purchased one time requiring products located behind pharmacist’s counter stated goal deterring illicitillegal manufacture methamphetamine additional 12 states enacted limits quantity pse person possess one state recently enacted legislation regulates pse products prescription status also us federal government proposed legislation placing restrictions sale products containing pse major us retailers customers company voluntarily placed nonprescription products containing pse behind pharmacy counter stores whether required local law sales nonprescription pse products 28 million approximately 9 percent compared 2004 company continues monitor developments area could negative impact operations financial results noted regulations relate sale prescription products clarinexd products contain pse global net sales animal health products increased 11 percent 2005 851 million increased sales reflected strong growth core brands across geographic species areas led products serving us cattle market including nuflor vaccine business increased sales also due part better product supply us sales growth included favorable foreign exchange impact 1 percent company expects growth rate moderate due increased competition including generic products global net sales animal health products increased 10 percent 2004 included favorable foreign exchange impact 6 percent certain situations positive impact sales net income 2005 may recur 2006 include favorable effect foreign exchange patient warehousing benefit pegintron rebetol related launch pegintron japan unusually severe allergy season japan benefited reported sales prescription claritin generic allegra fexofenadine introduced us 2005 expected negative impact us clarinex sales 2006 generic flonase fluticasone propionate approved 2006 may unfavorably impact corticosteroid nasal spray market growth remicade may also affected increased competition addition company expects growth rate animal health business moderate due increased competition including generic products costs expenses equity income summary costs expenses equity income years ended december 31 2005 2004 2003 follows n meaningful percentage substantially sales cholesterol products included company’s net sales results sales reflected equity income cholesterol joint venture addition due virtual nature joint venture company incurs substantial selling general administrative expenses captured equity income included company’s statements consolidated operations result company’s gross margin ratios sga expenses rd expenses percentage net sales reflect impact joint venture’s operating results gross margin gross margin increased 2005 compared 2004 629 percent 648 percent primarily due supply chain process improvements increased sales highermargin products favorable impact foreign exchange partly offset higher royalties related bayer products beginning september 1 2005 royalties integrilin restructuring integrilin agreement substantially offsetting effects generally increasing cost sales due increased royalties offset reduced selling general administrative expenses gross margin 2006 unfavorably impacted full year increased royalties restructured agreement gross margin 2004 decreased compared 2003 660 percent 629 percent primarily due lower production volumes coupled increased spending related fda consent decree manufacturing compliance spending efforts upgrade company’s global infrastructure absence european losec revenues change product sales mix including sales bayer licensed products contributed unfavorable comparison well selling general administrative selling general administrative expenses sga increased 15 percent 44 billion 2005 versus 38 billion 2004 increase primarily due addition 2004 fourth quarter bayer sales representatives increased selling expenses europe support continued launch vytorin zetia increased promotional spending primarily nasonex asmanex products agreement bayer sga expenses increased 10 percent 38 billion 2004 35 billion 2003 primarily due expansion sales field force higher employeerelated costs unfavorable impact foreign exchange partially offset lower promotional spending research development research development rd spending increased 16 percent 19 billion representing 196 percent net sales 2005 included 124 million charge conjunction company’s exercise rights develop commercialize golimumab rd spending 2004 included 80 million charge conjunction license toyama chemical company ltd garenoxacin generally changes rd spending reflect timing company’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products company believes strong early development pipeline across widerange therapeutic areas 14 preclinical phase compounds 2005 additionally later phase growthdrivers pipeline enter phase iii eg thrombin receptor antagonist vicriviroc hcv protease inhibitor company anticipates approximate doubling annual patient enrollment clinical trials next 24 years versus 2005 levels company expects rd spending increase compared prior years due progression company’s earlystage pipeline increased clinical trial activity maximize company’s chances successful development new products company began development excellence initiative 2005 build talent critical mass create uniform level excellence deliver highpriority programs within rd expenseincome net 2005 expenseincome net 5 million lower 2004 reflected higher net interest income due higher interest rates cash equivalents shortterm investments increase expenseincome net 2004 versus 2003 primarily result higher net interest expense due debt issuances 2003 special charges components special charges follows litigation charges 2005 litigation reserves increased 250 million increase resulted total reserve 500 million massachusetts investigation well investigations disclosed “awp investigations” state litigation disclosed “awp litigation” note 19 “legal environmental regulatory matters” representing company’s current estimate resolve matter additional information regarding litigation reserves also included note 19 “legal environmental regulatory matters” item 8 financial statements supplementary data 10k 2003 litigation reserves increased 350 million primarily result investigations company’s sales marketing practices employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program retired december 31 2005 total cost program approximately 191 million comprised increased pension costs 108 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million amounts recognized 2005 2004 2003 program 7 million 20 million 164 million respectively additional amounts expected recognized program termination costs associated verp totaled 21 million 99 million 15 million 2005 2004 2003 respectively following summarizes activity accounts related employee termination costs asset impairment charges year ended december 31 2005 company recognized asset impairment charges 16 million related primarily consolidation company’s us biotechnology organizations company recorded asset impairment charges 34 million 2004 related primarily shutdown small european research development facility asset impairment charges 2003 70 million related closure manufacturing facility united kingdom writedown production equipment related products longer going produced manufacturing site operating fda consent decree writedown drug license sun care trade name expected cash flows support carrying value equity income cholesterol joint venture global cholesterol franchise sales include sales made company cholesterol joint venture merck vytorin zetia totaled 24 billion 12 billion 471 million 2005 2004 2003 respectively 2005 sales comparison benefited us launch vytorin second half 2004 franchise two products combined passed 14 percent share level new prescriptions us cholesterol management market based january 2006 ims data vytorin launched 20 countries including us august 2004 zetia approved 70 countries launched 60 countries company utilizes equity method accounting joint venture sharing income operations based upon percentages vary product sales level country company’s allocation joint venture income increased milestones earned merck scheringplough partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico joint venture reimburses partner predefined amount physician details set annual basis company reports reimbursement part equity income cholesterol joint venture reimbursement represent reimbursement specific incremental identifiable costs company’s detailing cholesterol products markets addition reimbursement amount reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners equity income cholesterol joint venture totaled 873 million 347 million 54 million 2005 2004 2003 respectively 2005 equity income comparison benefited us launch vytorin second half 2004 2005 2004 2003 company recognized milestones merck 20 million 7 million 20 million respectively 20 million milestone 2005 related certain european approvals vytorin ezetimibesimvastatin 2005 7 million milestone 2004 related approval ezetimibesimvastatin mexico 2004 20 million milestone 2003 related certain european approvals zetia 2003 amounts included equity income certain conditions specified joint venture agreements merck company could earn additional milestones totaling 105 million noted company incurs substantial selling general administrative costs reflected equity income cholesterol joint venture instead included overall cost structure company provision income taxes tax expense 228 million 779 million 46 million 2005 2004 2003 respectively overall income tax expense 2005 net benefit described primarily related foreign taxes include benefit related us net operating losses nols company established valuation allowance net us deferred tax assets including benefit us nols management cannot conclude likely benefit us net deferred tax assets realized december 31 2005 company us nol carryforwards totaling approximately 15 billion company’s tax provision year ended december 31 2005 includes us federal income tax benefit approximately 42 million result irs notice issued august 2005 provisions notice resulted reduction previously accrued tax liability attributable ajca repatriation also reduced 2005 us nols carried forward subsequent years 2005 income tax provision includes charge approximately 260 million related foreign taxes 14 million state taxes benefit 46 million us federal taxes primarily related 2005 irs notice mentioned january 2006 internal revenue service irs completed examination company’s 1993 1996 federal income tax returns company made cash payment third quarter 2005 form tax deposit approximately 239 million anticipation settlement 1993 1996 tax examination prevent additional irs interest charges payment fully satisfied liability associated tax examination consistent previously recorded reserves irs currently examining company’s 1997 2002 federal income tax returns net incomeloss available common shareholders net income available common shareholders 2005 includes deduction preferred stock dividends 86 million related issuance 6 percent mandatory convertible preferred stock august 2004 net loss available common shareholders includes deduction preferred stock dividends 34 million liquidity financial resources discussion cash flow 2005 cash flow operating activities worldwide basis approximated cash payments capital expenditures dividends international operations generate cash excess local cash needs however us operations cash needs well excess cash generated us operations must fund dividend payments majority research development costs us capital expenditures years prior 2003 overall us cash needs funded primarily operations cash requirements 2005 us including operating cash needs capital expenditures tax payments dividends common preferred shares approximated 11 billion 2005 consolidated operating activities generated 882 million cash compared use 154 million 2004 increase primarily due higher net income timing payments special charges related litigation partially offset increase accounts receivable due sales growth payments tax authorities tax liabilities related repatriation foreign earnings ajca approximately 375 million tax deposits 239 million anticipated settlement certain tax contingencies tax years 1993 1996 tax charges related ajca expensed 2004 operating cash flow favorably impacted us tax refund 404 million result loss carry back however cash flow unfavorably impacted 473 million payment us government tax deficiency related certain transactions tax years 1991 1992 payment 294 million settlement agreement us attorney’s office eastern district pennsylvania 2003 operating activities provided approximately 601 million cash amount includes cash flow benefit reduction accounts receivable following end sales claritin prescription product us amount also includes 250 million payment terms fda consent decree net cash used investing activities 2005 454 million primarily related 478 million capital expenditures purchase intangible assets 51 million partially offset proceeds sales property equipment 43 million net reduction shortterm investments 33 million net cash used investing activities 2004 621 million included capital expenditures 489 million net purchases investments 264 million partially offset cash proceeds 118 million transfer license rights 7 million dispositions property equipment net cash used financing activities 2005 633 million compared net cash provided financing activities 15 billion 2004 uses cash financing activities 2005 include payment dividends common preferred shares 410 million repayment 12 billion commercial paper borrowings partially offset proceeds 900 million bank debt incurred foreign subsidiary related funding portion repatriations ajca 2005 net cash provided financing activities 2004 reflected proceeds 14 billion preferred stock issuance 546 million increase shortterm borrowings partially offset payment dividends common preferred shares 354 million company’s financial situation begun improve company moving forward additional investments enhance infrastructure business includes expected capital expenditures 300 million next several years pharmaceutical sciences center allow company streamline integrate company’s drug development process products moved drug discovery pipeline market additional related expenditures upgrade equipment staffing center 2006 us operations continue generate negative cash flow payments regarding litigation investigations could increase cash needs operating cash flows existing cash investments including repatriations made 2005 ajca expected provide company ability fund cash needs including us cash needs near intermediate term total cash equivalents shortterm investments less total debt approximately 19 billion december 31 2005 august 2004 company issued 6 percent mandatory convertible preferred stock see note 14 “shareholders equity” item 8 financial statements supplementary data received net proceeds 14 billion deducting commissions discounts underwriting expenses proceeds used reduce shortterm commercial paper borrowings pay tax litigation settlement amounts litigation costs fund operating expenses shareholder dividends capital expenditures preferred stock issued company’s 20 billion shelf registration december 31 2005 563 million remains registered unissued shelf registration borrowings credit facilities november 26 2003 company issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 proceeds offering 24 billion used general corporate purposes including repaying commercial paper outstanding us upon issuance notes rated a3 moody’s investors service moody’s credit watch negative implications standard poor’s sp interest rates payable notes subject adjustment rating assigned notes either moody’s sp downgraded a3 respectively interest rate payable series notes would increase see note 12 “shortterm borrowings longterm debt commitments” item 8 financial statements supplementary data 10k additional information july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 therefore december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent adjustment interest rate payable notes increased company’s interest expense approximately 6 million annually company revolving credit facility syndicate major financial institutions march 2005 company negotiated increase bank commitments 125 billion 15 billion changes basic terms preexisting credit facility concurrently increase commitments facility company terminated early separate 250 million line credit would matured may 2006 outstanding balance facility time terminated existing 15 billion credit facility matures may 2009 requires company maintain total debt total capital ratio 60 percent credit line available general corporate purposes considered support company’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2005 325 million drawn facility whollyowned international subsidiary purposes funding ajca related repatriations addition aforementioned credit facility company entered 575 million credit facility fourth quarter 2005 drawn december 31 2005 credit facility utilized whollyowned international subsidiary fund repatriations ajca credit facility requires company maintain total debt total capital ratio 60 percent borrowings payable later november 4 2008 funds borrowed facility subsequently repaid may reborrowed credit facility borrowings classified shortterm borrowings company intends repay amounts next twelve months december 31 2005 2004 shortterm borrowings including credit facilities mentioned totaled 13 billion 16 billion respectively commercial paper outstanding december 31 2005 2004 298 million 146 billion respectively weightedaverage interest rate shortterm borrowings december 31 2005 2004 47 percent 26 percent respectively credit ratings company’s current unsecured senior credit ratings outlook follows commercial paper ratings discussed significantly affected company’s ability issue rollover outstanding commercial paper borrowings time however company believes ability commercial paper issuers company one shortterm credit ratings p2 moody’s a2 sp andor fitch issue rollover outstanding commercial paper times less companies higher shortterm credit ratings addition total amount commercial paper capacity available issuers typically less higherrated companies company maintains sizable lines credit commercial banks well cash shortterm investments held us international subsidiaries serve alternative sources liquidity support commercial paper program company’s credit ratings could decline current levels impact decline could reduce availability commercial paper borrowing would increase interest rate company’s short longterm debt discussed company believes existing cash balances cash generated operations allow company fund us cash needs near intermediate term contractual obligations payments due period company’s known contractual obligations december 31 2005 follows 1 longterm debt obligations include 1250 million aggregate principal amount 555 percent senior unsecured notes due 2013 1150 million aggregate principal amount 675 percent senior unsecured notes due 2033 excludes interest obligations see note 12 “shortterm borrowings longterm debt commitments” item 8 financial statements supplementary data 10k additional information 2 research contracts include potential milestone payments made since payments contingent occurrence certain events table also excludes research contracts cancelable company without penalty 3 purchase obligations consist cancelable noncancelable inventory expense items 4 caption includes obligations based undiscounted amounts estimated payments certain company’s pension deferred compensation plans preferred stock dividends contractual obligations regulatory competitive environment company operates company subject jurisdiction various national state local regulatory agencies regulations described detail part item business 10k regulatory compliance complex regulatory standards including good clinical practices good laboratory practices good manufacturing practices vary jurisdiction constantly evolving regulatory compliance costly regulatory compliance also impacts timing needed bring new drugs market drugs new indications failure comply regulations result delays approval drugs seizure recall drugs suspension revocation authority necessary production sale drugs fines civil criminal sanctions regulatory compliance cost compliance failures material impact company’s results operations cash flows financial condition since 2002 company working us fda consent decree resolve issues involving company’s compliance current good manufacturing practices cgmp certain manufacturing sites new jersey puerto rico see details note 18 “consent decree” item 8 financial statements supplementary data 10k terms consent decree company made payments totaling 500 million end 2005 company completed revalidation programs bulk active pharmaceutical ingredients finished drug products well 212 significant steps cgmp work plan accordance schedules required consent decree company’s completion cgmp work plan currently pending certification third party expert whose certification turn subject acceptance fda terms decree provided fda notified company significant violation fda law regulations decree five year period since decree’s entry may 2002 may 2007 company may petition court decree dissolved fda oppose company’s petition company subject pharmacovigilance reporting requirements many countries jurisdictions including us european union eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert manufacturer drug governmental agency potential problems 2003 pharmacovigilance inspections officials british french medicines agencies conducted request european agency evaluation medicinal products emea cited serious deficiencies reporting processes company continued work longterm action plan rectify deficiencies provided regular updates emea fourth quarter 2005 local uk emea regulatory authorities conducted follow inspection assess company’s implementation action plan inspectors acknowledged progress made since 2003 also continued note significant concerns quality systems supporting company’s pharmacovigilance processes similarly follow inspection company’s clinical trial practices uk inspectors identified issues respect company’s management clinical trials related pharmacovigilance practices company intends continue upgrading skills processes systems clinical practices pharmacovigilance company remains committed accomplish work invest significant resources area february 2006 company announced 2006 initiative building clinical excellence trial design execution tracking strengthen company’s scientific compliance rigor global basis company know action emea national authorities take response inspections possible actions include inspections demands improvements reporting systems criminal sanctions company andor responsible individuals changes conditions marketing authorizations company’s products recently clinical trials postmarketing surveillance certain marketed drugs competitors’ within industry raised safety concerns led recalls withdrawals adverse labeling marketed products addition situations raised concerns among prescribers patients relating safety efficacy pharmaceutical products general company personnel regular open dialogue fda regulators review product labels materials regular basis new information becomes known following wake recent product withdrawals companies significant safety issues health authorities fda emea pmda increased focus safety assessing benefitrisk balance drugs health authorities appear become cautious making decisions approvability new products indications rereviewing select products already marketed adding uncertainties regulatory processes also greater regulatory scrutiny especially united states advertising promotion particular directtoconsumer advertising similarly major health authorities including fda emea pmda also increased collaboration amongst especially regard evaluation safety benefitrisk information media attention also increased current environment health authority regulatory action one market safety labeling change may regulatory prescribing marketing implications markets extent previously seen health authorities pmda japan publicly acknowledged significant backlog workload due resource constraints within agency backlog caused long regulatory review times new indications products including initial approval zetia japan added uncertainty predicting approval timelines markets pmda committed correcting backlog expected continue foreseeable future 2005 fda issued final rule removing essential use designation albuterol cfc products removal designation requires cfc albuterol products including company’s proventil cfc removed market later december 31 2008 necessitate transition marketplace albuterol cfc proventil albuterol hfa proventil hfa later end 2008 difficult predict impact transition albuterol marketplace company’s products uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect company’s operations effect regulatory approval processes operations cannot predicted company nevertheless achieved significant number important regulatory approvals since 2004 including approvals vytorin clarinex d24 clarinex reditabs clarinex d12 new indications temodar nasonex significant approvals since 2004 include asmanex dpi dry powder inhalation united states noxafil eu pegintron japan new indications remicade company also number significant regulatory submissions filed major markets awaiting approval described specifically note 19 “legal environmental regulatory matters” item 8 financial statements supplementary data 10k pricing sales marketing programs arrangements related business practices company participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda federal trade commission ftc various state attorneys general offices many health care laws certain governmental entities operate including federal state antikickback statutes statutory common law false claims laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject company substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs company also cannot predict whether investigations affect marketing practices sales result could material adverse impact company’s results operations cash flows financial condition business us many company’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts us market company pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans’ health care program governmentfunded programs international markets company operates environment government mandated costcontainment programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs example japan generally enacts biennial price reductions expected occur 2006 pricing actions occur 2006 certain major european markets since company unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals us effect operations cash flows cannot reasonably estimated similarly effect operations cash flows decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated company cannot predict net effect medicare prescription drug benefit markets sales new medicare drug benefit medicare part took effect january 1 2006 offers voluntary prescription drug coverage subsidized medicare 40 million medicare beneficiaries competing private prescription drug plans pdps medicare advantage plans many company’s leading drugs already covered medicare part b eg temodar integrilin intron medicare part b provides payment physician services include prescription drugs administered along physician services manner drugs reimbursed medicare part b may limit company’s ability offer larger price concessions make large price increases drugs scheringplough drugs relatively small portion sales medicare population eg clarinex hepatitis c franchise company could experience expanded utilization vytorin zetia new drugs company’s rd pipeline greater consequence company may legislation’s impact pricing rebates discounts market pharmaceutical products competitive company’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted 2006 outlook relates financial performance company anticipates sales profits pivotal cholesterol franchise continue grow 2006 company’s gross margin improved 2005 result among things operating efficiencies plants reduced spending related consent decree improvement gross margin expected moderate 2006 improvements may offset royalty payments partners company anticipates rd expenses may grow faster rate net sales 2006 depend timing studies success phase ii trials underway thrombin receptor antagonist hepatitis protease inhibitor hiv drug vicriviroc company moves forward action agenda additional investments anticipated enhance infrastructure areas clinical development pharmacovigilance information technology risks described item 1a “risk factors” could cause actual results differ expectations provided section impact recently issued accounting standards november 2004 fasb issued statement financial accounting standard sfas 151 “inventory costs” sfas requires abnormal spoilage expensed period incurred opposed inventoried amortized income inventory usage fixed production facility overhead costs allocated normal production level facility company implemented sfas 151 fourth quarter 2005 implementation sfas material impact company’s financial statements march 2005 fasb issued interpretation 47 fin 47 sfas 143 “accounting conditional asset retirement obligations” clarify term “conditional asset retirement obligations” used sfas 143 term refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity accordingly company required recognize liability fair value conditional asset retirement obligation fair value liability reasonably estimated interpretation effective later end fiscal year ending december 15 2005 retroactive application required company implemented fin 47 fourth quarter 2005 implementation fin 47 material impact company’s financial statements december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” sfas 123r sfas 123r effective company january 1 2006 sfas 123r requires companies recognize compensation costs related sharebased transactions well compensation based market performance company shares fair value basis company adopt sfas 123r first quarter 2006 using modified prospective method modified prospective method requires company recognize compensation costs sharebased grants made january 1 2006 well unrecognized cost unvested awards date adoption upon adoption sfas 123r company recognize sharebased compensation costs service period earlier employees’ retirement eligibility date stated vesting period award grants issued retirement eligible employees prior adoption sfas 123r company recognize compensation costs stated vesting period acceleration unrecognized compensation costs upon retirement employee sfas 123r also amends sfas 95 “statement cash flows” require excess tax benefits reflected operating cash flows reflected financing cash flows note 1 “summary significant accounting policies” item 8 financial statements supplementary data 10k presents pro forma disclosures reflecting effect net incomeloss stock based compensation applied sfas 123 “accounting stockbased compensation” fair value method result adoption sfas 123r company’s 2006 compensation expense stock options deferred stock units expected consistent 2005 pro forma amounts could lower based timing number individual grants company’s stock price assumptions necessary estimate fair value addition company two compensation plans accounted sfas 123r liabilitybased plans ultimate cash payout liabilitybased plans based company’s stock price performance compared stock price performance peer group change accounting required sfas 123r result cumulative effect 26 million income january 1 2006 order recognize difference company’s previously accrued liability reported accounting principles board apb opinion number 25 fair value liability plans future operating results impacted fluctuation fair value liability plans required remeasured reporting date critical accounting policies following accounting policies considered significant changes certain judgments assumptions inherent policies could affect company’s financial statements • revenue recognition • rebates discounts returns • provision income taxes • impairment intangible assets property • accounting pensions postretirement benefit plans • accounting legal regulatory matters revenue recognition company’s pharmaceutical products sold direct purchasers eg wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies well indirect purchasers market participants eg managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers company recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue company estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period estimates recorded prior periods reevaluated part process reliable estimates items cannot made company defers recognition revenue recognition new products based specific facts circumstances including estimated acceptance rates established products similar marketing characteristics absent ability make reliable estimates rebates discounts returns company would defer revenue recognition product discounts granted based terms arrangements wholesalers managedcare organizations government purchasers well market conditions including prices charged competitors rebates estimated based sales terms historical experience trend analysis projected market conditions various markets served company evaluates market conditions products groups products primarily analysis third party demand market research data well internally generated information data information provided purchasers obtained third parties subject inherent limitations accuracy validity sales returns generally estimated recorded based historical sales returns information analysis recent wholesale purchase information consideration stocking levels wholesalers forecasted demand amounts products exhibit unusual sales return patterns due dating competition marketing matters specifically investigated analyzed part formulation return reserves 2004 company entered agreements major us pharmaceutical wholesalers agreements deal number commercial issues product returns timing payment processing chargebacks quantity inventory held wholesalers respect quantity inventory held wholesalers agreements provide financial disincentive wholesalers acquire quantities product excess necessary meet current patient demand use monitoring noted agreements company expects avoid situations company’s shipments product reflective current demand rebates discounts returns rebate accruals federal state governmental programs 144 million december 31 2005 155 million december 31 2004 commercial discounts rebate accruals 378 million december 31 2005 382 million december 31 2004 rebate accruals established period related revenue recognized resulting reduction sales establishment liabilities included total current liabilities case governmental rebate programs company’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy company’s obligations additional information governmental inquiries focused part calculation rebates contained note 19 “legal environmental regulatory matters” item 8 financial statements supplementary data 10k addition possible result governmental challenges changes interpretive guidance actual rebates could materially exceed amounts accrued following summarizes activity accounts related accrued rebates sales returns discounts management makes estimates uses assumptions recording accruals actual amounts paid current period consistent previously estimated certain prior year amounts conformed reflect current year presentation provision income taxes december 31 2005 taxes provided approximately 31 billion undistributed earnings international subsidiaries company considers earnings permanently reinvested international subsidiaries company’s potential tax exposures result varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property although company’s cross border arrangements affiliates based upon internationally accepted standards tax authorities various jurisdictions may disagree subsequently challenge amount profits taxed country reasonably possible ultimate resolution tax matters could materially affect shareholders’ equity liquidity andor cash flows company believes accrual tax contingencies adequate open years based past experience interpretations tax law judgments potential actions taxing authorities company accrues liabilities identified tax contingencies result tax positions taken could challenged tax authorities company believes tax reserves reflect probable outcome identified tax contingencies reasonably possible ultimate resolution tax matters may materially greater less amount accrued company records valuation allowance reduce deferred tax assets amount likely realized company considered ongoing prudent feasible tax planning strategies assessing need valuation allowance event company determine would able realize additional portion net deferred tax assets adjustment valuation allowance would increase income period determination made likewise company subsequently determine would able realize additional portion remaining net deferred tax asset future adjustment deferred tax asset would charged income period determination made impairment intangible assets property intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 569 million december 31 2005 annual amortization expense next five years estimated approximately 50 million per year based intangible assets recorded december 31 2005 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment many company’s manufacturing sites operate capacity overall costs operating manufacturing sites significantly increased due consent decree compliance activities company’s manufacturing cost base relatively fixed actions part management significantly reduce company’s manufacturing infrastructure involve complex issues cases shifting products manufacturing plants take many years due construction revalidation registration requirements management continues review carrying value certain manufacturing assets indications impairment future events decisions may lead asset impairments andor related costs accounting pension postretirement benefit plans pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions company assesses pension postretirement benefit plan assumptions regular basis evaluating assumptions company considers many factors including evaluation discount rate expected rate return plan assets healthcare cost trend rate retirement age assumption company’s historical assumptions compared actual results analysis current market conditions asset allocations see note 6 “retirement plans postretirement benefits” item 8 financial statements supplementary data 10k additional information discount rates used pension postretirement benefit plan calculations evaluated annually modified reflect prevailing market rate measurement date highquality fixed income debt instrument portfolio would provide future cash flows needed pay benefits included benefit obligations come due countries debt instruments thinly traded estimates based available market rates actuarial assumptions based upon management’s best estimates judgment increase 50 basis points discount rate assumption assumptions held constant would estimated 21 million favorable impact net pension postretirement benefit cost increase 50 basis points expected rate return assumption assumptions held constant would estimated 8 million favorable impact net pension postretirement benefit cost expected rates return pension postretirement benefit plans represent average rates return earned plan assets period benefits included benefit obligation paid developing expected rate return company determines expected returns major asset classes principally equities fixed income real estate return expectations asset classes based assumptions economic growth inflation supported long term historical data well company’s actual experience return plan assets expected portfolio performance also reflects contribution active management appropriate unrecognized net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions expected returns based primarily calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns majority assets realized marketrelated value assets ratably fiveyear period total unrecognized net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees targeted investment portfolio company’s us pension plan allocated 65 percent equities 28 percent fixed income investments 7 percent real estate targeted investment portfolio company’s us postretirement benefit plans allocated 70 percent equities 30 percent fixed income investments portfolios’ equity weightings consistent longterm nature plans’ benefit obligations nonus pension plans targeted investment portfolio varies based duration pension liabilities local governmental rules regulations substantially investments equities fixed income valued based quoted public market values investments real estate valued based periodic appraisals accounting legal regulatory matters management judgments estimates required accounting legal regulatory matters ongoing basis including insurance coverages company reviews status claims investigations legal proceedings ongoing basis time company may settle otherwise resolve matters terms conditions management believes best interests company resolution claims investigations legal proceedings individually aggregate could material adverse effect company’s results operations cash flows financial condition market risk disclosure company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk company subsidiaries 50 countries 2005 sales outside us accounted approximately 62 percent global sales virtually sales denominated currencies local country company’s reported profits cash flows exposed changing exchange rates date management deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments company’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provides level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact company’s international operations widespread addition point time company’s international subsidiaries hold financial assets liabilities denominated currencies us dollars financial assets liabilities consist primarily shortterm third party intercompany receivables payables changes exchange rates affect translated value financial assets liabilities gains losses arise translation affect net income occasion company used derivatives hedge specific shortterm risk situations involving foreign currency exposures however derivative transactions material interest rate equity price risk financial assets exposed changes interest rates andor equity prices primarily cash equivalents shortterm investments debt equity securities held nonqualified trusts employee benefits assets totaled 57 billion december 31 2005 cash equivalents shortterm investments 10 percent decrease interest rates would decrease interest income approximately 15 million securities held nonqualified trusts due longterm nature liabilities trust assets fund company’s exposure market risk deemed low financial obligations exposed variability interest rates primarily shortterm borrowings company maintains investment portfolio excess amount borrowings accordingly company mitigated exposure changes interest rates relating financial obligations company longterm debt outstanding 10 percent decrease interest rates would increase fair value debt approximately 120 million however company expect refund debt disclosure notice cautionary statements private securities litigation reform act 1995 management’s discussion analysis financial condition results operations sections report written reports oral statements made time company may contain forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements relate strictly historical current facts based current expectations forecasts future events identify forwardlooking statements use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” similar words terms particular forwardlooking statements include statements relating future actions ability access capital markets prospective products product approvals timing conditions regulatory approvals patent intellectual property protection future performance results current anticipated products sales efforts research development programs estimates rebates discounts returns expenses programs reduce expenses cost savings reductions work force outcome contingencies litigation investigations growth strategy financial results forwardlooking statements publications may turn wrong guarantees company’s financial operational performance company’s stock company assume obligation update forwardlooking statement many factors could cause actual results differ company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors refer item 1a risk factors report incorporate herein reference identification important factors respect risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations executive summary overview scheringplough innovationdriven sciencecentered global health care company scheringplough discovers develops manufactures pharmaceuticals three customer markets human prescription animal health consumer research development activity directed toward prescription products important applications central research development platform animal health products consumer health care products scheringplough also accesses external innovation via partnering inlicensing acquisition three customer markets strategy focused science earlier decade scheringplough experienced number business regulatory legal challenges april 2003 board directors named fred hassan new chairman board chief executive officer scheringplough corporation support board initiated strategic plan goal stabilizing repairing turning around scheringplough order build longterm shareholder value also installed new senior executive team strategic plan action agenda six eightyear fivephase plan scheringplough currently fourth phase action agenda build base build base phase scheringplough continues focus strategy value creation across broad front believes organon biosciences nv obs acquisition major transformative accomplishment regard obs acquisition added diversification marketed products including two new therapeutic areas women’s health central nervous system well significant strength animal health products pipeline accomplishments 2007 include • growing business example double digit sales growth three product groups human pharmaceuticals animal health consumer health care • penetrating new markets including china brazil russia • expanding product portfolio scheringplough’s three customer groups human pharmaceutical animal health consumer health care • discovering developing acquiring new products key component action agenda applying science meet unmet medical needs research development activities focus mechanisms treat serious diseases result core strategy scheringplough invest substantial funds scientific research goal creating therapies treatments address important unmet medical needs also commercial value scheringplough successful advancing pipeline several latestage projects require sizable resources complete consistent core strategy scheringplough increasing investment research development scheringplough continues develop later phase growthdrivers pipeline eg sugammadex thrombin receptor antagonist golimumab vicriviroc boceprevir asenapine anticipates higher spending clinical trial activities scheringplough’s progressing early pipeline includes drug candidates across wide range therapeutic areas 20 compounds approaching phase development part action agenda scheringplough continues work enhance infrastructure upgrade processes systems strengthen talent recruitment talented individuals development key employees efforts implemented companywide basis scheringplough focusing especially research development support scheringplough’s sciencebased business integration obs employees scheringplough much new talent added addition part integration obs scheringplough also announced workforce reduction eliminate redundancies results highlights scheringplough’s performance 2007 follows • closed acquisition obs november 19 2007 purchase price approximately euro 11 billion • scheringplough’s net sales 2007 127 billion increase 21 billion 20 percent compared 2006 period 2007 net sales included 626 million sales products acquired part obs acquisition • net loss available common shareholders 2007 16 billion compared net income available common shareholders 11 billion 2006 included 2007 net loss approximately 40 billion charges related purchase accounting obs acquisition including 38 billion acquired inprocess research development charge cash flow provided operating activities 26 billion 2007 • global sales scheringplough’s cholesterol franchise products vytorin zetia made cholesterol joint venture merck company inc merck continued grow 2007 contributed significantly scheringplough’s improved operating results cash flow see note 2008 developments addition increased sales pharmaceutical products remicade temodar nasonex also contributed favorably scheringplough’s overall operating results cash flow additional strength scheringplough developed 2007 four years since mr hassan new management team began action agenda key scheringplough current environment pharmaceutical industry continues subject evermore critical scrutiny events mischaracterized drive amplified reactions scheringplough believes new scientific data best presented discussed appropriate scientific medical forums early 2008 developments relating cholesterol franchise explained detail part item 3 “legal proceedings” “enhance matter” early 2008 scheringplough encountered challenge results merckscheringplough cholesterol joint venture clinical trial called enhance joint venture products zetia vytorin became subject much media scrutiny prior fuller discussions trial results appropriate medical forums discussion scheduled american college cardiology meeting march 30 2008 medical experts health advisory groups long recognized high ldl cholesterol often known “bad cholesterol” significant cardiovascular risk factor recommended increasingly aggressive treatment high cholesterol certain patients lowering ldl cholesterol along healthy diet lifestyle changes remains cornerstone lipid treatment patients risk heart disease clinical studies including enhance demonstrated vytorin lowers patients’ ldl cholesterol rosuvastatin atorvastatin simvastatin doses studied able get patients ldl cholesterol goals defined atp iii early tell impact joint venture’s enhance trial results joint ventures’ cholesterol business scheringplough’s diversified group products geographic areas well highly experienced executive team gives scheringplough additional strength helpful weathering situation strategic alliances typical pharmaceutical industry scheringplough licenses manufacturing marketing andor distribution rights certain products others also manufactures markets andor distributes products owned others pursuant licensing joint venture arrangements time third parties involved additional factors relating third party outside control scheringplough may create positive negative impacts scheringplough vytorin zetia remicade subject arrangements key scheringplough’s current business financial performance addition potential strategic alternatives may impacted change control provisions arrangements could result vytorin zetia acquired merck remicade reverting back centocor change control provision relating vytorin zetia included contract merck filed exhibit 10r scheringplough’s 10k change control provision relating remicade contained contract centocor filed exhibit 10v scheringplough’s 10k cholesterol franchise scheringplough’s cholesterol franchise products vytorin zetia managed joint venture scheringplough merck treatment elevated cholesterol levels markets outside japan zetia scheringplough’s novel cholesterol absorption inhibitor vytorin combination zetia zocor simvastatin statin medication developed merck financial commitment compete cholesterol reduction market shared merck profits sales vytorin zetia also shared merck operating results joint venture merck recorded using equity method accounting cholesterolreduction market single largest pharmaceutical category world vytorin zetia competing market combined basis products continued grow terms sales market share 2007 see note 2008 developments material change sales market share scheringplough’s cholesterol franchise would significant impact scheringplough’s consolidated results operations cash flows order maintain enhance infrastructure business scheringplough must continue increase profits increased profitability largely dependent upon performance scheringplough’s cholesterol franchise japan included joint venture merck japanese market bayer healthcare comarketing scheringplough’s cholesterolabsorption inhibitor zetia approved japan april 2007 monotherapy coadministered statin use patients hypercholesterolemia familial hypercholesterolemia homozygous sitosterolemia zetia launched japan june 2007 scheringplough’s sales zetia japan comarketing agreement bayer healthcare recognized net sales license arrangements centocor remicade prescribed treatment inflammatory diseases rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis remicade scheringplough’s second largest marketed pharmaceutical product line cholesterol franchise remicade licensed manufactured centocor inc johnson company 2005 scheringplough exercised option contract centocor license rights develop commercialize golimumab fully human monoclonal antibody currently phase iii trials scheringplough exclusive marketing rights products outside us japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade golimumab extending scheringplough’s rights exclusively market remicade match duration scheringplough’s exclusive marketing rights golimumab effective upon regulatory approval golimumab eu scheringplough’s marketing rights products extend 15 years first commercial sale golimumab within eu centocor receive progressively increased share profits scheringplough’s distribution products scheringplough marketing territory 2010 2014 share profits remain fixed thereafter remainder term changes duration remicade marketing rights profit sharing arrangement products conditioned approval golimumab granted prior september 1 2014 scheringplough may independently develop market golimumab crohn’s disease indication territories option centocor participate addition scheringplough centocor agreed utilize autoinjector device commercialization golimumab agreed share development costs rights device scheringplough made upfront payment 21 million included research development expenses year ended december 31 2007 manufacturing sales marketing scheringplough supports commercialized products manufacturing sales marketing efforts scheringplough also moving forward additional investments enhance infrastructure business including capital expenditures drug development process products moved drug discovery pipeline markets information technology systems postmarketing studies monitoring scheringplough continually reviews business including manufacturing operations identify actions enhance longterm competitiveness however scheringplough’s manufacturing cost base relatively fixed actions significantly reduce scheringplough’s manufacturing infrastructure including obs’ manufacturing operations acquired 2007 involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements time actions taken enhance scheringplough’s overall manufacturing efficiency example 2006 scheringplough closed manufacturing plant puerto rico 2007 began process closing small manufacturing facility asia pacific region scheringplough continues review carrying value manufacturing assets indications impairment future events decisions may lead additional asset impairments related costs regulatory competitive environment scheringplough subject jurisdiction various national state local regulatory agencies regulatory compliance complex costly impacting timing needed bring new drugs market drugs new indications scheringplough engages clinical trial research many countries around world research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu member states clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products number intermediaries involved drug manufacturers scheringplough patients use drugs intermediaries impact patient’s ability precribers’s ability choose pay particular drug intermediaries include health care providers hospitals clinics payors representatives employers insurers managed care organizations governments others supply chain pharmacists wholesalers us many scheringplough’s pharmaceutical products subject increasingly competitive pricing certain intermediaries including managed care groups institutions government agencies seek price discounts international markets scheringplough operates environment government mandated costcontainment programs also pricing sales marketing programs arrangements related business practices scheringplough participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors loss patent protection due challenges competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature obs acquisition november 19 2007 scheringplough acquired obs purchase price approximately euro 11 billion cash approximately 161 billion commencing acquisition date obs’ assets acquired liabilities assumed well results obs’ operations included scheringplough’s consolidated financial statements approximately one onehalf months results operations relating obs included scheringplough’s statement consolidated operations year ended december 31 2007 impact purchase accounting based preliminary valuation resulted following noncash charges 2007 • acquired inprocess research development iprd onetime charge approximately 38 billion • amortization inventory adjusted fair value approximately 11 billion charged cost sales 258 million 2007 approximately one year period acquisition date • amortization acquired intangible assets adjusted fair value 68 billion amortized weighted average life 15 years cost sales 65 million 2007 • incremental depreciation relating adjustment fair value property plant equipment 885 million depreciated primarily cost sales lives applicable property 3 million 2007 38 billion acquired iprd charge associated research projects women’s health central nervous system anesthesia therapeutic areas human health well research projects animal health amount determined using discounted cash flow projections identified research projects technological feasibility established alternative future use discount rates used ranged 14 percent 18 percent projected launch dates following fda regulatory approval years 2008 2013 time scheringplough expects projects begin generate cash flows research development projects considered valuation subject normal risks uncertainties associated demonstrating safety efficacy required obtain fda regulatory approvals discussion operating results operations 2007 discussed include obs’ product sales expenses well certain noncash charges relating purchase accounting associated obs acquisition net sales significant portion net sales made major pharmaceutical health care product distributors major retail chains us consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler retail trade buying decisions changes overall demand factors addition fluctuations sales many pharmaceutical products us subject increased pricing pressure managed care groups institutions government agencies groups seeking discounts scheringplough pharmaceutical manufacturers us market also required provide statutorily defined rebates various government agencies order participate medicaid program veterans health care program governmentfunded programs medicare prescription drug improvement modernization act 2003 contains prescription drug benefit individuals eligible medicare prescription drug benefit became effective january 1 2006 resulting increased use generics increased purchasing power negotiating behalf medicare recipients international markets scheringplough operates environment governments may mandated costcontainment programs placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs consolidated net sales 2007 127 billion increase 21 billion 20 percent compared 2006 consolidated net sales 2007 included 626 million obs’ net sales related period subsequent acquisition increase also reflects growth sale volumes remicade temodar nasonex avelox well contributions animal health consumer health care favorable impact 4 percent foreign exchange consolidated net sales 2006 106 billion increase 11 billion 11 percent compared 2005 increase primarily reflected growth sale volumes remicade nasonex pegintron temodar increase also reflected unfavorable impact 1 percent foreign exchange net sales years ended december 31 2007 2006 2005 follows nm meaningful percentage sales human prescription pharmaceuticals 2007 totaled 102 billion 16 billion 19 increase compared 2006 included 2007 409 million net sales related organon human health business obs sales human prescription pharmaceuticals 2006 totaled 86 billion 10 billion 13 increase compared 2005 international net sales remicade drug treatment immunemediated inflammatory disorders rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis 33 percent 16 billion 2007 compared 2006 driven continued market growth expanded use across indications favorable impact foreign exchange global net sales increased 32 percent 2006 12 billion compared 2005 due greater demand expanded indications continued market growth competitive products indications referred introduced 2006 2007 global net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies rose 16 percent 11 billion 2007 compared 2006 due increased sales across geographic regions 28 percent 944 million 2006 compared 2005 product captured greater us international market share 2006 competitive products introduced 2007 global net sales pegintron powder injection pegylated interferon product treating hepatitis c increased 9 percent 911 million 2007 compared 2006 due higher sales latin america emerging markets across europe tempered lower sales japan due increased competition decrease us market size global net sales increased 11 percent 837 million 2006 compared 2005 reflecting higher sales volume japan us japan sales 2005 benefited significant number patients waiting approval pegintron beginning treatment global net sales temodar capsules treatment certain types brain tumors increased 22 percent 861 million 2007 compared 2006 due increased sales across geographic markets including japan product launched september 2006 global net sales increased 20 percent 703 million 2006 compared 2005 due increased utilization new indications global net sales clarinex marketed aerius many countries outside us treatment seasonal outdoor allergies yearround indoor allergies 2007 increased 11 percent 799 million compared 2006 primarily due higher sales international markets global net sales 2006 increased 12 percent 722 million compared 2005 due increased demand europe latin america well increased sales us despite slightly declining market share international net sales prescription claritin increased 10 percent 391 million 2007 compared 2006 reflecting growth latin america asia pacific japan sales 2006 decreased 4 percent 356 million compared 2005 net sales avelox fluoroquinolone antibiotic treatment certain respiratory skin infections sold primarily us scheringplough result license agreement bayer increased 26 percent 384 million 2007 compared 2006 primarily result increased market share net sales 2006 increased 34 percent 304 million 2006 compared 228 million 2005 due share growth new indications global net sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndrome sold primarily us scheringplough increased 1 percent 332 million 2007 compared 2006 sales increased 5 percent 329 million compared 2005 global 2007 net sales rebetol capsules use combination pegintron intron treating hepatitis c decreased 11 percent 277 million compared 2006 due lower patient enrollment japan increased generic competition global net sales 2006 decreased 6 percent 311 million compared 2005 due lower sales europe increased competition japan sales 2005 benefited significant number patients waiting approval pegintron beginning hepatitis c treatment international net sales caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma increased 25 percent 257 million 2007 compared 2006 primarily due increased sales latin america favorable impact foreign exchange sales 2006 increased 13 percent 206 million compared 2005 primarily due expanding market product global net sales intron injection chronic hepatitis b c antiviral anticancer indications decreased 2 percent 233 million 2007 compared 2006 17 percent 2006 237 million compared 2005 decrease 2007 2006 due conversion pegintron treating hepatitis c japan international net sales subutexsuboxone treatment opiate addiction increased 8 percent 220 million 2007 compared 2006 result benefit foreign exchange sales increased 3 percent 203 million 2006 compared 2005 due increased market share october 2006 suboxone approved eu including 25 member states well iceland norway treatment opioid dependence global net sales asmanex orally inhaled steroid asthma 57 percent 162 million 2007 compared 2006 primarily due market share growth us sales increased 103 million 2006 compared 2005 due asmanex launch commencing late 2005 pharmaceutical net sales include net sales organon date acquisition december 31 2007 large number lower sales volume human prescription pharmaceutical products net sales organon 409 million 2007 included 57 million follistimpuregon fertility treatment 45 million nuvaring contraception product also included pharmaceutical sales several lower volume products often sold limited markets outside us many multiple source products longer protected patents products include treatments respiratory cardiovascular dermatological infectious oncological diseases included pharmaceutical sales scheringplough’s albuterol products 2005 fda issued final rule requires cfc albuterol products including scheringplough’s proventil cfc removed market later december 31 2008 scheringplough’s transition albuterol hfa proventil hfa complete scheringplough longer manufactures cfc product remaining cfc inventories sold 2007 scheringplough uncertain ultimate impact scheringplough’s overall future sales proventil hfa due complexities multiple external factors influencing transition including competing albuterol hfa products global net sales animal health products increased 37 percent 13 billion 2007 compared 2006 included global animal health net sales 217 million related intervet animal health business obs period subsequent acquisition global net sales 2007 also benefited solid growth geographic areas led cattle companion animal product lines coupled positive impact foreign currency exchange rates global net sales increased 7 percent 2006 910 million compared 2005 reflecting strong growth core brands across geographic species areas led higher sales companion animal products animal health segment’s sales growth rate impacted intense competition frequent introduction generic products global net sales consumer health care products include otc foot care sun care products increased 13 percent 143 million compared 2006 increase 2007 primarily due sales miralax launched february 2007 first rxtootc switch laxative category 30 years higher sales otc claritin global net sales 2006 increased 3 percent 30 million compared 2005 reflecting increase sales sun care products dr scholl’s foot care products sales otc claritin increased 18 percent 462 million 2007 compared 2006 due sales growth across product forms otc claritin sales decreased 1 percent 2006 compared 2005 result restrictions retail sale otc products containing pseudoephedrine pse addition otc claritin continues face competition private labels branded loratadine competing prescription antihistamine launched otc sale early 2008 net sales sun care products increased 17 million 8 percent 2007 compared 2006 due coppertone continuous spray line extensions 18 million 9 percent 2006 compared 2005 primarily due success new coppertone continuous spray products launched 2005 future sales consumer health care segment difficult predict consumer health care market highly competitive heavy advertising consumers frequent competitive product introductions costs expenses equity income summary costs expenses equity income years ended december 31 2007 2006 2005 follows nm meaningful percentage substantially sales cholesterol products included scheringplough’s net sales results sales reflected equity income addition due virtual nature joint venture scheringplough incurs substantial selling general administrative expenses captured equity income included scheringplough’s statements consolidated operations result scheringplough’s gross margin ratios sga expenses rd expenses percentage net sales reflect benefit impact joint venture’s operating results gross margin gross margin 653 percent 2007 compared 651 percent 2006 gross margin 2007 unfavorably impacted 326 million purchase accounting adjustments included cost sales purchase accounting adjustments result amortization fair values certain assets acquired part obs acquisition gross margin 2007 compared 2006 benefited realized cost savings approximately 100 million manufacturing streamlining 2006 nonrecurrence 146 million charges associated aforementioned manufacturing streamlining actions favorable product mix despite negative impacts cost sales costs resulting scheringplough’s actions streamline manufacturing operations 2006 gross margin increased 651 percent 2006 648 percent 2005 improvement gross margin primarily due increased sales higher margin products process improvements within scheringplough’s supply chain including cost savings manufacturing streamlining activities completed 2006 cost sales included charges totaling 146 million associated scheringplough’s actions streamline manufacturing operations offset savings approximately 30 million result actions see note 3 “special acquisition related charges manufacturing streamlining” item 8 “financial statements supplemental data” additional information selling general administrative selling general administrative expenses sga increased 16 percent 55 billion 2007 compared 2006 included sga 2007 227 million obs addition increase sga reflects higher promotion spending ongoing investments emerging markets unfavorable impact foreign exchange sga increased 8 percent 47 billion 2006 compared 2005 reflecting ongoing investments emerging markets field support product launches well higher promotional spending research development research development rd spending increased 34 percent 29 billion 2007 compared 2006 period included rd 2007 111 million obs also included rd upfront payments 197 million mainly related certain licensing transactions increase rd spending versus 2006 also reflects higher spending clinical trials related activities investments build greater breadth capacity support continued expansion scheringplough’s pipeline 2006 rd spending increased 17 percent 22 billion compared 2005 period 2006 increase due higher costs associated clinical trials well building greater breadth capacity support scheringplough’s progressing pipeline generally changes rd spending reflect timing scheringplough’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products maximize scheringplough’s chances successful development new products scheringplough began development excellence initiative 2005 build talent critical mass create uniform level excellence deliver highpriority programs within rd 2006 scheringplough began global clinical harmonization program maximize globalize quality clinical trial execution pharmacovigilance regulatory processes 2007 certain aspects global clinical harmonization program implemented acquired inprocess research development acquired inprocess research development charge 38 billion 2007 result obs acquisition represents immediate expense recognition fair value acquired research projects technological feasibility established alternative future use incomeexpense net scheringplough income net 683 million 2007 compared 135 million income net 2006 expense net 5 million 2005 income net 2007 included net realized gains foreign currency options 510 million related obs acquisition increase income net 2007 also reflected higher interest income due higher balances cash equivalents shortterm investments partially offset higher interest expense due issuance new debt special acquisition related charges manufacturing streamlining special acquisition related charges year ended december 31 2007 scheringplough incurred 84 million special acquisitionrelated charges comprised 61 million integrationrelated costs obs acquisition 23 million severance charges part integration activities manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamlined global supply chain enhanced scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new jersey total actions resulted elimination 1000 positions scheringplough expects actions yield annualized cost savings approximately 100 million special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 special charge activities special charges incurred 2005 follows litigation charges 2005 litigation reserves increased 250 million increase resulted total reserve 500 million massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 20 “legal environmental regulatory matters” representing scheringplough’s current estimate resolve matter august 29 2006 scheringplough announced reached agreement us attorney’s office district massachusetts us department justice settle massachusetts investigation aggregate amount 435 million plus interest settlement amount relates massachusetts investigation awp investigations litigation ongoing 2007 scheringplough made payments totaling 435 million related settlement employee termination costs employee termination costs 2005 consisted 7 million associated voluntary early retirement program verp us 2003 21 million employee termination costs asset impairment charges year ended december 31 2005 scheringplough recognized asset impairment charges 16 million related primarily consolidation scheringplough’s us biotechnology organizations equity income sales merckscheringplough cholesterol joint venture totaled 52 billion 39 billion 24 billion 2007 2006 2005 respectively sales growth 2007 due primarily higher market share market growth us continued expansion international markets sales growth 2006 due primarily increase market share companies bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement company physician details set annual basis italy contractual amount included profit sharing calculation reimbursed us canada puerto rico amount equal company’s physician details multiplied contractual fixed fee scheringplough reports amounts part equity income amounts represent reimbursement specific incremental identifiable costs scheringplough’s detailing cholesterol products markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher costs joint venture companies contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally scheringplough merck certain conditions specified joint venture agreements merck scheringplough could entitled receive reimbursements future research development expenses 105 million additional information regarding joint venture merck also included note 4 “equity income” item 8 “financial statements supplementary data” equity income merckscheringplough joint venture totaled 20 billion 15 billion 873 million 2007 2006 2005 respectively increase 2007 equity income compared 2006 reflected higher market share us international sales growth increase 2006 equity income compared 2005 reflected continued strong sales vytorin zetia 2005 scheringplough recognized milestones merck 20 million related certain european approvals vytorin ezetimibesimvastatin 2005 noted scheringplough incurs substantial selling general administrative costs reflected equity income instead included overall cost structure scheringplough provision income taxes tax expense 258 million 362 million 228 million 2007 2006 2005 respectively 2007 tax provision included tax benefits 89 million related amortization fair values certain assets acquired part obs acquisition 2006 income tax provision primarily relates foreign taxes 2005 tax provision includes benefit 46 million related irs notice issued august 2005 resulted reduction previously accrued tax liability attributable repatriations american jobs creation act 2004 ajca tax provisions 2007 2006 2005 include benefit related us operating losses 2004 scheringplough established valuation allowance net us deferred tax assets including benefit us operating losses management concluded likely benefit us net deferred tax assets realized december 31 2007 scheringplough continues maintain valuation allowance us net deferred tax assets scheringplough expects report us net operating loss nol carryforward 17 billion tax return year ended december 31 2007 us nol carryforward could materially reduced examination scheringplough’s income tax returns internal revenue service irs 2007 scheringplough generated approximately 980 million us losses including impact purchase accounting however due differences financial tax reporting scheringplough expects report minimal increase nol 2007 us tax return scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 20 “legal environmental regulatory matters” item 8 “financial statements supplemental data” additional information january 1 december 31 2007 total amount unrecognized tax benefits 924 million 859 million respectively includes reductions deferred tax assets carrying full valuation allowance potential refund claims tax liabilities january 1 december 31 2007 approximately 645 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period 615 million decrease would primarily attributable decision tax matter currently litigated newark district court possible final resolution scheringplough’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment andor receipt related cash dependent number factors many outside scheringplough’s control scheringplough includes interest expense income well potential penalties related tax positions component income tax expense statement consolidated operations total amount accrued interest related tax positions january 1 december 31 2007 193 million 197 million respectively included accrued liabilities second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns scheringplough seeking resolution issue raised examination irs administrative appeals process scheringplough remains open irs 1997 2007 tax years significant tax jurisdictions us state foreign scheringplough’s income tax returns open examination period 2000 2007 net lossincome available common shareholders scheringplough net lossincome available common shareholders 16 billion 11 billion 183 million 2007 2006 2005 respectively net loss available common shareholders 2007 included approximately 40 billion charges related purchase accounting obs acquisition including 38 billion acquired inprocess research development charge net loss available common shareholders 2007 included deduction preferred stock dividends 118 million related 2004 2007 preferred stock net income available common shareholders 2006 2005 included deduction preferred stock dividends 86 million period related 2004 preferred stock net lossincome available common shareholders 2007 2006 2005 also included special acquisition related charges manufacturing streamlining costs approximately 84 million 248 million 294 million respectively see note 3 “special acquisition related charges manufacturing streamlining” item 8 “financial statements supplementary data” additional information liquidity financial resources discussion cash flow operating activities 2007 operating activities provided 26 billion cash compared net cash provided operations 22 billion 2006 increase primarily due net realized gain 510 million foreign currency options relating obs acquisition higher net sales equity income partially offset payments 435 million settlement massachusetts investigation 98 million tax interest due connection examination irs scheringplough’s 19972002 federal income tax returns 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options derivatives aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives shortterm trading nature hedge specific financing investment transaction accordingly cash impacts derivatives classified operating cash flows statement consolidated cash flows 2006 net cash provided operating activities 22 billion increase 13 billion compared 2005 increase primarily resulted higher net income timing operating cash payments receipts 2005 operating activities generated 882 million cash including payments approximately 375 million tax authorities tax liabilities related repatriation foreign earnings ajca tax payments 239 million related settlement certain tax contingencies tax years 1993 1996 investing activities net cash used investing activities 2007 132 billion primarily consisting 158 billion net cash used purchase obs addition source cash investing activities included net reduction shortterm investments 33 billion partially offset 618 million capital expenditures net cash used investing activities 2006 29 billion primarily related net purchases shortterm investments 24 billion previously invested cash equivalents 458 million capital expenditures net cash used investing activities 2005 454 million primarily related 478 million capital expenditures purchase intangible assets 51 million partially offset proceeds sales property equipment 43 million net reduction shortterm investments 33 million financing activities net cash provided financing activities 101 billion 2007 compared cash used 14 billion period 2006 net cash provided financing activities 2007 included net proceeds issuance common mandatory convertible preferred shares approximately 15 billion 24 billion respectively net proceeds approximately 64 billion issuance longterm debt net cash provided financing activities also included 225 million proceeds stock option exercises offset payment dividends common preferred shares 481 million net cash used financing activities 2006 2005 14 billion 633 million respectively uses cash financing activities 2006 2005 include payment dividends common preferred shares 412 million 410 million respectively repayment 10 billion bank debt shortterm commercial paper borrowings 2006 12 billion shortterm commercial paper borrowings 2005 uses cash financing activities 2005 partially offset proceeds 900 million bank debt incurred foreign subsidiary related funding portion repatriations ajca 2005 bank debt fully repaid 2006 discussion cash flows scheringplough moving forward additional investments enhance infrastructure business currently process building us pharmaceutical sciences center new jersey capital expenditures approximately 50 million 40 million made 2007 2006 respectively related center additional capital expenditures approximately 175 million expected next two years center allow scheringplough streamline integrate drug development process products moved drug discovery pipeline market additional related expenditures upgrade equipment staffing center december 31 2007 scheringplough net debt total debt less cash equivalents shortterm investments marketable securities 71 billion cash generated operations available cash shortterm investments available credit facilities expected provide scheringplough ability fund cash needs intermediate term borrowings credit facilities september 17 2007 scheringplough issued 10 billion aggregate principal amount 600 percent senior unsecured notes due 2017 10 billion aggregate principal amount 655 percent senior unsecured notes due 2037 net proceeds offering approximately 20 billion interest notes payable semiannually effective interest rate 600 percent senior unsecured notes 655 percent senior unsecured notes incorporates initial discount debt issuance fees 613 percent 667 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted redemption date semiannual basis using rate treasury notes comparable remaining terms plus 25 basis points 2017 notes 30 basis points 2037 notes change control triggering event occurs defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase october 1 2007 scheringplough issued euro 500 million aggregate principal amount 500 percent senior unsecured eurodenominated notes due 2010 euro 15 billion aggregate principal amount 5375 percent senior unsecured eurodenominated notes due 2014 net proceeds offering approximately 28 billion interest notes payable annually effective interest rate 500 percent senior unsecured eurodenominated notes 5375 percent senior unsecured eurodenominated notes incorporates initial discount debt issuance fees impact interest rate hedges 510 percent 546 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price specified prospectus change control triggering event occurs defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase scheringplough used net proceeds notes fund portion purchase price obs acquisition october 24 2007 scheringplough entered fiveyear senior unsecured eurodenominated term loan facility syndicate banks october 31 2007 scheringplough drew euro 11 billion 16 billion term loan fund portion purchase price obs acquisition new term loan floating interest rate requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing term loan term loan also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets reported us dollar amounts outstanding debt balance interest expense eurodenominated notes eurodenominated term loan fluctuate due impact foreign currency translation november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 interest rates payable notes subject adjustment connection ratings downgrades 2004 december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply notes subsequently rated baa1 moody’s bbb sp rating assigned notes either moody’s sp downgraded a3 respectively interest rate payable series notes would increase see note 14 “borrowings commitments” item 8 “financial statements supplementary data” additional information august 9 2007 scheringplough entered 20 billion revolving credit agreement syndicate banks terminated 15 billion credit facility due mature may 2009 credit facility floating interest rate matures august 2012 requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing credit facility credit facility also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets credit line available general corporate purposes considered support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2007 borrowings outstanding facility december 31 2007 2006 shortterm borrowings including credit facilities mentioned totaled 451 million 242 million respectively including outstanding commercial paper 149 million dates weightedaverage interest rate shortterm borrowings december 31 2007 2006 79 percent 64 percent respectively scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 “foreign currency translation” sfas 52 foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income credit ratings scheringplough’s current unsecured senior credit ratings outlook follows shortterm ratings discussed significantly affected scheringplough’s ability issue rollover outstanding commercial paper borrowings time however scheringplough believes ability commercial paper issuers scheringplough one shortterm credit ratings p2 moody’s a2 sp andor fitch issue rollover outstanding commercial paper times less companies higher shortterm credit ratings addition total amount commercial paper capacity available issuers typically less higherrated companies scheringplough’s sizable lines credit commercial banks well cash shortterm investments held us international subsidiaries serve alternative sources liquidity support commercial paper program scheringplough’s credit ratings could decline current levels impact decline could reduce availability commercial paper borrowing would increase interest rate portion scheringplough’s short longterm debt discussed scheringplough believes existing cash shortterm investments available credit facilities cash generated operations allow scheringplough fund cash needs intermediate term mandatory convertible preferred stock august 15 2007 scheringplough issued 10000000 shares 6 percent mandatory convertible preferred stock 2007 preferred stock face value 25 billion net proceeds scheringplough approximately 24 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale 2007 preferred stock fund portion purchase price obs acquisition share 2007 preferred stock automatically convert 74206 90909 common shares scheringplough depending average closing price scheringplough’s common shares 20 trading day period ending third trading day prior mandatory conversion date august 13 2010 defined prospectus preferred shareholders may elect convert time prior august 13 2010 minimum conversion ratio 74206 common shares per share 2007 preferred stock additionally time prior mandatory conversion date closing price scheringplough’s common shares exceeds 5053 least 20 trading days within period 30 consecutive trading days scheringplough may elect cause conversion less 2007 preferred stock outstanding minimum conversion ratio 74206 common shares share 2007 preferred stock 2007 preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent scheringplough legally permitted pay dividends board directors declares dividend payable scheringplough pay dividends dividend payment date dividend payment dates february 15 may 15 august 15 november 15 year first dividend paid november 15 2007 year ended december 31 2007 shares 6 percent mandatory convertible preferred stock issued august 10 2004 preferred stock converted 64584929 shares scheringplough common stock equity issuance treasury shares august 15 2007 scheringplough issued 57500000 common shares treasury shares 2750 per share net proceeds scheringplough approximately 15 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale common shares fund portion purchase price obs acquisition see note 2 “acquisition” item 8 “financial statements supplementary data” contractual obligations offbalance sheet arrangements scheringplough various contractual obligations reported liabilities consolidated balance sheets others required recognized liabilities certain purchase commitments executory contracts following table summarizes payments due period scheringplough’s known contractual obligations december 31 2007 1 longterm debt obligations include aggregate principal amount longterm debt excludes interest obligations see note 14 “borrowings commitments” item 8 “financial statements supplementary data” additional information 2 purchase obligations include advertising research contracts capital expenditure commitments inventory expense items unless material research milestone payments likely paid include potential milestone payments since payments contingent occurrence certain events table also excludes research contracts cancelable scheringplough without penalty purchase obligations consist cancelable noncancelable items 3 caption includes obligations based undiscounted amounts estimated payments certain scheringplough’s pension plans preferred stock dividends management’s estimate current portion unrecognized tax benefits contractual obligations regulatory competitive environment scheringplough operates scheringplough subject jurisdiction various national state local regulatory agencies regulations described detail part item business 10k regulatory compliance complex regulatory standards including good clinical practices good laboratory practices good manufacturing practices vary jurisdiction constantly evolving regulatory compliance also costly regulatory compliance also impacts timing needed bring new drugs market drugs new indications failure comply regulations result delays approval drugs seizure recall drugs suspension revocation authority necessary production sale drugs fines civil criminal sanctions regulatory compliance cost compliance failures material impact scheringplough’s results operations cash flows financial condition much still unknown science human health every drug benefits risks societal government pressures constantly shifting demand innovation meet urgent unmet medical needs adversity risk pressures impact regulatory environment market scheringplough’s products regulatory compliance pharmacovigilance consent decree august 2 2007 scheringplough announced dissolution consent decree us district court district new jersey see note 19 “consent decree” item 1 “financial statements” regulatory inspections scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert drug’s manufacturer governmental agency potential problems 2003 pharmacovigilance inspections officials british french medicines agencies conducted request european medicines agency emea cited serious deficiencies reporting processes scheringplough continued work longterm action plan rectify deficiencies provided regular updates emea fourth quarter 2005 local uk emea regulatory authorities conducted follow inspection assess scheringplough’s implementation action plan first quarter 2006 authorities also inspected usbased components scheringplough’s pharmacovigilance system inspectors acknowledged progress made since 2003 also continued note significant concerns quality systems supporting scheringplough’s pharmacovigilance processes similarly follow inspection scheringplough’s clinical trial practices uk inspectors identified issues respect scheringplough’s management clinical trials related pharmacovigilance practices february 2006 scheringplough began global clinical harmonization program building clinical excellence trial design execution tracking strengthen scheringplough’s scientific compliance rigor global basis 2007 certain aspects global clinical harmonization program implemented work expected continue 2008 several years addition fourth quarter 2007 local uk regulatory authority conducted followup inspection confirmed corrective actions committed scheringplough following 2006 inspection scheringplough’s ukbased clinical trial operations fact completed early january 2008 local uk regulatory authority returned followup inspection scheringplough’s ukpharmacovigilance operations inspection likewise confirmed number corrective actions completed since last inspection noted number actions scheringplough taken set forth scheringplough’s periodic updates emea noted limited number observations scheringplough addressing scheringplough intends continue upgrading skills processes systems clinical practices pharmacovigilance scheringplough remains committed accomplish work invest significant resources area scheringplough know action emea national authorities take response inspections possible actions include inspections demands improvements reporting systems criminal sanctions schering plough andor responsible individuals changes conditions marketing authorizations scheringplough’s products regulatory compliance postmarketing surveillance scheringplough engages clinical trial research many countries around world clinical trial research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities failure comply current good clinical practices applicable laws regulations result delays approval clinical trials suspension ongoing clinical trials delays approval marketing authorizations criminal sanctions scheringplough andor responsible individuals changes conditions marketing authorizations scheringplough’s products clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products addition situations raised concerns among prescribers patients relating safety efficacy pharmaceutical products general past several years occurrences increased recently media mischaracterization early topline results enhance clinical trail led concerns among patients prescribers zetia vytorin see discussion “early 2008 developments” executive summary management discussion analysis financial condition results operations scheringplough’s personnel regular open dialogue fda regulators review product labels materials regular basis new information becomes known following wave recent product withdrawals companies significant safety issues health authorities fda emea pmda continued increase focus safety assessing benefitrisk balance drugs health authorities appear become cautious making decisions approvability new products indications rereviewing select products already marketed adding uncertainties regulatory processes also greater regulatory scrutiny especially us advertising promotion particular directtoconsumer advertising similarly major health authorities including fda emea pmda also increased collaboration amongst especially regard evaluation safety benefitrisk information media attention also increased current environment health authority regulatory action one market safety labeling change may regulatory prescribing marketing implications markets extent previously seen health authorities pmda japan publicly acknowledged significant backlog workload due resource constraints within agency backlog caused long regulatory review times new indications products added uncertainty predicting approval timelines markets pmda committed correcting backlog made progress last year expected continue foreseeable future uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect scheringplough’s operations effect regulatory approval processes operations cannot predicted scheringplough nevertheless achieved significant number important regulatory approvals since 2004 including approvals vytorin noxafil clarinex d24 clarinex reditabs clarinex d12 suboxone new indications temodar nasonex significant approvals since 2004 include asmanex dpi dry powder inhalation us pegintron zetia temodar esmeroneslax japan new indications remicade scheringplough also number significant regulatory submissions filed major markets awaiting approval pricing pressures described specifically note 20 “legal environmental regulatory matters” item 1 “financial statements” pricing sales marketing programs arrangements related business practices scheringplough participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda federal trade commission ftc various state attorneys general offices many health care laws certain governmental entities operate including federal state antikickback statutes statutory common law false claims laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject scheringplough substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs scheringplough also cannot predict whether investigations affect marketing practices sales result could material adverse impact scheringplough’s results operations cash flows financial condition business us many scheringplough’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts us market scheringplough pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans health care program governmentfunded programs medicare prescription drug improvement modernization act 2003 contains prescription drug benefit individuals eligible medicare prescription drug benefit became effective january 1 2006 resulting increased use generics increased purchasing power negotiating behalf medicare recipients international markets scheringplough operates environment government mandated costcontainment programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs since scheringplough unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals us effect operations cash flows cannot reasonably estimated similarly effect operations cash flows decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated competition market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted outlook scheringplough provide numeric guidance however following outlook may helpful readers assessing future prospects see earlier discussion matters relating merckscheringplough cholesterol joint venture’s enhance clinical trial ims prescription data us shows date 2008 prescriptions vytorin zetia declined although prescription data shown early signs stabilization limitations prescription data early discern trends data likely weekly fluctuations ims reported prescription volumes vytorin zetia trend identified wholesalers retail chains trade buyers may respond fluctuations changing buying patterns reducing inventory levels early determine business financial impact lower prescription volumes 2008 longerterm however first quarter 2008 merckscheringplough cholesterol joint venture sales vytorin zetia us likely negatively impacted scheringplough accounts joint venture equity method scheringplough successful advancing several research development projects late stage projects require sizable resources complete research development expenses expected continue increase next several years result expanded pipeline projects added obs acquisition need larger frequent longer clinical trials current global regulatory environment risks described item 1a “risk factors” could cause actual results differ materially expectations provided section impact recently issued accounting standards september 2006 fasb issued sfas 157 “fair value measurements” standard defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements standard codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions calendar year companies standard effective beginning january 1 2008 except nonfinancial items measured nonrecurring basis effective beginning january 1 2009 based scheringplough’s current financial position impact standard consolidated financial statements expected material november 2006 fasb issued emerging issues task force issue eitf 0610 “accounting deferred compensation postretirement benefits aspects collateral assignment splitdollar life insurance arrangements” effective calendar year companies january 1 2008 task force concluded employer recognize liability postretirement benefit related collateral assignment splitdollar life insurance arrangement accordance either fasb statement 106 apb opinion 12 based substantive agreement employee task force also concluded employer recognize measure asset based nature substance collateral assignment splitdollar life insurance arrangement impact standard consolidated financial statements expected material february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also includes amendment sfas 115 “accounting certain investments debt equity securities” applies entities availableforsale trading securities statement effective beginning entity’s first fiscal year begins november 15 2007 based scheringplough’s current financial position impact standard consolidated financial statements expected material june 2007 fasb issued eitf issue 073 “accounting nonrefundable advance payments goods services received use future research development activities” effective calendar year companies january 1 2008 task force concluded nonrefundable advance payments goods services used rendered future research development activities deferred capitalized amounts recognized expense related goods delivered services performed goods services longer expected provided impact standard consolidated financial statements expected material december 2007 fasb issued eitf issue 071 “accounting collaborative arrangements” effective calendar year companies january 1 2009 task force clarified manner costs revenues sharing payments made received partner collaborative arrangements presented income statement set forth certain disclosures required partners’ financial statements scheringplough currently assessing potential impacts implementing standard december 2007 securities exchange commission sec issued staff accounting bulletin sab 110 permits entities certain circumstances continue use “simplified” method estimating expected term plain vanilla options discussed sab 107 accordance sfas 123 revised 2004 “sharebased payment” guidance release effective january 1 2008 impact standard consolidated financial statements expected material december 2007 fasb issued sfas 141 revised 2007 “business combinations” calendar year companies standard applicable new business combinations occurring january 1 2009 sfas 141 r requires acquiring entity recognize assets acquired liabilities assumed transaction acquisitiondate fair value limited exceptions significantly sfas 141 r require acquisition costs generally expensed incurred certain acquired contingent liabilities recorded fair value acquired inprocess research development recorded fair value indefinitelived intangible asset acquisition date standard also impact certain unresolved matters related purchase transactions consummated prior effective date standard scheringplough currently assessing potential impacts implementing standard december 2007 fasb also issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” effective fiscal years interim periods within fiscal years beginning december 15 2008 standard establishes new accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary scheringplough currently assessing potential impacts implementing standard critical accounting policies estimates following accounting policies estimates considered significant changes certain judgments assumptions inherent policies could affect scheringplough’s financial statements • revenue recognition • rebates discounts returns • provision income taxes • acquisitions impairment goodwill intangible assets property • accounting pensions postretirement benefit plans • accounting legal regulatory matters revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process revenue recognition new products based specific facts circumstances including estimated acceptance rates established products similar marketing characteristics absent ability make reliable estimates rebates discounts returns scheringplough would defer revenue recognition product discounts granted based terms arrangements wholesalers managedcare organizations government purchasers certain market conditions rebates estimated based sales contract terms historical experience trend analysis projected market conditions various markets served scheringplough evaluates market conditions products groups products primarily analysis third party demand market research data well internally generated information data information provided purchasers obtained third parties subject inherent limitations accuracy validity sales returns estimated recorded based historical sales returns information analysis recent wholesale purchase information consideration stocking levels wholesalers forecasted demand amounts products exhibit unusual sales return patterns due dating competition including expected generic introductions marketing matters specifically investigated analyzed part formulation return reserves scheringplough’s agreements major us pharmaceutical wholesalers address number commercial issues product returns timing payment processing chargebacks quantity inventory held wholesalers respect quantity inventory held wholesalers agreements provide financial disincentive wholesalers acquire quantities product excess necessary meet current patient demand use agreements scheringplough expects avoid situations scheringplough’s shipments product reflective current demand rebates discounts returns scheringplough’s rebate accruals federal state governmental programs including medicaid medicare part december 31 2007 2006 114 million 115 million respectively commercial discounts returns rebate accruals december 31 2007 2006 412 million 371 million respectively accruals established period related revenue recognized resulting reduction sales establishment liabilities included total current liabilities case returns receivable adjustments allowance provided accounts receivable case governmental rebate programs scheringplough’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy scheringplough’s obligations additional information governmental inquiries focused part calculation rebates contained note 20 “legal environmental regulatory matters” item 8 “financial statements supplementary data” addition possible result governmental challenges changes interpretive guidance actual rebates could materially exceed amounts accrued following summarizes activity accounts related accrued rebates sales returns discounts 1 year ended december 31 2006 adjustment prioryear estimates rebates includes 24 million related reversal previously accrued rebate amounts recorded 2005 2004 us government’s tricare retail pharmacy program us federal court ruled pharmaceutical manufacturers obligated pay formulating recording accruals management utilizes assumptions estimates include historical experience wholesaler data projection market conditions estimated lag time sale payment rebate utilization estimates forecasted product demand amounts discussed critical accounting policy entitled “revenue recognition” part review accruals management performs sensitivity analysis considers differing assumptions subject judgment rebate accrual calculation based upon scheringplough’s sensitivity analysis reasonably possible changes assumptions related rebate accruals could favorably unfavorably impact 2008 net sales income taxes amount consistent 2007 provision income taxes scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 20 “legal environmental regulatory matters” january 1 december 31 2007 total amount unrecognized tax benefits 924 million 859 million respectively includes reductions deferred tax assets carrying full valuation allowance potential refund claims tax liabilities january 1 december 31 2007 approximately 645 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period 615 million decrease would primarily attributable decision tax matter currently litigated newark district court possible final resolution taxpayer’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment andor receipt related cash dependent number factors many outside scheringplough’s control scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations total amount accrued interest related uncertain tax positions january 1 december 31 2007 193 million 197 million respectively included accrued liabilities scheringplough records valuation allowance reduce deferred tax assets amount likely realized scheringplough considered ongoing prudent feasible tax planning strategies assessing need valuation allowance event scheringplough determine would able realize additional portion net deferred tax assets adjustment valuation allowance would increase income period determination made likewise scheringplough subsequently determine would able realize additional portion remaining net deferred tax asset future adjustment deferred tax asset would charged income period determination made acquisitions impairment goodwill intangible assets property scheringplough accounts acquired businesses using purchase method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values consolidated financial statements results operations reflect acquired business completion acquisition cost acquire business including transaction costs allocated underlying net assets acquired business based respective fair values excess purchase price estimated fair values net assets acquired recorded goodwill amounts allocated acquired inprocess research development expensed date acquisition intangible assets amortized based sales expected life asset judgments made determining estimated fair value assigned class assets acquired liabilities assumed well asset lives materially impact results operations useful lives determined based expected future period benefit asset considers various characteristics asset including projected cash flows intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 99 billion december 31 2007 intangible assets goodwill increased significantly 2007 due acquisition obs annual amortization expense next five years estimated approximately 570 million per year based intangible assets recorded december 31 2007 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment certain scheringplough’s manufacturing sites operate capacity overall costs operating manufacturing sites significantly increased due consent decree compliance activities scheringplough’s manufacturing cost base relatively fixed actions part management significantly reduce scheringplough’s manufacturing infrastructure involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements management continues review carrying value certain manufacturing assets indications impairment future events decisions may lead additional asset impairments andor related costs accounting pension postretirement benefit plans pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions scheringplough assesses pension postretirement benefit plan assumptions regular basis evaluating assumptions scheringplough considers many factors including evaluation discount rate expected rate return plan assets healthcare cost trend rate retirement age assumption scheringplough’s historical assumptions compared actual results analysis current market conditions asset allocations see note 8 “retirement plans postretirement benefits” item 8 “financial statements supplementary data” additional information discount rates used pension postretirement benefit plan calculations evaluated annually modified reflect prevailing market rates measurement date highquality fixed income debt instrument portfolio would provide future cash flows needed pay benefits included benefit obligations come due countries debt instruments thinly traded estimates based available market rates actuarial assumptions based upon management’s best estimates judgment assumptions held constant increase 50 basis points discount rate would estimated favorable impact 43 million net pension postretirement benefit cost increase 50 basis points expected rate return assumption would estimated favorable impact 17 million net pension postretirement benefit cost assumptions held constant decrease 50 basis points discount rate would estimated unfavorable impact 41 million net pension postretirement benefit cost decrease 50 basis points expected rate return assumption would estimated unfavorable impact 17 million net pension postretirement benefit cost sensitivities based estimated net pension postretirement benefit cost 2008 includes annual impact obs’ plans expected rates return pension postretirement benefit plans represent average rates return earned plan assets period benefits included benefit obligation paid developing expected rate return scheringplough determines expected returns major asset classes principally equities fixed income real estate return expectations asset classes based assumptions economic growth inflation supported longterm historical data well scheringplough’s actual experience return plan assets expected portfolio performance also reflects contribution active management appropriate unrecognized net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions expected returns based primarily calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ scheringplough’s expected returns majority assets realized marketrelated value assets ratably fiveyear period total unrecognized net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees targeted investment portfolio scheringplough’s us retirement plan allocated 65 percent equities 28 percent fixed income investments 7 percent real estate targeted investment portfolio scheringplough’s us postretirement benefit plan allocated 70 percent equities 30 percent fixed income investments portfolios’ equity weightings consistent longterm nature plans’ benefit obligations nonus pension plans targeted investment portfolio varies based duration pension liabilities local governmental rules regulations substantially investments equities fixed income valued based quoted public market values investments real estate valued based periodic appraisals september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans” amendment fasb statements 87 88 106 132r effective december 31 2006 scheringplough accounts retirement postretirement benefit plans accordance sfas 158 shareholders’ equity december 31 2006 reduced approximately 7 percent upon adoption sfas 158 see note 8 “retirement plans postretirement benefits” item 8 “financial statements supplemental data” additional information sfas 158 allows extended adoption date requirement scheringplough’s yearend date measurement date defined benefit pension postretirement plans measurement dates yearend prior adoption sfas 158 scheringplough adopted yearend measurement date effective 2007 impact consolidated financial statements related measurement date change material accounting legal regulatory matters management judgments estimates required accounting legal regulatory matters ongoing basis including insurance coverages scheringplough reviews status claims investigations legal proceedings ongoing basis time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s results operations cash flows financial condition market risk disclosure scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk scheringplough subsidiaries 55 countries 2007 sales outside us accounted approximately 64 percent global sales virtually sales denominated currencies local country scheringplough’s reported profits cash flows exposed changing exchange rates date management deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact scheringplough’s international operations widespread addition point time scheringplough’s international subsidiaries hold financial assets liabilities denominated currencies us dollars financial assets liabilities consist primarily shortterm thirdparty intercompany receivables payables changes exchange rates affect translated value financial assets liabilities gains losses arise translation affect net income occasion scheringplough used derivatives hedge specific foreign currency exposures 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options mitigate exposure event significant strengthening euro compared us dollar scheringplough purchased options aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 “accounting derivative instruments hedging activities” amended sfas 133 accordingly gain derivatives recognized statement consolidated operations december 31 2007 open foreign currency option contracts scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income interest rate equity price risk financial assets exposed changes interest rates andor equity prices primarily cash equivalents shortterm investments debt equity securities held qualified nonqualified trusts employee benefits assets totaled 23 billion december 31 2007 cash equivalents shortterm investments 10 percent decrease interest rates would decrease interest income approximately 36 million securities held qualified nonqualified trusts due longterm nature liabilities trust assets fund scheringplough’s exposure market risk deemed low financial obligations exposed variability interest rates primarily shortterm borrowings longterm floatingrate eurodenominated term loan scheringplough longterm fixed rate debt outstanding 10 percent decrease interest rates would increase fair value debt approximately 256 million 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 14 “borrowings commitments” item 8 “financial statements supplementary data” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations effective portion swaps 12 million recorded comprehensive income recognized interest expense life related debt december 31 2007 open interest rate swaps disclosure notice cautionary statements private securities litigation reform act management’s discussion analysis financial condition results operations sections report written reports oral statements made time scheringplough may contain forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements relate strictly historical current facts based current expectations forecasts future events identify forwardlooking statements use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” similar words terms particular forwardlooking statements include statements relating future actions ability access capital markets pending acquisitions prospective products product approvals timing conditions regulatory approvals patent intellectual property protection future performance effectiveness marketed products pipeline drugs trends performance including trends cholesterol market sales efforts research development programs anticipated spending estimates rebates discounts returns expenses programs reduce expenses outcome contingencies litigation investigations growth strategy expected synergies financial results forwardlooking statements publications may turn wrong guarantees scheringplough’s financial operational performance scheringplough’s stock scheringplough assume obligation update forwardlooking statement many factors could cause actual results differ scheringplough’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors scheringplough refers item 1a “risk factors” report incorporate herein reference identification important factors respect risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations executive summary overview scheringplough innovationdriven sciencecentered global health care company scheringplough discovers develops manufactures pharmaceuticals three customer markets prescription animal health consumer research development activity directed toward prescription products important applications central research development platform animal health products consumer health care products scheringplough also accesses external innovation via partnering inlicensing acquisition three customer markets strategy focused science 2003 soon fred hassan elected chairman board chief executive officer scheringplough corporation initiated sixtoeight year strategic plan called action agenda key component action agenda applying science meet unmet medical needs core strategy scheringplough invest substantial funds scientific research goal creating therapies treatments address important unmet medical needs also commercial value consistent core strategy scheringplough increased investment research development scheringplough successful advancing pipeline several latestage projects require sizable resources complete scheringplough continues develop laterphase pipeline compounds eg golimumab sugammadex us thrombin receptor antagonist vicriviroc boceprevir asenapine progressing early pipeline includes drug candidates across wide range therapeutic areas another key component action agenda focus building longterm value shareholders patients rely upon scheringplough’s drugs longerterm focus includes concurrent emphasis growing sales disciplined cost controls investing research development future early hassan new management team recruited applied action agenda stabilizing repairing turning around scheringplough encountered challenges earlier decade prior management team currently scheringplough continues work fourth five phases action agenda fourth build base phase scheringplough continues focus strategy value creation across broad front past five years sales scheringplough pharmaceutical products across array therapeutic areas showed strong growth compared prior periods pharmaceutical companies scheringplough’s pharmaceutical sales marketing activities expanded newer markets geographic diversity adds growth makes performance less sensitive one geographic area substantial progress made integration organon biosciences nv obs purchased akzo nobel late 2007 acquisition transformative giving scheringplough • key new pipeline projects including asenapine schizophrenia bipolar disease sugammadex reverse deep anesthesia • key products two new therapeutic areas women’s health central nervous system • position leader animal health combining scheringplough animal health intervet • leadership position animal vaccines intervet earlystage innovation capabilities human vaccines nobilon • additional stateoftheart biologics capabilities • substantial expansion company’s geographic footprint • significant talent including key research development functions april 2008 scheringplough announced productivity transformation program ptp goal program includes ongoing integration obs create leaner stronger company support scheringplough’s goal building longterm high performance despite current challenging pharmaceutical industry environment particular challenges facing scheringplough program targets savings 15 billion annualized basis 2012 designed reduce avoid costs increasing productivity total targeted savings approximately 125 billion anticipated accomplished end 2010 balance achieved 2012 targeted savings envisioned program include resulting previously announced obs integration synergies beyond program scheringplough anticipates investing new highpriority clinical trials pursuit strategic opportunities including product launches anticipates natural cost growth part action agenda scheringplough continues work enhance infrastructure upgrade processes systems strengthen talent efforts implemented companywide basis scheringplough focusing especially research development support scheringplough’s sciencebased business pharmaceutical industry increasing political regulatory pressure particularly united states scheringplough merckscheringplough cholesterol joint venture encountered specific challenges 2008 explained detail item 3 “legal proceedings” litigation investigations relating merckscheringplough cholesterol joint venture strength scheringplough built earlier phases action agenda including diversified group products customer segments geographic areas well highly experienced executive team helpful weathering current future challenges including relating merckscheringplough cholesterol joint venture results highlights scheringplough’s performance 2008 follows • scheringplough’s net sales 2008 185 billion increase 58 billion 46 percent compared 2007 increase net sales primarily due contribution products obs 2008 • 2008 net sales outside us totaled 129 billion approximated 70 percent consolidated net sales • net income available common shareholders 2008 18 billion includes gain divestitures certain animal health products • increased sales 2008 pharmaceutical products remicade temodar nasonex well increased sales animal health segment contributed favorably scheringplough’s overall operating results overall operating results also benefited increased sales obs products • global combined net sales scheringplough’s cholesterol franchise products vytorin zetia decreased 11 percent 2008 compared 2007 combined net sales products vytorin zetia us decreased 24 percent 2008 compared 2007 strategic alliances typical pharmaceutical industry scheringplough licenses manufacturing marketing andor distribution rights certain products others also manufactures markets andor distributes products owned others pursuant licensing joint venture arrangements time third parties involved additional factors relating third party outside control scheringplough may create positive negative impacts scheringplough vytorin zetia remicade subject arrangements key scheringplough’s current business financial performance addition potential strategic alternatives may impacted change control provisions arrangements could result vytorin zetia acquired merck remicade golimumab reverting back centocor change control provision relating vytorin zetia included contract merck filed exhibit 10r 10k change control provision relating remicade golimumab contained contract centocor filed exhibit 10v 10k cholesterol franchise scheringplough’s cholesterol franchise products vytorin zetia managed joint venture scheringplough merck treatment elevated cholesterol levels markets outside japan zetia scheringplough’s novel cholesterol absorption inhibitor vytorin combination zetia zocor simvastatin statin medication developed merck financial commitment compete cholesterolreduction market shared merck profits sales vytorin zetia also shared merck operating results joint venture merck recorded using equity method accounting cholesterolreduction market single largest pharmaceutical category world vytorin zetia competing market global total combined sales vytorin zetia 2008 decreased 11 percent compared 2007 2008 total combined sales vytorin zetia us declined 24 percent compared 2007 2008 total combined sales vytorin zetia outside us increased 30 percent compared 2007 december 2008 total combined prescription share vytorin zetia us versus december 2007 169 percent 101 percent past scheringplough’s profitability largely dependent upon performance cholesterol franchise performance cholesterol franchise still material scheringplough product diversity become stronger obs acquisition well development scheringplough products dependence cholesterol franchise lessening japan included joint venture merck japanese market bayer healthcare comarketing scheringplough’s cholesterolabsorption inhibitor zetia approved japan april 2007 monotherapy coadministered statin use patients hypercholesterolemia familial hypercholesterolemia homozygous sitosterolemia zetia launched japan june 2007 scheringplough’s sales zetia japan comarketing agreement bayer healthcare recognized net sales included pharmaceuticals license arrangements centocor remicade prescribed treatment inflammatory diseases rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis remicade scheringplough’s secondlargest marketed pharmaceutical product line cholesterol franchise remicade licensed manufactured centocor inc johnson company 2005 scheringplough exercised option contract centocor license rights develop commercialize golimumab fully human monoclonal antibody filed approval europe scheringplough exclusive marketing rights products outside us japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade golimumab extending scheringplough’s rights exclusively market remicade match duration scheringplough’s exclusive marketing rights golimumab effective upon regulatory approval golimumab eu scheringplough’s marketing rights products extend 15 years first commercial sale golimumab within eu centocor receive progressively increased share profits scheringplough’s distribution products scheringplough marketing territory 2010 2014 share profits remain fixed thereafter remainder term changes duration remicade marketing rights profit sharing arrangement products conditioned approval golimumab granted prior september 1 2014 scheringplough may independently develop market golimumab crohn’s disease indication territories option centocor participate addition scheringplough centocor agreed utilize autoinjector device commercialization golimumab agreed share development costs manufacturing sales marketing scheringplough supports commercialized products manufacturing sales marketing efforts scheringplough also moving forward additional investments enhance infrastructure business including capital expenditures drug development process products moved drug discovery pipeline markets information technology systems postmarketing studies monitoring scheringplough continually reviews business including manufacturing operations identify actions enhance longterm competitiveness however scheringplough’s manufacturing cost base relatively fixed actions significantly reduce scheringplough’s manufacturing infrastructure including specific reductions number scheringplough manufacturing facilities made part productivity transformation program involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements future events decisions may lead asset impairments related costs regulatory competitive environment scheringplough subject jurisdiction various national state local regulatory agencies regulatory compliance complex costly impacting timing needed bring new drugs market drugs new indications scheringplough engages clinical trial research many countries around world research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu member states clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products number intermediaries involved drug manufacturers scheringplough patients use drugs intermediaries impact patient’s ability prescribers’ ability choose pay particular drug intermediaries include health care providers hospitals clinics payors representatives employers insurers managed care organizations governments others supply chain pharmacists wholesalers us many scheringplough’s pharmaceutical products subject increasingly competitive pricing certain intermediaries including managed care groups institutions government agencies seek price discounts international markets scheringplough operates environment governmentmandated costcontainment programs also pricing sales marketing programs arrangements related business practices scheringplough participants health care industry continued scrutiny federal state regulatory investigative prosecutorial administrative entities market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors loss patent protection due challenges competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature obs acquisition november 19 2007 scheringplough acquired obs purchase price approximately euro 11 billion cash approximately 161 billion commencing acquisition date obs’s assets acquired liabilities assumed well results obs’s operations included scheringplough’s consolidated financial statements approximately one onehalf months results operations relating obs included scheringplough’s statement consolidated operations year ended december 31 2007 impact purchase accounting resulted following noncash charges 2008 2007 • acquired inprocess research development iprd onetime charge approximately 38 billion 2007 • amortization inventory adjusted fair value approximately 11 billion charged cost sales 889 million 2008 258 million 2007 • amortization acquired intangible assets adjusted fair value 68 billion amortized weighted average life 15 years cost sales 527 million 2008 65 million 2007 • incremental depreciation relating adjustment fair value property plant equipment approximately 900 million depreciated primarily cost sales lives applicable property 33 million 2008 3 million 2007 discussion operating results operations 2008 2007 discussed include obs’s product sales expenses well certain noncash charges relating purchase accounting associated obs acquisition net sales consolidated net sales 2008 185 billion increase 58 billion 46 percent compared 2007 consolidated net sales 2008 included 54 billion net sales products obs increase primarily due acquisition obs november 19 2007 foreign exchange estimated 3 favorable impact sales 2008 since acquisition obs greater proportion scheringplough’s sales denominated euros net sales outside us approximately 70 percent consolidated net sales consolidated net sales 2007 127 billion increase 21 billion 20 percent compared 2006 consolidated net sales 2007 included 626 million net sales products obs related period subsequent acquisition increase primarily reflected growth sales volumes remicade temodar nasonex avelox well contributions animal health consumer health care estimated favorable impact 4 percent foreign exchange significant portion us net sales made major pharmaceutical health care product distributors major retail chains consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler retail trade buying decisions changes overall demand factors addition fluctuations sales many pharmaceutical products us subject increased pricing pressure managed care groups institutions government agencies groups seeking discounts scheringplough pharmaceutical manufacturers us market also required provide statutorily defined rebates various government agencies order participate medicaid program veterans health care program governmentfunded programs medicare prescription drug improvement modernization act 2003 contains prescription drug benefit individuals eligible medicare prescription drug benefit became effective january 1 2006 resulting increased use generics increased purchasing power negotiating behalf medicare recipients international markets scheringplough operates environment governments may mandated costcontainment programs placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs net sales years ended december 31 2008 2007 2006 follows 1 products acquired obs acquisition november 19 2007 nm meaningful percentage sales prescription pharmaceuticals 2008 totaled 143 billion 41 billion 40 percent increase compared 2007 included 2008 2007 35 billion 409 million net sales related organon human health business obs sales prescription pharmaceuticals 2007 totaled 102 billion 16 billion 19 percent increase compared 2006 international net sales remicade drug treatment immunemediated inflammatory disorders rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis 28 percent 21 billion 2008 compared 2007 driven continued market growth expanded penetration certain indications favorable impact foreign exchange international net sales increased 33 percent 2007 16 billion compared 2006 due greater demand expanded use across indications favorable impact foreign exchange remicade antitnf antibody marketed scheringplough outside us japan certain asian markets competitive products indications referred introduced 2007 2008 global net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies rose 6 percent 12 billion 2008 compared 2007 due increased sales international market 16 percent 11 billion 2007 compared 2006 product captured greater us international market share 2007 competitive products introduced 2007 2008 global net sales temodar treatment certain types brain tumors increased 16 percent 1 billion 2008 compared 2007 due increased sales across geographic regions global net sales increased 22 percent 861 million 2007 compared 2006 due increased sales across geographic markets including japan product launched september 2006 temodar lose patent exclusivity eu 2009 global net sales pegintron powder injection pegylated interferon product treating hepatitis c essentially flat 2008 compared 2007 including favorable impact foreign exchange global net sales increased 9 percent 911 million 2007 compared 2006 due higher sales latin america emerging markets across europe tempered lower sales japan due increased competition decrease us market size global net sales clarinex marketed aerius many countries outside us treatment seasonal outdoor allergies yearround indoor allergies 2008 decreased 1 percent 790 million compared 2007 primarily due lower sales united states global net sales 2007 increased 11 percent 799 million compared 2006 primarily due higher sales international markets global net sales follistimpuregon recombinant folliclestimulating hormone treating infertility 577 million 2008 57 million 2007 represent sales date obs acquisition november 19 2007 december 31 2007 follistimpuregon lose patent exclusivity eu 2009 global net sales nuvaring contraception product 440 million 2008 45 million 2007 represent sales date obs acquisition november 19 2007 december 31 2007 international net sales prescription claritin increased 9 percent 425 million 2008 compared 2007 primarily due higher sales japan favorable foreign exchange sales 2007 increased 10 percent 391 million compared 2006 reflecting growth latin america asia pacific japan net sales avelox fluoroquinolone antibiotic treatment certain respiratory skin infections marketed us scheringplough result license agreement bayer decreased 2 percent 376 million 2008 compared 2007 reflecting decline us respiratory tract infection market net sales 2007 increased 26 percent 384 million 2007 compared 304 million 2006 primarily result increased market share global net sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndrome sold primarily us scheringplough decreased 5 percent 314 million 2008 compared 2007 sales increased 1 percent 332 million compared 2006 international net sales caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma increased 16 percent 297 million 2008 compared 2007 primarily due higher sales across europe favorable foreign exchange sales 2007 increased 25 percent 257 million compared 2006 primarily due increased sales latin america favorable impact foreign exchange global 2008 net sales rebetol capsules use combination pegintron intron treating hepatitis c decreased 6 percent 260 million compared 2007 due lower sales japan continued generic competition global net sales 2007 decreased 11 percent 277 million compared 2006 due lower patient enrollment japan increased generic competition global net sales zemuron muscle relaxant used surgical procedures 253 million 2008 25 million 2007 represent sales date obs acquisition november 19 2007 december 31 2007 zemuron lost patent exclusivity us october 2008 lose patent exclusivity eu 2009 global net sales remeron antidepressant 239 million 2008 33 million 2007 represent sales date obs acquisition november 19 2007 december 31 2007 global net sales intron injection chronic hepatitis b c antiviral anticancer indications essentially flat 2008 compared 2007 decreased 2 percent 2007 233 million compared 2006 decrease 2007 compared 2006 due conversion pegintron treating hepatitis c japan international net sales subutexsuboxone treatment opiate addiction increased 5 percent 230 million 2008 compared 2007 sales increased 8 percent 220 million 2007 compared 2006 increases 2008 2007 resulted primarily benefit foreign exchange global net sales asmanex orally inhaled steroid asthma 11 percent 180 million 2008 compared 2007 primarily due market share growth us sales increased 162 million 2007 compared 2006 due increase sales us pharmaceutical net sales include large number lower sales volume prescription pharmaceutical products included 20 billion 249 million net sales obs products 2008 2007 respectively several products sold limited markets outside us many multiplesource products longer protected patents products include treatments respiratory cardiovascular dermatological infectious oncological diseases global net sales animal health products increased 138 percent approximately 30 billion 2008 compared 2007 included global animal health net sales 19 billion related intervet animal health business obs global net sales 2008 benefited solid growth geographic areas led cattle poultry companion animal product lines coupled positive impact foreign currency exchange rates global net sales increased 37 percent 2007 13 billion compared 2006 reflecting strong growth core brands across geographic species areas led higher sales companion animal products inclusion intervet sales animal health segment’s sales impacted intense competition frequent introduction generic products global net sales consumer health care products include otc foot care sun care products increased 1 percent 10 million compared 2007 increase 2008 mainly due higher sales miralax launched february 2007 first rxtootc switch laxative category 30 years offset lower sales otc products otc claritin sales decreased 12 percent 405 million 2008 compared 2007 result increased competition privatelabel products global net sales 2007 increased 13 percent 143 million compared 2006 reflecting increase sales sun care products dr scholl’s products launch miralax addition sales otc claritin increased 18 percent 462 million 2007 compared 2006 due sales growth across product forms net sales sun care products increased 17 million 8 percent 2007 compared 2006 primarily due success coppertone continuous spray products launched 2005 consumer health care market highly competitive heavy advertising consumers frequent competitive product introductions including former prescription antihistamine launched otc sales early 2008 impact us consumers’ purchasing patterns costs expenses equity income summary costs expenses equity income years ended december 31 2008 2007 2006 follows nm meaningful percentage substantially sales cholesterol products included scheringplough’s net sales results sales reflected equity income addition due virtual nature joint venture scheringplough incurs substantial selling general administrative expenses captured equity income included scheringplough’s statements consolidated operations result scheringplough’s gross margin ratios sga expenses rd expenses percentage net sales reflect benefit impact joint venture’s operating results gross margin gross margin 605 percent 2008 compared 653 percent 2007 gross margin 2008 2007 unfavorably impacted 14 billion 326 million respectively purchase accounting adjustments included cost sales purchase accounting adjustments result amortization fair values primarily inventories intangible assets acquired part obs acquisition gross margin 2007 compared 2006 benefited realized cost savings approximately 100 million manufacturing streamlining 2006 nonrecurrence 146 million charges associated aforementioned manufacturing streamlining actions favorable product mix selling general administrative selling general administrative expenses sga increased 25 percent 68 billion 2008 compared 2007 increase sga primarily due inclusion expenses obs impact foreign exchange partially offset productivity transformation program savings sga increased 16 percent 55 billion 2007 compared 2006 reflecting higher promotion spending ongoing investments emerging markets unfavorable impact foreign exchange research development research development rd spending increased 21 percent 35 billion 2008 compared 2007 included rd 2007 upfront payments 197 million mainly related certain licensing transactions increase rd spending versus 2007 also reflects increased spending result obs acquisition well higher spending clinical trials related activities investments build greater breadth capacity support scheringplough’s expanding global rd pipeline 2007 rd spending increased 34 percent 29 billion compared 2006 2007 increase due higher costs associated clinical trials well building greater breadth capacity support scheringplough’s pipeline changes rd spending also reflect timing scheringplough’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products maximize chances successful development new products scheringplough began development excellence initiative 2005 build talent critical mass create uniform level excellence deliver highpriority programs within rd 2006 scheringplough began global clinical harmonization program maximize globalize quality clinical trial execution pharmacovigilance regulatory processes beginning 2007 certain aspects global clinical harmonization program implemented continue integrated processes obs expenseincome net expenseincome net comprised following years ended december 31 scheringplough 335 million expense net 2008 683 million income net 2007 interest expense higher 2008 due issuance new debt connection acquisition obs second half 2007 expense net 2008 includes 160 million 149 million tax gain sale divestitures certain animal health products required regulatory agencies us europe connection acquisition obs addition 2008 scheringplough recognized gain 17 million 12 million tax sale manufacturing site income net 2007 included net realized gains foreign currency options 510 million related obs acquisition increase income net 2007 compared 2006 also reflected higher interest income due higher balances cash equivalents shortterm investments partially offset higher interest expense due issuance new debt special acquisitionrelated charges manufacturing streamlining special acquisitionrelated charges special acquisitionrelated charges relate productivity transformation program activities include ongoing integration obs business special acquisitionrelated charges 2008 329 million costs 2008 included 275 million employee termination costs remaining charges 54 million related integration activities following table summarizes charges cash payments liabilities related productivity transformation program includes ongoing integration obs december 31 2008 recorded special acquisitionrelated charges b recorded part purchase accounting included acquisitionrelated liabilities december 31 2008 costs exit certain activities obs special acquisitionrelated charges year ended december 31 2007 scheringplough incurred 84 million special acquisitionrelated charges comprised 61 million integrationrelated costs obs acquisition 23 million employee termination costs part integration activities manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamlined global supply chain enhanced scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new jersey special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 equity income sales merckscheringplough cholesterol joint venture totaled 46 billion 52 billion 39 billion 2008 2007 2006 respectively sales decrease 2008 due primarily lower market share us partially offset continued growth international markets sales growth 2007 compared 2006 due primarily increase market share companies bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement company physician details set annual basis italy contractual amount included profit sharing calculation reimbursed us canada puerto rico amount equal company’s agreed physician details multiplied contractual fixed fee scheringplough reports amounts part equity income amounts represent reimbursement specific incremental identifiable costs scheringplough’s detailing cholesterol products markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher us market scheringplough receives greater share profits first 300 million annual zetia sales 300 million annual zetia sales merck scheringplough generally share profits equally costs joint venture companies contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally scheringplough merck allergyasthma agreements provided joint development marketing companies oncedaily fixedcombination tablet containing loratadinemontelukast april 2008 merckscheringplough joint venture received notapprovable letter fda proposed fixed combination loratadinemontelukast second quarter 2008 respiratory joint venture terminated accordance agreements action impact cholesterol joint venture result termination respiratory joint venture scheringplough received payments totaling 105 million scheringplough recognized 2008 equity income equity income merckscheringplough joint venture totaled 19 billion 20 billion 15 billion 2008 2007 2006 respectively decrease 2008 equity income amounts compared 2007 reflects sales declines vytorin zetia us partially offset sales growth internationally receipt 105 million termination respiratory joint venture increase 2007 equity income compared 2006 reflected increased sales vytorin zetia 2007 compared 2006 noted scheringplough incurs substantial selling general administrative costs reflected equity income instead included overall cost structure scheringplough provision income taxes tax expense 146 million 258 million 362 million 2008 2007 2006 respectively 2008 2007 tax provision amounts included tax benefits 344 million 89 million respectively related amortization fair values certain assets acquired part obs acquisition purchaseaccounting related items tax provisions 2008 2007 2006 include benefit related us operating losses 2004 scheringplough established valuation allowance net us deferred tax assets including benefit us operating losses management concluded likely benefit us net deferred tax assets realized december 31 2008 scheringplough continues maintain valuation allowance us net deferred tax assets scheringplough expects report us net operating loss nol carryforward 13 billion tax return year ended december 31 2008 us nol carryforward could materially reduced examination scheringplough’s income tax returns internal revenue service irs scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 21 “legal environmental regulatory matters” item 8 “financial statements supplementary data” december 31 2008 2007 total amount unrecognized tax benefits 994 million 859 million respectively includes tax liabilities well reductions deferred tax assets carrying full valuation allowance december 31 2008 2007 approximately 596 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period approximately 625 million would primarily attributable decision tax matter currently litigated newark district court decision yet rendered possible final resolution scheringplough’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment receipt related cash dependent number factors many outside scheringplough’s control scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations total amount interest expense related uncertain tax positions years ended december 31 2008 2007 63 million 50 million respectively total amount accrued interest related uncertain tax positions december 31 2008 2007 245 million 197 million respectively included accrued liabilities second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns scheringplough seeking resolution issue raised examination irs administrative appeals process july 2007 scheringplough made payment 98 million irs pertaining 19972002 examination scheringplough’s tax returns open examination irs 1997 2008 tax years 2008 irs commenced examination 2003 2006 federal income tax returns examination expected completed 2010 significant tax jurisdictions us state foreign scheringplough’s income tax returns open examination period 2000 2008 net incomeloss available common shareholders scheringplough net incomeloss available common shareholders 18 billion 16 billion 11 billion 2008 2007 2006 respectively net incomeloss available common shareholders 2008 2007 included approximately 11 billion 40 billion respectively charges related purchase accounting obs acquisition net incomeloss available common shareholders 2008 2007 2006 included deduction preferred stock dividends 150 million 118 million 86 million respectively related 2004 2007 mandatory convertible preferred shares loss 2007 due impact purchase accounting items obs acquisition increased interest expense result issuance debt second half 2007 amounts partially offset impacts gain currency options 2007 period gain divestitures certain animal health products 2008 period net incomeloss available common shareholders 2008 2007 2006 also included special acquisitionrelated charges manufacturing streamlining costs approximately 329 million 84 million 248 million respectively see note 3 “special acquisitionrelated charges manufacturing streamlining” item 8 “financial statements supplementary data” additional information liquidity financial resources discussion cash flow operating activities 2008 operating activities provided 34 billion cash compared net cash provided operations 26 billion 2007 increase primarily due inclusion obs business absence special acquisitionrelated payments 2007 associated settlement investigation us attorney’s office district massachusetts involving certain scheringplough’s sales marketing clinical trial practices programs massachusetts investigation 2007 net cash provided operating activities 26 billion increase 04 billion compared 2006 increase primarily due net realized gain 510 million foreign currency options relating obs acquisition higher net sales equity income partially offset payments 435 million settlement massachusetts investigation 98 million tax interest due connection examination irs scheringplough’s 19972002 federal income tax returns 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options derivatives aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives shortterm trading nature hedge specific financing investment transaction accordingly cash impacts derivatives classified operating cash flows statement consolidated cash flows investing activities net cash used investing activities 2008 532 million primarily relates capital expenditures 747 million partially offset proceeds divested products 241 million net cash used investing activities 2007 132 billion primarily consisting 158 billion net cash used purchase obs addition source cash investing activities 2007 included net reduction shortterm investments 33 billion partially offset 618 million capital expenditures net cash used investing activities 2006 29 billion primarily related net purchases shortterm investments 24 billion previously invested cash equivalents 458 million capital expenditures financing activities net cash used financing activities 17 billion 2008 compared 101 billion cash provided financing activities 2007 uses cash financing activities 2008 included pay eurodenominated longterm debt euro 600 million debt payments total payments 929 million payment dividends common preferred shares 572 million pay commercial paper shortterm debt outstanding 169 million net cash provided financing activities 2007 included net proceeds issuance common preferred shares approximately 15 billion 24 billion respectively net proceeds approximately 64 billion issuance longterm debt net cash provided financing activities 2007 also included 225 million proceeds stock option exercises offset payment dividends common preferred shares 481 million net cash used financing activities 2006 14 billion included payment dividends common preferred shares 412 million repayment 10 billion bank debt shortterm commercial paper borrowings discussion cash flows scheringplough expects contribute approximately 350 million retirement plans 2009 including approximately 200 million us scheringplough retirement plan december 31 2008 2007 scheringplough net debt total debt less cash equivalents shortterm investments marketable securities 48 billion 71 billion respectively cash generated operations available cash shortterm investments available credit facilities expected provide scheringplough ability fund cash needs intermediate term borrowings credit facilities september 17 2007 scheringplough issued 10 billion aggregate principal amount 600 percent senior unsecured notes due 2017 10 billion aggregate principal amount 655 percent senior unsecured notes due 2037 net proceeds offering approximately 20 billion interest notes payable semiannually effective interest rate 600 percent senior unsecured notes 655 percent senior unsecured notes incorporates initial discount debt issuance fees 613 percent 667 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted redemption date semiannual basis using rate treasury notes comparable remaining terms plus 25 basis points 2017 notes 30 basis points 2037 notes change control triggering event occurs certain circumstances defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase october 1 2007 scheringplough issued euro 500 million aggregate principal amount 500 percent senior unsecured eurodenominated notes due 2010 euro 15 billion aggregate principal amount 5375 percent senior unsecured eurodenominated notes due 2014 net proceeds offering approximately 28 billion interest notes payable annually effective interest rate 500 percent senior unsecured eurodenominated notes 5375 percent senior unsecured eurodenominated notes incorporates initial discount debt issuance fees impact interest rate hedges 510 percent 546 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price specified prospectus change control triggering event occurs certain circumstances defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase scheringplough used net proceeds notes fund portion purchase price obs acquisition october 24 2007 scheringplough entered fiveyear senior unsecured eurodenominated term loan facility syndicate banks october 31 2007 scheringplough drew euro 11 billion 16 billion term loan fund portion purchase price obs acquisition term loan floating interest rate requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing term loan term loan also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets february 27 2009 outstanding balance eurodenominated term loan euro 450 million reported us dollar amounts outstanding debt balance interest expense eurodenominated notes eurodenominated term loan fluctuate due impact foreign currency translation november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 interest rates payable notes subject adjustment connection ratings downgrades 2004 december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply notes subsequently rated baa1 moody’s bbb sp rating assigned notes either moody’s sp downgraded a3 respectively interest rate payable series notes would increase see note 15 “borrowings commitments” item 8 “financial statements supplementary data” additional information august 9 2007 scheringplough entered 20 billion revolving credit agreement syndicate banks terminated 15 billion credit facility due mature may 2009 credit facility floating interest rate matures august 2012 requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing credit facility credit facility also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets credit line available general corporate purposes considered primarily support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2008 2007 borrowings outstanding facility december 31 2008 2007 shortterm borrowings including credit facilities mentioned totaled 245 million 461 million respectively outstanding commercial paper december 31 2008 weightedaverage interest rate shortterm borrowings december 31 2008 2007 71 percent 79 percent respectively scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 “foreign currency translation” sfas 52 foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income credit ratings scheringplough’s current unsecured senior credit ratings outlook follows february 2009 moody’s investors service changed long term review status scheringplough’s credit ratings negative outlook stable august 2008 standard poor’s fitch ratings changed long term review status negative watch stable april 2008 moody’s investor service changed long term review status stable negative outlook fitch ratings changed long term review status stable negative watch march 2008 standard poor’s changed long term review status stable negative watch scheringplough paid entire commercial paper borrowings 149 million 2008 cash perspective scheringplough remains invested highlyliquid highlyrated securities scheringplough remains focused credit markets continues closely monitor broader financial economic situation scheringplough believes ability commercial paper issuers scheringplough one shortterm credit ratings p2 moody’s a2 sp andor fitch issue rollover outstanding commercial paper times less companies higher shortterm credit ratings total amount commercial paper capacity available issuers scheringplough typically less higherrated companies addition scheringplough’s ability issue commercial paper future dependent capital market conditions time scheringplough’s sizable lines credit commercial banks well cash shortterm investments held us international subsidiaries serve alternative sources liquidity scheringplough’s credit ratings could decline current levels impact decline could reduce availability commercial paper borrowing would increase interest rate portion scheringplough’s short longterm debt discussed scheringplough believes existing cash shortterm investments available credit facilities cash generated operations allow scheringplough fund cash needs intermediate term mandatory convertible preferred stock august 15 2007 scheringplough issued 10000000 shares 6 percent mandatory convertible preferred stock 2007 preferred stock face value 25 billion net proceeds scheringplough approximately 24 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale 2007 preferred stock fund portion purchase price obs acquisition share 2007 preferred stock automatically convert 74206 90909 common shares scheringplough depending average closing price scheringplough’s common shares 20 trading day period ending third trading day prior mandatory conversion date august 13 2010 defined prospectus preferred shareholders may elect convert time prior august 13 2010 minimum conversion ratio 74206 common shares per share 2007 preferred stock additionally time prior mandatory conversion date closing price scheringplough’s common shares exceeds 5053 least 20 trading days within period 30 consecutive trading days scheringplough may elect cause conversion less 2007 preferred stock outstanding minimum conversion ratio 74206 common shares share 2007 preferred stock 2007 preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent scheringplough legally permitted pay dividends board directors declares dividend payable scheringplough pay dividends dividend payment date dividend payment dates february 15 may 15 august 15 november 15 year ended december 31 2007 shares 6 percent mandatory convertible preferred stock issued august 10 2004 preferred stock converted 64584929 shares scheringplough common stock equity issuance treasury shares august 15 2007 scheringplough issued 57500000 common shares treasury shares 2750 per share net proceeds scheringplough approximately 15 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale common shares fund portion purchase price obs acquisition see note 2 “acquisition” item 8 “financial statements supplementary data” contractual obligations offbalance sheet arrangements scheringplough various contractual obligations reported liabilities consolidated balance sheets others required recognized liabilities certain purchase commitments executory contracts following table summarizes payments due period scheringplough’s known contractual obligations december 31 2008 1 purchase obligations include advertising research contracts capital expenditure commitments inventory expense items potential milestone payments approximately 2 billion included contractual obligations table contingent achievement various research development approximately 370 million regulatory approval approximately 630 million salesbased approximately 1 billion milestones research development regulatory milestones depend upon future clinical developments well regulatory agency actions may never occur salesbased milestones contingent generating levels sales current future products yet achieved 2 caption includes obligations based undiscounted amounts estimated payments certain scheringplough’s pension plans preferred stock dividends management’s estimate current portion unrecognized tax benefits contractual obligations regulatory competitive environment scheringplough operates scheringplough subject jurisdiction various national state local regulatory agencies regulations scheringplough subject described detail part item “business” 10k regulatory compliance complex regulatory standards including good clinical practices good laboratory practices good manufacturing practices vary jurisdiction constantly evolving regulatory compliance also costly regulatory compliance also impacts timing needed bring new drugs market drugs new indications failure comply regulations result delays approval drugs seizure recall drugs suspension revocation authority necessary production sale drugs fines civil criminal sanctions regulatory compliance cost compliance failures material impact scheringplough’s results operations cash flows financial condition much still unknown science human health every drug benefits risks societal governmental pressures constantly shifting demand innovation meet urgent unmet medical needs adversity risk pressures impact regulatory environment market scheringplough’s products regulatory compliance pharmacovigilance regulatory inspections scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert drug’s manufacturer governmental agency potential problems february 2006 scheringplough began global clinical harmonization program building clinical excellence trial design execution tracking strengthening scheringplough’s scientific compliance rigor global basis 2007 certain aspects global clinical harmonization program implemented significant work continued 2008 expected continue several years scheringplough intends continue upgrading skills processes systems clinical practices pharmacovigilance scheringplough remains committed accomplish work invest significant resources area like pharmaceutical companies scheringplough subject inspections fda emea regulatory authorities possible actions include demands improvements reporting systems criminal sanctions scheringplough andor responsible individuals changes conditions marketing authorizations scheringplough’s products regulatory compliance postmarketing surveillance scheringplough engages clinical trial research many countries around world clinical trial research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities failure comply current good clinical practices applicable laws regulations result delays approval clinical trials suspension ongoing clinical trials delays approval marketing authorizations criminal sanctions scheringplough andor responsible individuals financial penalties changes conditions marketing authorizations scheringplough’s products clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products addition situations raised concerns among prescribers patients relating safety efficacy pharmaceutical products general past several years occurrences increased 2008 intense media attention results enhance clinical trial led concerns among patients prescribers zetia vytorin see discussion item 3 “legal proceedings” “litigation investigations relating merckscheringplough cholesterol joint venture” following wave product withdrawals companies significant safety issues health authorities fda emea pmda continued increase focus safety assessing benefitrisk balance drugs fda particular granted new legislative authority 2007 included several provisions focused drug safety pharmacovigilance including ability mandate labeling changes require postapproval evaluations studies addition health authorities appear become cautious making decisions approvability new products indications rereviewing select products already marketed adding uncertainties potential delays regulatory approval processes also continues significant regulatory legislative scrutiny especially us advertising promotion particular directtoconsumer advertising similarly major health authorities including fda emea pmda also increased collaboration amongst especially regard evaluation safety benefitrisk information media attention also increased current environment health authority regulatory action one market safety labeling change may regulatory prescribing marketing implications markets extent previously seen health authorities pmda japan publicly acknowledged significant backlog workload due resource constraints within agency backlog caused long regulatory review times new indications products added uncertainty predicting approval timelines markets pmda committed correcting backlog made progress last two years expected continue foreseeable future us new presidential administration announced health care reform including regulation pharmaceutical companies products priority administration yet named health human services secretary fda commissioner may initiate change impact actions well budget pressures governments us nations cannot predicted time uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect scheringplough’s operations effect regulatory approval processes operations cannot predicted scheringplough nevertheless achieved significant number important regulatory approvals since 2004 including approvals vytorin bridion europe noxafil clarinex d24 clarinex reditabs clarinex d12 suboxone new indications temodar nasonex significant approvals since 2004 include asmanex dpi dry powder inhalation us pegintron zetia temodar esmeroneslax nasonex ganirest japan new indications remicade scheringplough also number significant regulatory submissions filed major markets awaiting approval including golimumab europe sugammadex us saphris asenapine us scheringplough’s personnel regular open dialogue fda emea regulators review product labels materials regular basis new information becomes known pricing pressures described specifically note 21 “legal environmental regulatory matters” item 8 “financial statements supplementary data” pricing sales marketing programs arrangements related business practices scheringplough participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda ftc various state attorneys’ general offices many health care laws certain governmental entities operate including federal state antikickback statutes statutory common law false claims laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject scheringplough substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs scheringplough also cannot predict whether investigations affect marketing practices sales result could material adverse impact scheringplough’s results operations cash flows financial condition business us many scheringplough’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts instance third party payors use formulary restrictions control costs negotiating discounted prices exchange inclusion formulary change formulary status product may impact sales product us market scheringplough pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans health care program governmentfunded programs medicare prescription drug improvement modernization act 2003 contains prescription drug benefit individuals eligible medicare resulted increased use generics increased purchasing power negotiating behalf medicare recipients international markets scheringplough operates environment government mandated costcontainment programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs since scheringplough unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals us effect operations cash flows cannot reasonably estimated similarly effect operations cash flows future decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated competition market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted outlook scheringplough provide numeric guidance however following outlook may helpful readers assessing future prospects uncertainties financial credit markets along generally difficult business conditions contributed recently pressures companies us including pharmaceutical companies development economic effects along potential healthcare reforms federal state level us difficult predict scheringplough plans remain flexible managing business face challenges given current uncertainties cholesterol markets remains difficult predict longterm performance cholesterol franchise currently scheringplough believes 2009 us sales vytorin zetia expected lower 2008 international sales excluding impact foreign exchange continue grow full year 2009 scheringplough currently expects rd spending grow mid singledigit range risks set forth item 1a “risk factors” 10k could cause actual results differ materially expectation provided section impact recently issued accounting standards september 2006 financial accounting standards board fasb issued statement financial accounting standards sfas 157 “fair value measurements” standard defines fair value establishes framework measuring fair value accordance us generally accepted accounting principles expands disclosures fair value measurements standard codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions calendaryear companies standard became effective january 1 2008 see note 17 “fair value measurements” item 8 “financial statements supplementary data” except nonfinancial items measured nonrecurring basis effective beginning january 1 2009 implementation standard material impact scheringplough’s financial statements based scheringplough’s current financial position impact provisions standard effective january 1 2009 expected material february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also includes amendment sfas 115 “accounting certain investments debt equity securities” applies entities availableforsale trading securities calendaryear companies standard became effective january 1 2008 scheringplough chose elect fair value option prescribed sfas 159 result implementation standard material impact scheringplough’s financial statements december 2007 fasb issued eitf issue 071 “accounting collaborative arrangements” effective calendaryear companies beginning january 1 2009 task force clarified manner costs revenues sharing payments made received partner collaborative arrangement presented income statement set forth certain disclosures required partners’ financial statements impact standard consolidated financial statements expected material december 2007 fasb issued sfas 141 revised 2007 “business combinations” sfas 141r calendaryear companies standard applicable new business combinations occurring january 1 2009 sfas 141r requires acquiring entity recognize assets acquired liabilities assumed transaction acquisitiondate fair value limited exceptions significantly sfas 141r require acquisition costs generally expensed incurred certain acquired contingent liabilities recorded fair value acquired inprocess research development recorded fair value indefinitelived intangible asset acquisition date standard also impact certain unresolved matters related purchase transactions consummated prior effective date standard impact standard consolidated financial statements expected material standard may effect accounting future business combinations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” effective calendaryear companies beginning january 1 2009 standard establishes new accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary impact standard consolidated financial statements expected material march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” effective calendaryear companies beginning january 1 2009 standard enhances required disclosures regarding derivatives hedging activities impact standard consolidated financial statements expected material april 2008 fasb issued fasb staff position fsp fas 1423 “determination useful life intangible assets” fsp 1423 fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 fsp 1423 effective calendaryear companies beginning january 1 2009 requirement determining useful lives must applied prospectively intangible assets acquired effective date disclosure requirements must applied prospectively intangible assets recognized subsequent effective date impact standard consolidated financial statements expected material may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” standard identifies sources accounting principles framework selecting principles used preparation financial statements presented conformity generally accepted accounting principles gaap united states gaap hierarchy sfas 162 became effective november 15 2008 implementation standard material impact scheringplough’s financial statements june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp addresses whether instruments granted sharebased payment transactions participating securities prior vesting therefore need included earnings allocation calculating earnings per share twoclass method described sfas 128 “earnings per share” fsp requires companies treat unvested sharebased payment awards nonforfeitable rights dividend equivalents separate class securities calculating earnings per share fsp effective calendaryear companies beginning january 1 2009 impact standard consolidated financial statements expected material october 2008 fasb issued fsp 1573 “determining fair value financial asset market active” fsp 1573 fsp 1573 clarified application sfas 157 inactive market demonstrated fair value financial asset determined market financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued implementation standard material impact scheringplough’s financial statements december 2008 fasb issued fsp fas 1404 fin 46r8 “disclosures public entities enterprises transfers financial assets interest variable interest entities” fsp fas 1404 fin 46r8 requires enhanced disclosures transfers financial assets interests variable interest entities fsp effective interim annual periods ending december 15 2008 since fsp requires additional disclosures concerning transfers financial assets interest variable interest entities adoption fsp affect scheringplough’s disclosures critical accounting policies estimates following accounting policies estimates considered significant changes certain judgments assumptions inherent policies could affect scheringplough’s financial statements • revenue recognition • rebates discounts returns • provision income taxes • acquisitions impairment goodwill intangible assets property • accounting pensions postretirement benefit plans • accounting legal regulatory matters revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business revenue recognition also requires reasonable assurance collection sales proceeds recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process revenue recognition new products based specific facts circumstances including estimated acceptance rates established products similar marketing characteristics absent ability make reliable estimates rebates discounts returns scheringplough would defer revenue recognition product discounts granted based terms arrangements wholesalers managed care organizations government purchasers certain market conditions rebates estimated based sales contract terms historical experience trend analysis projected market conditions various markets served scheringplough evaluates market conditions products groups products primarily analysis third party demand market research data well internally generated information data information provided purchasers obtained third parties subject inherent limitations accuracy validity sales returns estimated recorded based historical sales returns information analysis recent wholesale purchase information consideration stocking levels wholesalers forecasted demand amounts products exhibit unusual sales return patterns due dating competition including expected generic introductions marketing matters specifically investigated analyzed part formulation return reserves scheringplough’s agreements major us pharmaceutical wholesalers address number commercial issues product returns timing payment processing chargebacks quantity inventory held wholesalers respect quantity inventory held wholesalers agreements provide financial disincentive wholesalers acquire quantities product excess necessary meet current patient demand use agreements scheringplough expects avoid situations scheringplough’s shipments product reflective current demand rebates discounts returns scheringplough’s rebate accruals federal state governmental programs including medicaid medicare part december 31 2008 2007 162 million 114 million respectively commercial discounts returns rebate accruals december 31 2008 2007 373 million 412 million respectively accruals established period related revenue recognized resulting reduction sales establishment liabilities included total current liabilities case returns receivable adjustments allowance provided accounts receivable case governmental rebate programs scheringplough’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy scheringplough’s obligations additional information governmental inquiries focused part calculation rebates contained note 21 “legal environmental regulatory matters” item 8 “financial statements supplementary data” addition possible result governmental challenges changes interpretive guidance actual rebates could materially differ amounts accrued following summarizes activity accounts related accrued rebates sales returns discounts 1 year ended december 31 2008 purchase accounting adjustments reflect 9 million related reversal return reserves recorded part purchase accounting obs reversal recorded reduction goodwill formulating recording accruals management utilizes assumptions estimates include historical experience wholesaler data projection market conditions estimated lag time sale payment rebate utilization estimates forecasted product demand amounts discussed critical accounting policy entitled “revenue recognition” part review accruals management performs sensitivity analysis considers differing assumptions subject judgment rebate accrual calculation based upon scheringplough’s sensitivity analysis reasonably possible changes assumptions related rebate accruals could favorably unfavorably impact 2009 net sales income taxes annual amount consistent prior years sensitivity analysis excludes potential impacts specific matter involves interpretations statutes could favorable impact net sales income taxes future periods provision income taxes scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 21 “legal environmental regulatory matters” item 8 “financial statements supplementary data” december 31 2008 2007 total amount unrecognized tax benefits 994 million 859 million respectively includes tax liabilities well reductions deferred tax assets carrying full valuation allowance december 31 2008 2007 approximately 596 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period approximately 625 million would primarily attributable decision tax matter currently litigated newark district court decision yet rendered possible final resolution scheringplough’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment receipt related cash dependent number factors many outside scheringplough’s control scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations total amount interest expense related uncertain tax positions years ended december 31 2008 2007 63 million 50 million respectively total amount accrued interest related uncertain tax positions december 31 2008 2007 245 million 197 million respectively included accrued liabilities acquisitions impairment goodwill intangible assets property scheringplough accounts acquired businesses using purchase method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values consolidated financial statements results operations reflect acquired business completion acquisition cost acquire business including transaction costs allocated underlying net assets acquired business based respective fair values excess purchase price estimated fair values net assets acquired recorded goodwill amounts allocated acquired inprocess research development expensed date acquisition intangible assets amortized straightline basis expected life asset judgments made determining estimated fair value assigned class assets acquired liabilities assumed well asset lives materially impact results operations useful lives determined based expected future period benefit asset considers various characteristics asset including projected cash flows recoverability goodwill measured reporting unit level based twostep approach first carrying amount reporting unit compared fair value estimated future net discounted cash flows expected generated reporting unit extent carrying value reporting unit exceeds fair value reporting unit second step would performed whereby reporting unit’s assets liabilities fair valued extent reporting unit’s carrying value goodwill exceeds implied fair value goodwill impairment exists would recognized intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 89 billion 99 billion december 31 2008 december 31 2007 respectively intangible assets goodwill increased significantly 2007 due acquisition obs annual amortization expense next five years estimated approximately 570 million per year based intangible assets recorded december 31 2008 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment certain scheringplough’s manufacturing sites operate capacity overall costs operating manufacturing sites significantly increased past several years due compliance activities scheringplough’s manufacturing cost base relatively fixed actions part management significantly reduce scheringplough’s manufacturing infrastructure involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements management continues review carrying value certain manufacturing assets indications impairment future events decisions may lead additional asset impairments andor related costs accounting pension postretirement benefit plans pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions scheringplough assesses pension postretirement benefit plan assumptions regular basis evaluating assumptions scheringplough considers many factors including evaluation discount rate expected rate return plan assets healthcare cost trend rate retirement age assumption scheringplough’s historical assumptions compared actual results analysis current market conditions asset allocations see note 9 “retirement plans postretirement benefits” item 8 “financial statements supplementary data” additional information discount rates used pension postretirement benefit plan calculations evaluated annually modified reflect prevailing market rates measurement date highquality fixed income debt instrument portfolio would provide future cash flows needed pay benefits included benefit obligations come due countries debt instruments thinly traded estimates based available market rates actuarial assumptions based upon management’s best estimates judgment assumptions held constant increase 50 basis points discount rate would estimated favorable impact 52 million net pension postretirement benefit cost increase 50 basis points expected rate return assumption would estimated favorable impact 17 million net pension postretirement benefit cost assumptions held constant decrease 50 basis points discount rate would estimated unfavorable impact 52 million net pension postretirement benefit cost decrease 50 basis points expected rate return assumption would estimated unfavorable impact 17 million net pension postretirement benefit cost sensitivities based estimated net pension postretirement benefit cost 2008 includes annual impact obs’s plans expected rates return pension postretirement benefit plans represent average rates return earned plan assets period benefits included benefit obligation paid developing expected rate return scheringplough determines expected returns major asset classes principally equities fixed income real estate return expectations asset classes based assumptions economic growth inflation supported longterm historical data well scheringplough’s actual experience return plan assets expected portfolio performance also reflects active management appropriate 2008 conditions worldwide debt equity markets deteriorated significantly conditions negative effect fair value plan assets unrecognized net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions expected returns based primarily calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ scheringplough’s expected returns majority assets realized marketrelated value assets ratably fiveyear period total unrecognized net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees scheringplough’s practice fund qualified pension plans least sufficient amounts meet minimum requirements set forth applicable laws scheringplough expects contribute approximately 350 million retirement plans 2009 including approximately 200 million us scheringplough retirement plan targeted investment portfolio scheringplough’s us retirement plan allocated 65 percent equities 29 percent fixed income investments 6 percent real estate targeted investment portfolio scheringplough’s us postretirement benefit plan allocated 70 percent equities 30 percent fixed income investments portfolios’ equity weightings consistent longterm nature plans’ benefit obligations nonus pension plans targeted investment portfolio varies based duration pension liabilities local governmental rules regulations substantially investments equities fixed income valued based quoted public market values investments real estate valued based periodic appraisals accounting legal regulatory matters management judgments estimates required accounting legal regulatory matters ongoing basis including insurance coverages scheringplough reviews status claims investigations legal proceedings ongoing basis time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s results operations cash flows financial condition market risk disclosure scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk scheringplough subsidiaries 55 countries 2008 sales outside us accounted approximately 70 percent global sales virtually sales denominated currencies local country scheringplough’s reported sales profits cash flows exposed changing exchange rates date management deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact scheringplough’s international operations widespread net assets scheringplough’s international subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account separate component shareholders’ equity remaining international subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included statements consolidated operations occasion scheringplough used derivatives hedge specific foreign currency exposures 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options mitigate exposure event significant strengthening euro compared us dollar scheringplough purchased options aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 “accounting derivative instruments hedging activities” amended sfas 133 accordingly gain derivatives recognized statement consolidated operations december 31 2008 2007 open foreign currency option contracts scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income interest rate equity price risk financial assets exposed changes interest rates andor equity prices primarily cash equivalents shortterm investments debt equity securities held nonqualified trusts employee benefits assets totaled 34 billion december 31 2008 cash equivalents shortterm investments 10 percent decrease interest rates would decreased interest income approximately 6 million 2008 securities held qualified nonqualified trusts due longterm nature liabilities trust assets fund scheringplough’s exposure market risk deemed low financial obligations exposed variability interest rates primarily shortterm borrowings longterm floatingrate eurodenominated term loan scheringplough longterm fixed rate debt outstanding 10 percent decrease interest rates would increase fair value debt december 31 2008 approximately 135 million 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 15 “borrowings commitments” item 8 “financial statements supplementary data” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations effective portion swaps 12 million recorded comprehensive income 2007 recognized interest expense life related debt december 31 2008 2007 open interest rate swaps disclosure notice cautionary statements private securities litigation reform act management’s discussion analysis financial condition results operations sections report written reports oral statements made time scheringplough may contain forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements relate strictly historical current facts based current expectations forecasts future events identify forwardlooking statements use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” similar words terms particular forwardlooking statements include statements relating future actions ability access capital markets pending acquisitions prospective products product approvals timing conditions regulatory approvals patent intellectual property protection future performance effectiveness marketed products pipeline drugs trends performance including trends cholesterol market sales efforts research development programs anticipated spending estimates rebates discounts returns expenses programs reduce expenses outcome contingencies litigation investigations growth strategy expected synergies financial results forwardlooking statements publications may turn wrong guarantees scheringplough’s financial operational performance scheringplough’s stock scheringplough assume obligation update forwardlooking statement many factors could cause actual results differ scheringplough’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors scheringplough refers item 1a “risk factors” report scheringplough incorporates herein reference identification important factors respect risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business november 3 2009 merck co inc “old merck” scheringplough corporation “scheringplough” completed previouslyannounced merger “merger” merger scheringplough acquired shares old merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp scheringplough continued surviving public company renamed merck co inc “new merck” “company” however accounting purposes merger treated acquisition old merck considered accounting acquirer accordingly accompanying financial statements reflect old merck’s standalone operations existed prior completion merger results scheringplough’s business included new merck’s financial statements periods subsequent completion merger therefore new merck’s financial results 2009 reflect full year legacy scheringplough operations references report accompanying financial statements “merck” periods prior merger refer old merck periods completion merger new merck company global health care company delivers innovative health solutions medicines vaccines biologic therapies consumer animal products markets directly joint ventures company’s operations principally managed products basis comprised one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventative pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company’s professional representatives communicate effectiveness safety value pharmaceutical vaccine products health care professionals private practice group practices managed care organizations company also animal health operations discover develop manufacture market animal health products including vaccines company’s professional representatives communicate safety value company’s animal health products veterinarians distributors animal producers additionally company consumer health care operations develop manufacture market overthecounter “otc” foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets united states canada overview discussed merger completed november 3 2009 merger old merck shareholders received one share common stock new merck share old merck stock owned scheringplough shareholders received 05767 share common stock new merck 1050 cash share scheringplough stock owned consideration merger valued 496 billion aggregate scheringplough old merck’s longterm partner merckscheringplough cholesterol partnership “msp partnership” cash portion consideration funded combination existing cash including proceeds sale old merck’s interest merial limited sale redemption investments issuance debt combined company research development pipeline greater depth breadth many promising drug candidates significantly broader portfolio medicines expanded presence key international markets particularly highgrowth emerging markets company anticipates efficiencies gained merger allow invest promising pipeline candidates well strategic external research development opportunities combination increased company’s pipeline early mid late stage product candidates including significant increase number potential medicines company phase iii development 19 candidates additionally number candidates currently review united states internationally merger also expected accelerate expansion therapeutic areas old merck focused recent years addition scheringplough’s established presence expertise oncology neuroscience novel biologics merger expected broaden company’s commercial portfolio leading franchises key therapeutic areas including cardiovascular respiratory oncology neuroscience infectious diseases immunology women’s health additionally combined company expected realize potential benefits animal health business portfolio consumer health brands including claritin coppertone dr scholl’s many legacy scheringplough’s products expected long periods marketing exclusivity leveraging combined company’s expanded product offerings company expects benefit additional revenue growth opportunities example combined company expected expanded opportunities lifecycle management introduction potential new combinations formulations existing products two legacy companies also company expanded global presence geographically diverse revenue base scheringplough’s significant international presence accelerate old merck’s international growth efforts 2009 revenue increased 15 driven largely incremental sales resulting inclusion postmerger results legacy scheringplough products remicade treatment inflammatory diseases temodar treatment certain types brain tumors nasonex nasal spray inhaled nasal corticosteroid treatment nasal allergy symptoms pegintron treating chronic hepatitis c well recognition revenue sales zetia vytorin cholesterol modifying medicines prior merger sales zetia vytorin recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates result merger msp partnership whollyowned company therefore revenues products postmerger period reflected sales additionally company recognized sales postmerger period legacy scheringplough animal health consumer health care products also contributing sales increase growth januvia janumet treatment type 2 diabetes isentress antiretroviral therapy treatment hiv infection singulair medicine indicated chronic treatment asthma relief symptoms allergic rhinitis varivax vaccine help prevent chickenpox varicella pneumovax vaccine help prevent pneumococcal disease increases partially offset lower sales fosamax treatment prevention osteoporosis fosamax plus lost market exclusivity substantially formulations united states february 2008 april 2008 respectively revenue also negatively affected lower sales gardasil vaccine help prevent cervical vulvar vaginal cancers precancerous dysplastic lesions genital warts caused human papillomavirus “hpv” types 6 11 16 18 cosopttrusopt ophthalmic products lost us market exclusivity october 2008 lower revenue company’s relationship astrazeneca lp “azlp” products experiencing declines include rotateq vaccine help protect rotavirus gastroenteritis infants children zocor company’s statin modifying cholesterol primaxin treatment bacterial infections result merger company expects achieve substantial cost savings across areas including consolidation sales marketing research development application company’s lean manufacturing sourcing strategies expanded operations full integration msp partnership february 2010 company announced first phase new global restructuring program “merger restructuring program” conjunction integration legacy merck legacy scheringplough businesses merger restructuring program intended optimize cost structure combined company part first phase merger restructuring program end 2012 company expects reduce total workforce approximately 15 across areas company worldwide company also plans eliminate 2500 vacant positions part first phase program workforce reductions primarily come elimination duplicative positions sales administrative headquarters organizations well consolidation certain manufacturing facilities research development operations company continue hire new employees strategic growth areas business period certain actions ongoing reevaluation manufacturing research development facilities worldwide yet completed included later 2010 phases merger restructuring program connection first phase merger restructuring program separation costs company’s existing severance programs worldwide recorded fourth quarter 2009 extent costs probable reasonably estimable company recorded pretax restructuring costs 15 billion primarily employee separation costs related merger restructuring program fourth quarter 2009 first phase merger restructuring program expected completed end 2012 total pretax costs estimated 26 billion 33 billion company estimates approximately 85 cumulative pretax costs relate cash outlays primarily related employee separation expense approximately 15 cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company expects first phase merger restructuring program yield annual savings 2012 approximately 26 billion 30 billion anticipated savings relate first phase merger restructuring program therefore portion estimated 35 billion incremental annual savings originally disclosed merger announced company expects additional savings generated subsequent phases merger restructuring program announced later year well nonrestructuring related activities procurement savings initiatives cost savings expected come areas company’s pharmaceutical business addition previously announced ongoing cost reduction initiatives legacy companies result merger company obtained controlling interest msp partnership owned 100 company accordingly company required remeasure merck’s previously held equity interest msp partnership mergerdate fair value recognize resulting gain earnings result company recorded gain 75 billion recognized income expense net 2009 also 2009 old merck sold 50 interest merial limited “merial” sanofiaventis 4 billion cash sale resulted recognition 32 billion gain reflected income expense net 2009 see note 10 consolidated financial statements earnings per common share “eps” assuming dilution 2009 565 reflect net impact 240 resulting gains related msp partnership sale merial partially offset increased expenses amortization purchase accounting adjustments restructuring mergerrelated costs eps 2009 also affected dilutive impact shares issued merger competition health care environment competition markets company conducts business pharmaceutical industry highly competitive highly regulated company’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect certain products competitive pressures intensified pressures industry grown effect operations competitive factors patent disputes cannot predicted pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances joint ventures licenses refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacement even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth company’s products therapeutic category global efforts toward healthcare cost containment continue exert pressure product pricing access addressing cost containment pressure company makes continuing effort demonstrate medicines provide value patients pay healthcare addition pricing flexibility across company’s product portfolio encouraged growing use medicines mitigated effects increasing cost pressures individual medicines outside united states difficult government budgetary environments company worked payers encourage allocation scarce resources optimize healthcare outcomes limiting potentially detrimental effects government policies sales growth access innovative medicines vaccines support discovery development innovative products benefit patients company also working governments many emerging markets eastern europe latin america asia encourage increase investments health thereby improve citizens’ access medicines addition certain countries within european union “eu” recognizing economic importance researchbased pharmaceutical industry value innovative medicines society working industry representatives improve competitive climate variety means including market deregulation company anticipates worldwide trend toward cost containment continue resulting ongoing pressures healthcare budgets united states major healthcare reform introduced passed houses congress final revised bill unifies versions may considered adopted law impact actions well budget pressures governments united states nations cannot predicted time company continues successfully launch new products contribute healthcare debates monitor reforms new products policies strategies enable maintain strong position changing economic environment although one predict outcome legislative regulatory advocacy initiatives company believes well positioned respond evolving healthcare environment market forces access medicines company also committed improving access medicines enhancing quality life people around world cite one example african comprehensive hivaids partnerships botswana partnership government botswana bill melinda gates foundation merck company foundationmerck co inc supporting botswana’s response hivaids comprehensive sustainable approach hiv prevention care treatment support catalyze access hiv medicines developing countries company makes profit sale current hivaids medicines world’s poorest countries hardest hit pandemic offers hivaids medicines significantly reduced prices mediumincome countries february 2007 old merck announced reduced price stocrin least developed countries world hardest hit pandemic actions company working independently partners public private sectors address critical barriers access medicines developing world addressing barriers requires investments education training health infrastructure improve capacity developing countries achieved increased international assistance sustainable financing addition old merck committed providing rotateq vaccine help protect rotavirus gastroenteritis infants children global alliance vaccines immunizationeligible countries prices profit also 2009 old merck wellcome trust established msd wellcome trust hilleman laboratories joint venture india develop vaccines millions people poorest areas world government regulation pharmaceutical industry subject regulation regional country state local agencies around world particular importance us food drug administration “fda” united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals many cases fda requirements increased amount time resources necessary develop new products bring market united states 1997 food drug administration modernization act “fda modernization act” passed culmination comprehensive legislative reform effort designed streamline regulatory procedures within fda improve regulation drugs medical devices food legislation principally designed ensure timely availability safe effective drugs biologics expediting premarket review process new products key provision legislation reauthorization prescription drug user fee act 1992 permits continued collection user fees prescription drug manufacturers augment fda resources earmarked review human drug applications helps provide resources necessary ensure prompt approval safe effective new drugs united states government expanded access senior citizens prescription drug coverage enacting medicare prescription drug improvement modernization act 2003 signed law december 2003 prescription drug coverage began january 1 2006 legislation supports company’s goal improving access medicines expanding insurance coverage preserving marketbased incentives pharmaceutical innovation time legislation helped control cost prescription drug costs competitive pressures encouraging appropriate use medicines mentioned united states major healthcare reform introduced passed houses congress final revised bill unifies versions may considered adopted law us congress also considered may consider proposals increase government’s role pharmaceutical pricing medicare program proposals may include removing current legal prohibition secretary health human services intervening price negotiations medicare drug benefit program plans pharmaceutical companies may also include mandating payment rebates pharmaceutical utilization medicare drug benefit plans addition congress may consider proposals allow certain conditions importation medicines countries many years pharmaceutical industry federal state oversight approval process new drugs drug safety advertising promotion drug purchasing reimbursement programs formularies company believes continue able conduct operations including introduction new drugs market regulatory environment company continues work private public payors slow increases healthcare spending also us federal state governments pursued methods directly reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities “disproportionate share” hospitals meeting certain criteria provide minimum discounts 24 defined “nonfederal average manufacturer price” purchases certain components federal government department veterans affairs department defense initiatives states seek rebates beyond minimum required medicaid legislation cases patients beyond eligible medicaid federal vaccines children entitlement program us centers disease control prevention “cdc” funds purchases recommended pediatric vaccines public sector price immunization medicaideligible uninsured native american certain underinsured children old merck awarded cdc contract 2009 supply pediatric vaccines children program outside united states company encounters similar regulatory legislative issues countries business primary thrust governmental inquiry action toward determining drug safety effectiveness often mechanisms controlling prices reimbursement prescription drugs profits prescription drug companies eu adopted directives concerning classification labeling advertising wholesale distribution approval marketing medicinal products human use company’s policies procedures already consistent substance directives consequently believed material effect company’s business january 2008 european commission “ec” launched sector inquiry pharmaceutical industry rules eu competition law part inquiry old merck’s offices germany inspected authorities beginning january 2008 preliminary report ec issued november 28 2008 following public consultation period final report issued july 2009 final report confirmed decline number novel medicines reaching market instances delayed market entry generic medicines discussed industry practices may contributed phenomena ec issued inquiries respect subject investigation ec alleged company subsidiaries engaged unlawful practices company subject jurisdiction various regulatory agencies therefore subject potential administrative actions may include seizures products civil criminal sanctions certain circumstances company may deem advisable initiate product recalls company believes able compete effectively within environment privacy data protection company subject number privacy data protection laws regulations globally legislative regulatory landscape privacy data protection continues evolve increasing attention privacy data protection issues potential affect directly company’s business including recently enacted laws regulations united states internationally requiring notification individuals government authorities security breaches involving certain categories personal information operating results sales worldwide sales totaled 274 billion 2009 increase 15 compared 2008 foreign exchange unfavorably affected global sales performance 2 revenue increase 2008 largely reflects incremental sales resulting inclusion postmerger results legacy scheringplough products remicade temodar nasonex nasal spray pegintron well recognition revenue sales zetia vytorin prior merger sales zetia vytorin recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates result merger msp partnership whollyowned company therefore revenues products postmerger period reflected sales additionally company recognized sales postmerger period legacy scheringplough animal health consumer healthcare products also contributing sales increase growth januvia janumet isentress singulair varivax pneumovax increases partially offset lower sales fosamax plus lost market exclusivity substantially formulations united states february 2008 april 2008 respectively revenue also negatively affected lower sales gardasil cosopttrusopt lost us market exclusivity october 2008 lower revenue company’s relationship azlp products experiencing declines include rotateq zocor primaxin domestic sales increased 8 compared 2008 foreign sales rose 24 driven primarily incremental sales resulting inclusion postmerger results legacy scheringplough products domestic sales increase also driven higher sales januvia janumet isentress singulair increases partially offset lower sales fosamax plus cosopttrusopt gardasil rotateq foreign sales growth reflects strong performance januvia janumet isentress partially offset lower sales fosamax plus vaccines foreign sales represented 47 total sales 2009 worldwide sales totaled 239 billion 2008 decline 1 compared 2007 foreign exchange favorably affected global sales performance 3 revenue decline 2007 largely reflects lower sales fosamax plus also contributing decline lower sales zocor vasotecvaseretic sales certain vaccines including hepatitis haemophilus influenzae type b “hib” vaccines partially offsetting declines higher sales januvia janumet isentress cozaarhyzaar rotateq singulair foreign sales represented 44 total sales 2008 sales1 company’s products follows 1 sales legacy scheringplough products reflect results postmerger period december 31 2009 sales msp partnership products zetia vytorin represent sales postmerger period december 31 2009 prior merger sales zetia vytorin primarily recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates sales zetia vytorin 2008 2007 reflect old merck’s sales products latin america part msp partnership 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily includes sales human pharmaceutical products including products within franchises listed separately 4 reflects nonreportable segments including animal health consumer health care revenue company’s relationship azlp primarily relating sales nexium well prilosec revenue azlp 14 billion 16 billion 17 billion 2009 2008 2007 respectively 5 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results pharmaceutical segment revenues bone respiratory immunology dermatology worldwide sales singulair leukotriene receptor antagonist chronic treatment asthma relief symptoms allergic rhinitis grew 7 reaching 47 billion 2009 primarily driven favorable pricing strong performance japan asia pacific global sales singulair rose 2 43 billion 2008 reflecting higher sales outside united states including volume growth europe japan positive effect foreign exchange partially offset lower sales domestically singulair continues number one prescribed product us respiratory market us sales singulair 30 billion 2009 patent provides us marketing exclusivity singulair expires august 2012 company expects within two years following patent expiration lose substantially us sales singulair declines coming first full year following patent expiration addition patent singulair expire number major european markets august 2012 company expects sales singulair markets decline significantly thereafter worldwide sales fosamax plus marketed fosavance throughout eu fosamac japan treatment case fosamax prevention osteoporosis decreased 29 2009 11 billion declined 49 2008 16 billion since substantially formulations medicines lost us market exclusivity company experiencing significant declines sales united states within fosamax product franchise company expects declines continue international sales remicade treatment inflammatory diseases 4307 million postmerger period december 31 2009 remicade marketed company outside united states except japan certain asian markets products compete remicade launched past several years october 2009 ec approved simponi golimumab oncemonthly subcutaneous treatment certain inflammatory diseases company launched simponi canada germany denmark launches international markets ongoing planned see note 12 consolidated financial statements discussion arbitration proceedings involving remicadesimponi global sales nasonex nasal spray inhaled nasal corticosteroid treatment nasal allergy symptoms 1649 million postmerger period december 31 2009 global sales clarinex marketed aerius many countries outside united states nondrowsy antihistamine 1006 million postmerger period december 31 2009 products included bone respiratory immunology dermatology franchise include among others propecia product treatment male pattern hair loss arcoxia treatment arthritis pain asmanex orally inhaled steroid asthma cardiovascular sales zetia cholesterol absorption inhibitor vytorin combination product containing active ingredients zetia zocor 4029 million 4408 million respectively postmerger period december 31 2009 prior merger sales products recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates result merger msp partnership whollyowned company therefore revenues products reflected sales discussion performance zetia vytorin prior closing merger see “selected joint venture affiliate information” global sales integrilin injection legacy scheringplough product treatment patients acute coronary syndrome sold company united states canada 459 million postmerger period december 31 2009 june 2009 launches tredaptive began international markets december 31 2009 merck launched tredaptive 20 countries including major european markets tredaptive lipidmodifying therapy patients mixed dyslipidemia primary hypercholesterolemia tredaptive also known trademark cordaptive certain countries approved 45 countries outside united states united states remains investigational diabetes obesity global sales januvia merck’s dipeptidyl peptidase4 “dpp4” inhibitor treatment type 2 diabetes 19 billion 2009 14 billion 2008 6675 million 2007 januvia approved fda october 2006 ec march 2007 dpp4 inhibitors represent class prescription medications improve blood sugar control patients type 2 diabetes enhancing natural body system called incretin system helps regulate glucose affecting beta cells alpha cells pancreas 2009 januvia received regulatory approval japan china 2009 ec approved restricted first line use januvia treatment type 2 diabetes approval sitagliptin indicated improve glycemic control diet exercise alone provide adequate glycemic control metformin inappropriate due contraindications intolerance sitagliptin diabetes treatment dpp4 inhibitor class restricted first line indication eu worldwide sales janumet merck’s oral antihyperglycemic agent combines sitagliptin merck’s dpp4 inhibitor januvia metformin single tablet target three key defects type 2 diabetes 6584 million 2009 compared 3511 million 2008 864 million 2007 janumet initially approved adjunct diet exercise improve blood sugar control adult patients type 2 diabetes adequately controlled metformin sitagliptin alone patients already treated combination sitagliptin metformin february 2008 fda approval market janumet initial treatment type 2 diabetes received july 2008 janumet approved marketing eu iceland norway 2009 ec approved use januvia tablets janumet tablets addon insulin treatment type 2 diabetes sitagliptin diabetes treatment dpp4 inhibitor class indication use addon insulin eu united states supplemental new drug application concerning use januvia janumet combination insulin accepted fda currently review infectious disease worldwide sales isentress antiretroviral therapy treatment hiv infection 7518 million 2009 3611 million 2008 413 million 2007 sales growth 2009 reflects positive performance united states well internationally due part strong 2008 launches certain countries including france spain italy isentress available major international markets october 2007 fda granted isentress accelerated approval use combination antiretroviral agents treatment hiv1 infection treatmentexperienced adult patients evidence viral replication hiv1 strains resistant multiple antiretroviral agents isentress first medicine approved class antiretroviral drugs called integrase inhibitors isentress works inhibiting insertion hiv dna human dna integrase enzyme inhibiting integrase performing essential function limits ability virus replicate infect new cells january 2009 fda granted traditional approval isentress following review 48 week data benchmrk 1 2 clinical trials july 2009 fda approved expanded indication isentress include use treatment adult patients starting hiv1 therapy first time treatment naïve well treatmentexperienced adult patients september 2009 isentress granted expanded license ec use combination antiretroviral medicinal products treatment hiv1 infection adult patients including treatmentnaïve adult patients well treatmentexperienced adult patients commission’s decision applicable 27 countries members eu well iceland norway additionally october 2009 merck announced isentress indicated use treatmentnaïve adults canada sales primaxin antibacterial product declined 9 2009 6889 million compared 2008 results reflect competitive pressures also reflect supply constraints patents primaxin expired worldwide multiple generics approved europe accordingly company experiencing decline sales product company expects decline continue sales primaxin essentially flat 2008 compared 2007 worldwide sales pegintron treating chronic hepatitis c 1487 million postmerger period december 31 2009 products contained infectious diseases franchise include among others cancidas antifungal product crixivan stocrin antiretroviral therapies treatment hiv infection avelox fluoroquinolone antibiotic treatment certain respiratory skin infections invanz treatment certain infections mature brands merck’s mature brands human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatment hypertension 36 billion 2009 comparable sales 2008 reflecting unfavorable effect foreign exchange offset strong performance products united states hyzaar japan marketed preminent global sales cozaar hyzaar grew 6 36 billion 2008 driven strong performance hyzaar japan well positive effect foreign exchange cozaar hyzaar among leading medicines angiotensin receptor blocker class patents provide us market exclusivity cozaar hyzaar expire april 2010 addition patent cozaar expire number major european markets march 2010 hyzaar lost patent protection number major european markets february 2010 company anticipates significant decline future cozaarhyzaar sales since multiple sources generics expected medicines time patent expiry worldwide sales zocor statin modifying cholesterol declined 15 2009 25 2008 zocor lost us market exclusivity june 2006 also lost market exclusivity major international markets products contained mature brands franchise include among others prescription claritin treatment seasonal outdoor allergies yearround indoor allergies vasotecvaseretic hypertension andor heart failure proscar urology product treatment symptomatic benign prostate enlargement neurosciences ophthalmology sales cosopt trusopt merck’s largestselling ophthalmic products declined 36 5035 million 2009 compared 2008 patent provided us market exclusivity cosopt trusopt expired october 2008 cosopt also lost market exclusivity number major european markets trusopt lose market exclusivity number major european markets april 2012 company expects sales markets decline significantly thereafter sales cosopt trusopt declined 1 2008 compared 2007 saphris asenapine merck’s sublingual tablet acute treatment schizophrenia adults acute treatment manic mixed episodes associated bipolar disorder approved fda august 2009 full launch underway company filed two supplemental new drug applications fda saphris adjunct therapy patients mania maintenance therapy patients schizophrenia application asenapine also review eu company’s muscle relaxant reversal drug bridion currently approved 44 countries including japan launched 28 countries around world 2009 saflutan tafluprost launched number countries including united kingdom spain additional launches countries expected next year pending regulatory approvals saflutan preservative free synthetic analogue prostaglandin α reduction elevated intraocular pressure appropriate patients primary openangle glaucoma ocular hypertension tafluprost phase iii development united states april 2009 old merck santen pharmaceutical co ltd “santen” announced worldwide licensing agreement tafluprost see “research development update” also 2009 old merck divested us marketing rights timoptic product franchise aton pharma inc timoptic product franchise includes ophthalmic products treat elevated intraocular pressure patients ocular hypertension openangle glaucoma oncology sales temodar treatment certain types brain tumors 1881 million postmerger period december 31 2009 temodar lost patent exclusivity eu 2009 january 2010 company announced us district court district delaware ruled company patent infringement suit teva pharmaceuticals usa inc see note 12 consolidated financial statements decision appealed effects ruling uncertain matter appeal products oncology franchise include emend treatment chemotherapy induced nausea vomiting caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma marketing rights caelyx return johnson december 31 2010 vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd “spmsd” company’s joint venture sanofi pasteur results included equity income affiliates see “selected joint venture affiliate information” supply sales spmsd however included worldwide sales gardasil recorded merck declined 20 11 billion 2009 declined 5 14 billion 2008 gardasil world’s topselling hpv vaccine indicated girls women 9 26 years age prevention cervical vulvar vaginal cancers precancerous dysplastic lesions genital warts caused hpv types 6 11 16 18 gardasil also approved united states use boys men ages 9 26 years age prevention genital warts caused hpv types 6 11 sales performance 2009 driven largely declines united states continue affected saturation 13 18 yearold female cohort due rapid early uptake ongoing challenges vaccinating 19 26 yearold female age group sales 2009 include 51 million revenue result government purchases us centers disease control prevention’s “cdc” strategic national stockpile 2008 sales performance reflects lower sales domestically partially offset growth outside united states sales 2007 include initial purchases many states cdc vaccines children program company party certain third party license agreements respect gardasil including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasil sales 21 27 vary country included materials production costs october 2009 fda approved gardasil use boys men making gardasil hpv vaccine approved use males later october 2009 merck announced cdc’s advisory committee immunization practices “acip” supports permissive use gardasil boys men ages 9 26 means gardasil may given males ages 9 26 reduce likelihood acquiring genital warts acip also voted recommend funding provided use gardasil males vaccines children program january 2009 fda issued second complete response letter regarding supplemental biologics license application “sbla” use gardasil women ages 27 45 fda completed review response old merck provided july 2008 fda’s first complete response letter issued june 2008 recommended old merck submit additional data 48 month study completed initial sbla included data collected average 24 months enrollment study number prespecified endpoints met merck provided response fda fourth quarter 2009 class 2 response generally carries 6month review time point fda accepted file complete response letter affect current indications gardasil females ages 9 26 global sales rotateq vaccine help protect rotavirus gastroenteritis infants children recorded merck declined 21 2009 5219 million reflecting moderate impact competition united states greater impact public sector worldwide sales rotateq grew 27 2008 6645 million primarily driven continued uptake united states successful launches around world sales 2008 included purchases 54 million support cdc strategic national stockpile old merck received regulatory approvals united states certain markets increase manufacturing capacity company’s varicella zoster virus “vzv”containing vaccines company manufacturing bulk varicella producing doses varivax zostavax proquad pediatric combination vaccine help protect measles mumps rubella varicella one vzvcontaining vaccines currently available ordering however orders transitioned appropriate mmr ii varivax total sales recorded merck proquad 95 million 2008 2644 million 2007 merck anticipates proquad available us market 2010 merck’s sales varivax vaccine help prevent chickenpox varicella 10 billion 2009 9246 million 2008 8549 million 2007 varivax vaccine available united states help protect chickenpox due unavailability proquad sales 2009 reflect 64 million revenue result government purchases cdc’s strategic national stockpile 2007 varivax benefited acip’s june 2006 second dose recommendation merck’s sales mmr ii vaccine help protect measles mumps rubella 3314 million 2009 3344 million 2008 2278 million 2007 sales varivax mmr ii affected unavailability proquad combined sales proquad mmr ii varivax increased 8 2009 declined 6 2008 sales zostavax vaccine help prevent shingles herpes zoster recorded merck 2774 million 2009 3124 million 2008 2360 million 2007 sales years affected supply issues normal shipping schedules zostavax united states resumed june 2009 company anticipates zostavax available 2010 united states customers likely experience back orders zostavax throughout year international launches zostavax delayed 2011 vaccine first medical option prevention shingles sales pneumovax vaccine help prevent pneumococcal disease 3456 million 2009 compared 2493 million 2008 2332 million 2007 increase 2009 due favorable pricing united states higher demand associated flu pandemic september 2009 old merck announced entered exclusive agreement csl biotherapies “csl” subsidiary csl limited market distribute afluria csl’s seasonal influenza flu vaccine united states 2010201120152016 flu seasons terms agreement company assume responsibility aspects commercialization afluria united states csl supply afluria merck retain responsibility marketing vaccine outside united states afluria indicated active immunization persons age 6 months older influenza disease caused influenza virus subtypes type b present vaccine efforts resolve manufacturing issues related hibcontaining vaccines pedvaxhib comvax ongoing since december 2007 january 2010 pedvaxhib became fully available united states routine vaccination well booster dose catchup vaccination timing availability outside united states dependent upon local regulatory requirements market return comvax dependent upon supply situation company’s hibcontaining vaccine hepatitis b vaccine pediatricadolescent formulation vaqta vaccine hepatitis currently available company continuing prioritize pediatricadolescent formulation merck anticipates adult formulation available 2010 outside united states supply vaqta limited availability vary region pediatricadolescent formulation recombivax hb vaccine hepatitis b became available december 2009 company anticipate availability adult formulation first half 2010 company anticipates dialysis formulation become available end 2010 women’s health endocrine global sales follistimpuregon fertility treatment 965 million postmerger period december 31 2009 follistimpuregon lost market exclusivity eu august 2009 worldwide sales nuvaring contraceptive product 883 million postmerger period december 31 2009 january 2010 merck received ec approval elonva indicated controlled ovarian stimulation combination gnrh antagonist development multiple follicles women participating assisted reproductive technology program ec approval merck receives marketing authorization elonva unified labeling valid european union member states elonva first class sustained follicle stimulant due ability initiate sustain multiple follicular growth entire week single subcutaneous injection recommended dose elonva may replace first seven injections daily recombinant follicle stimulating hormone rfsh preparation controlled ovarian stimulation treatment cycle january 2010 company azlp teva pharmaceuticals inc acquired ivax pharmaceuticals inc entered settlement agreement resolve patent litigation respect esomeprazole nexium provides tevaivax bring generic esomeprazole product market united states may 27 2014 2008 old merck azlp entered similar agreement ranbaxy laboratories ltd “ranbaxy” provides ranbaxy bring generic esomeprazole product market united states may 27 2014 company faces challenges respect outstanding patent infringement matters esomeprazole see note 12 consolidated financial statements animal health global sales animal health products include livestock poultry companion animal aquaculture products prevent treat animal diseases totaled 4942 million postmerger period december 31 2009 animal health sales affected intense competition frequent introduction generic products consumer health care global sales consumer health care products include otc foot care sun care products 1492 million postmerger period december 31 2009 consumer health care product sales affected competition frequent competitive product introductions consumer spending patterns consumer health care products include dr scholl’s foot care products claritin nondrowsy antihistamines miralax treatment occasional constipation coppertone sun care products december 2009 merck announced fda approved zegerid otc overthecounter treatment frequent heartburn agreement santarus inc specialty pharmaceutical company developed currently markets prescription zegerid scheringplough healthcare products consumer healthcare division merck responsible development manufacturing commercialization zegerid otc products heartburnrelated indications united states canada costs expenses 100 greater materials production 2009 materials production costs 90 billion compared 56 billion 2008 materials production costs include expenses related sale legacy scheringplough products postmerger period additionally costs unfavorably affected 15 billion amortization purchase accounting adjustments scheringplough’s inventories 08 billion expense amortization intangible assets recognized merger also included materials production costs 2009 1152 million costs associated restructuring activities substantially represents accelerated depreciation associated planned sale closure manufacturing facilities see note 4 consolidated financial statements 2008 materials production costs declined 9 compared 1 decline sales primarily reflecting lower restructuring costs included materials production costs 2008 1232 million restructuring costs comprised 887 million accelerated depreciation 345 million costs primarily asset writeoffs compares restructuring costs 4831 million 2007 representing 4606 million accelerated depreciation 225 million asset impairments gross margin 671 2009 compared 766 2008 746 2007 additional amortization expense result merger 2009 restructuring charges reflected periods noted unfavorable impact 88 percentage points 2009 05 percentage points 2008 20 percentage points 2007 gross margin 2008 reflects changes product mix including decline fosamax plus sales result loss us market exclusivity 2008 manufacturing efficiencies gross margin 2007 reflects slight unfavorable impact changes product mix positive impact manufacturing efficiencies marketing administrative marketing administrative expenses increased 16 2009 driven largely inclusion expenses related scheringplough activities postmerger period additionally 3707 million mergerrelated costs recognized 2009 consisting transaction costs directly related merger including advisory legal fees integration costs increases partially offset initiatives reduce cost base place prior consummation merger separation costs associated sales force reductions incurred reflected restructuring costs discussed addition marketing administrative expenses benefited foreign exchange marketing administrative expenses 2009 2008 included 75 million 62 million respectively additional reserves solely future vioxx legal defense costs expenses 2009 2008 also reflect 40 million additional reserves solely future legal defense costs fosamax litigation see note 12 consolidated financial statements information vioxx fosamax litigation related matters marketing administrative expenses declined 2 2008 compared 2007 included marketing administrative expenses 2008 2007 62 million 280 million respectively additional reserves solely future vioxx legal defense costs also included costs 2008 40 million additional reserves solely future legal defense costs fosamax litigation addition marketing administrative expenses 2007 included 455 million gain insurance arbitration award related vioxx product liability litigation coverage addition lower expenses future legal defense costs decline marketing administrative expenses 2008 compared 2007 also reflects efforts reduce cost base research development research development expenses increased 22 2009 compared 2008 due part incremental expenditures associated inclusion scheringplough’s results postmerger period additionally expenses 2009 reflect 2316 million costs associated restructuring activities including closure sale research facilities connection 2008 restructuring program substantially represent accelerated depreciation see note 4 consolidated financial statements addition research development expenses 2009 compared 2008 reflect increase development spending support continued advancement research pipeline including investments latestage clinical trials research development expenses declined 2 2008 compared 2007 expenses 2008 reflect 1284 million costs related restructuring activities expenses 2007 reflect 3251 million inprocess research development expense related novacardia acquisition research development expenses 2008 compared 2007 reflect increase development spending support continued advancement research pipeline sharebased compensation total pretax sharebased compensation expense 4155 million 2009 3480 million 2008 3302 million 2007 december 31 2009 5218 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 15 years segment reporting sharebased compensation costs unallocated expenses restructuring costs restructuring costs 16 billion 10 billion 3271 million 2009 2008 2007 respectively restructuring costs recorded 2009 14 billion related merger restructuring program 1782 million related 2008 restructuring program 387 million related legacy scheringplough productivity transformation program restructuring costs recorded 2008 7355 million related 2008 restructuring program remainder associated 2005 restructuring program 2009 2008 2007 separation costs 14 billion 9573 million 2514 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated 3525 positions 2009 related 2008 restructuring program 5800 positions 2008 approximately 1750 related 2008 restructuring program 4050 related 2005 restructuring program 2400 positions 2007 position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs curtailment settlement termination charges pension postretirement benefit plans shutdown costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production costs research development expenses equity income affiliates equity income affiliates reflects performance company’s joint ventures partnerships decline 2009 primarily driven lower equity income msp partnership whollyowned company result merger therefore results reflected consolidated results company beginning date merger decreased equity income merial due sale old merck’s interest september 2009 partially offset higher partnership returns azlp 2008 decline equity income affiliates reflects decreased equity income msp partnership lower partnership returns azlp partially offset higher equity income merial spmsd decrease equity income msp partnership 2008 primarily result lower revenues vytorin zetia following announcements enhance seas clinical trial results lower partnership returns azlp 2008 primarily attributable first quarter 2008 partial redemption old merck’s interest certain azlp product rights resulted reduction priority return variable returns based part upon sales certain former astra usa inc products higher equity income merial 2008 primarily reflects higher sales biological products increase equity income spmsd 2008 largely attributable higher sales gardasil joint venture territories outside united states see “selected joint venture affiliate information” us vioxx settlement agreement charge november 9 2007 old merck entered agreement “settlement agreement” law firms comprise executive committee plaintiffs’ steering committee federal multidistrict vioxx litigation well representatives plaintiffs’ counsel state coordinated proceedings resolve state federal myocardial infarction “mi” ischemic stroke “is” claims filed date old merck united states settlement agreement old merck paid aggregate fixed amount 485 billion two funds qualifying claims consisting 40 billion qualifying mi claims 850 million qualifying claims entered resolution process “settlement program” 750 million paid funds 2008 remainder 2009 consequence settlement agreement pretax charge 485 billion recorded 2007 see note 12 consolidated financial statements income expense net included income expense net 2009 75 billion gain related merck’s previously held interest msp partnership result merger company obtained controlling interest msp partnership owned 100 company previously company noncontrolling interest business combination acquirer holds noncontrolling equity investment acquiree immediately obtaining control acquiree referred “step acquisition” acquirer required remeasure previously held equity interest acquiree acquisitiondate fair value recognize resulting gain loss earnings additionally 2009 32 billion gain recognized sale old merck’s interest merial see note 10 consolidated financial statements also included income expense net 2009 231 million investment portfolio recognized net gains 80 million charge related settlement vioxx thirdparty payor litigation united states see note 12 consolidated financial statements included income expense net 2008 aggregate gain distribution azlp 22 billion see note 10 consolidated financial statements gain 249 million related sale remaining worldwide rights aggrastat 300 million expense contribution merck company foundation 117 million investment portfolio recognized net losses 58 million charge related resolution investigation whether old merck violated state consumer protection laws respect sales marketing vioxx merck experienced decline interest income 2009 compared 2008 primarily result lower interest rates change investment portfolio mix toward cash shorterdated securities anticipation merger merck recognized higher interest expense 2009 largely due 174 million commitment fees incremental interest expense related financing merger change income expense net 2008 compared 2007 primarily due aggregate gain 2008 azlp 22 billion impact 671 million charge 2007 related resolution certain civil governmental investigations 2008 gain 249 million related sale remaining worldwide rights aggrastat partially offset 300 million expense 2008 contribution merck company foundation increase exchange losses 202 million higher recognized losses 153 million net investment portfolio 58 million charge related resolution investigation whether old merck violated consumer protection laws respect sales marketing vioxx fluctuation exchange losses gains 2008 2007 primarily due higher cost foreign currency contracts due lower us interest rates unfavorable impacts periodtoperiod changes foreign currency exchange rates net long net short foreign currency positions considering net monetary assets related foreign currency contracts segment profits segment profits comprised segment revenues less certain elements materials production costs operating expenses including components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate production costs standard costs research development expenses general administrative expenses well cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits gain related msp partnership amortization purchase accounting adjustments gain disposition merial gain distribution azlp restructuring costs us vioxx settlement agreement charge taxes paid joint venture level portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items reflected “other” table also included miscellaneous corporate profits operating profits related divested products businesses supply sales adjustments eliminate effect double counting certain items income expense pharmaceutical segment profits rose 11 2009 largely driven inclusion legacy scheringplough results postmerger period pharmaceutical segment profits decreased 3 2008 largely driven lower sales fosamax plus zocor decreased equity income msp partnership taxes income effective income tax rate 148 2009 201 2008 27 2007 2009 effective tax rate reflects favorable impacts increased income lower tax jurisdictions includes favorable impact msp partnership gain higher expenses certain jurisdictions including amortization purchase accounting adjustments restructuring costs effective income tax rate 2009 also benefited 2009 tax settlements including previously announced settlement canada revenue agency “cra” favorable impacts partially offset unfavorable effect gain sale old merck’s interest merial taxable united states combined federal state tax rate approximately 380 net favorable impact items 2009 effective tax rate approximately 7 percentage points 2008 effective tax rate reflects net favorable impact compared statutory rate approximately 3 percentage points includes favorable impacts relating tax settlements resulted reduction liability unrecognized tax benefits approximately 200 million realization foreign tax credits favorable tax impact foreign exchange rate changes fourth quarter particularly strengthening japanese yen us dollar partially offset unfavorable impact resulting azlp gain fully taxable united states combined federal state tax rate approximately 363 first quarter 2008 old merck decided distribute certain prior years’ foreign earnings united states result utilization foreign tax credits foreign tax credits arose result tax payments made outside united states prior years became realizable first quarter based change old merck’s decision distribute foreign earnings 2007 effective tax rate reflects reduction domestic pretax income primarily resulting us vioxx settlement agreement charge related change mix domestic foreign pretax income net income earnings per common share net income available common shareholders 129 billion 2009 compared 78 billion 2008 33 billion 2007 earnings per common share assuming dilution available common shareholders “eps” 565 2009 compared 363 2008 149 2007 increases net income earnings per share 2009 largely driven gain associated msp partnership recognized conjunction merger well gain recorded sale old merck’s interest merial partially offset incremental charges associated merger including amortization intangible assets inventory stepup recognition mergerrelated costs eps 2009 also affected dilutive impact shares issued merger increases net income earnings per share 2008 compared 2007 primarily attributable gain distribution azlp 2008 impacts 2007 us vioxx settlement agreement civil governmental investigations charges addition increases reflect positive impact certain tax items lower inprocess research development costs lower expenses legal defense costs partially offset higher restructuring costs lower equity earnings 2008 well recognition 2007 insurance arbitration gain nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap earnings per share exclude certain items nature items impact analysis underlying business performance trends excluded items certain purchase accounting items related merger restructuring activities mergerrelated costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income earnings per share prepared accordance generally accepted accounting principles united states “gaap” additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows purchase accounting adjustments nongaap income nongaap eps exclude certain amounts recorded connection merger see note 3 consolidated financial statements amounts include amortization intangible assets inventory stepup restructuring activities nongaap income nongaap eps exclude restructuring activities including restructuring activities related merger see note 4 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities sold closed company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business mergerrelated costs nongaap income nongaap eps exclude transaction costs associated directly merger well integration costs excluded management believes costs unique merger transaction representative ongoing normal business activities integration costs associated merger occur several years however impacts within year vary integration progresses certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis certain items include among items gain fair value adjustment merck’s existing interest msp partnership result merger gain divestiture interest merial gain distribution azlp certain legal settlements research development chart reflecting company’s current research pipeline february 12 2010 set forth item 1 “business research development” research development update connection merger company assessing pipeline identify promising highpotential compounds development company completed prioritization clinical development programs company continuing work prioritization value adding programs related currently marketed products preclinicaldiscovery programs company anticipates full prioritization process completed first half 2010 connection process company may recognize noncash impairment charges cancellation certain legacy scheringplough pipeline programs measured fair value capitalized connection merger noncash impairment charges anticipated excluded company’s nongaap earnings could material company’s future gaap earnings company currently number candidates regulatory review united states internationally additionally company 19 drug candidates phase iii development mk6621 vernakalant iv investigational candidate treatment atrial fibrillation currently undergoing regulatory review eu april 2009 old merck cardiome pharma corp “cardiome” announced collaboration license agreement development commercialization vernakalant provides merck exclusive rights outside united states canada mexico intravenous formulation vernakalant see vernakalent oral currently phase ii development merck exclusive global rights oral formulation vernakalent maintenance normal heart rhythm patients atrial fibrillation sch 418131 mff combination two previously approved drugs treatment asthma mometasone asmanex formoterol foradil company aiming create new option patients bringing two key treatments together july 2009 scheringplough announced filed new drug application “nda” fda mff also currently regulatory review eu sch 900121 nomace2 oral contraceptive combines selective progestin estradiol estrogen women produce naturally drug currently regulatory review eu phase iii development us market sch 900274 saphris asenapine central nervous system compound bipolar disorder schizophrenia currently undergoing regulatory review eu fda approved saphris august 2009 sch 900616 bridion sugammadex medication designed rapidly reverse effects certain muscle relaxants used part general anesthesia ensure patients remain immobile surgical procedures differs reversal agents administered muscle relaxant begins wear bridion received regulatory approval eu australia new zealand japan regulatory review markets including united states prior merger scheringplough received complete response letter fda bridion following communication fda company assessing agency’s feedback order determine new timetable response sch 503034 boceprevir hepatitis c protease inhibitor currently development boceprevir fully enrolled phase iii program company expects conclude mid2010 company expects submit nda fda boceprevir end 2010 treatmentexperienced treatmentnaïve patients hepatitis c mk8669 ridaforolimus novel mtor mammalian target rapamycin inhibitor evaluated treatment cancer drug candidate jointly developed commercialized ariad pharmaceuticals inc agreement entered 2007 phase iii study succeed patients metastatic softtissue bone sarcomas underway company continues anticipate filing nda ridaforolimus fda 2010 subject review results planned interim analysis succeed sch 697243 allergy immunotherapy sublingual tablet “ait” grass pollen allergy developed company november 2009 sch 697243 met primary endpoint phase iii study adult subjects united states history grass pollen induced rhinoconjunctivitis without asthma investigational grass ait treatment designed work inducing protective immune response grass pollen allergy providing sustained prevention allergy symptoms treating symptoms underlying cause disease sch 039641 ait ragweed allergy also phase iii development us market sch 530348 vorapaxar thrombin receptor antagonist antiplatelet protease activated receptor1 inhibitor studied prevention treatment thrombosis november 2009 merck announced completion patient enrollment 26000 patients tra 2°ptimi 50 clinical trial phase iii randomized doubleblind placebocontrolled multinational study trial assess ability sch 530348 prevent major cardiovascular events added current antiplatelet regimens aspirin plus adp inhibitor patients previously experienced heart attack stroke peripheral arterial disease sch 530348 also studied treatment patients acute coronary syndrome ongoing phase iii thrombin receptor antagonist clinical event reduction acute coronary syndrome trial led duke clinical research institute company anticipates filing nda vorapaxar fda 2011 mk2452 tafluprost preservative free synthetic analogue prostaglandinα reduction elevated intraocular pressure appropriate patients primary openangle glaucoma ocular hypertension april 2009 old merck santen announced worldwide licensing agreement tafluprost see previously disclosed old merck submitted filing nda fda mk0653c ezetimibe combined atorvastatin investigational medication treatment dyslipidemia fda refused file application fda identified additional manufacturing stability data needed company assessing fda’s response anticipates filing 2011 mk0431c candidate currently phase iii clinical development combines januvia pioglitazone another type 2 diabetes therapy company continues anticipate filing nda mk0431c fda 2011 mk0822 odanacatib oral onceweekly investigational treatment osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis september 2009 data phase iib clinical study odanacatib presented 31st annual meeting american society bone mineral research showed stopping treatment two years increases lower back lumbar spine bone mineral density “bmd” reversed next year bmd hip femoral neck remained levels observed start study additionally three years treatment odanacatib 50 mg demonstrated increases bmd key fracture sites minimal impact formation new bone measured biochemical markers bone turnover odanacatib currently phase iii clinical trials evaluated largescale global outcomes study determine effects vertebral hip nonvertebral fractures company continues anticipate filing nda fda 2012 v503 ninevalent hpv vaccine development expand protection cancercausing hpv types phase iii clinical program underway merck anticipates filing biologics license application “bla” fda 2012 mk0524a drug candidate combines extendedrelease “er” niacin novel flushing inhibitor laropiprant mk0524a demonstrated ability lower ldlcholesterol “ldlc” “bad” cholesterol raise hdlcholesterol “hdlc” “good” cholesterol lower triglycerides significantly less flushing traditional extended release niacin alone high ldlc low hdlc elevated triglycerides risk factors associated heart attacks strokes april 2008 old merck received nonapprovable action letter fda response nda mk0524a meeting discuss letter fda stated additional efficacy safety data required suggested old merck wait results treatment hdl reduce incidence vascular events “hps2thrive” cardiovascular outcomes study expected completed 2012 company anticipates filing nda fda mk0524a 2012 mk0524a approved 45 countries outside united states treatment dyslipidemia particularly patients combined mixed dyslipidemia characterized elevated levels ldlc triglycerides low hdlc patients primary hypercholesterolemia heterozygous familial nonfamilial marketed tredaptive cordaptive certain countries tredaptive used patients combination statins cholesterol lowering effects statin monotherapy inadequate tredaptive used monotherapy patients statins considered inappropriate tolerated mk0524b drug candidate combines novel approach raising hdlc lowering triglycerides er niacin combined laropiprant proven benefits simvastatin one combination product merck seek approval mk0524b united states files complete response relating mk0524a mk0859 anacetrapib inhibitor cholesteryl ester transfer protein shown promise lipid management raising hdlc reducing ldlc without raising blood pressure november 2009 merck announced phase iib study 589 patients primary hypercholesterolemia mixed hyperlipidemia treated anacetrapib monotherapy coadministered atorvastatin persistent lipid effects higher dose arms monotherapy coadministration treatment groups eight weeks stopping active therapy anacetrapib effect cetp inhibition cardiovascular risk yet established phase iii trial titled define ongoing evaluate safety efficacy anacetrapib patients coronary heart disease company anticipates filing nda fda beyond 2015 previously disclosed 2009 old merck announced delaying filing us application telcagepant mk0974 company’s investigational calcitonin generelated peptide “cgrp”receptor antagonist intermittent treatment acute migraine decision based findings phase iia exploratory study small number patients taking telcagepant twice daily three months prevention migraine found marked elevations liver transaminases daily dosing regimen prevention study different dosing regimen used phase iii studies telcagepant intermittently administered one two doses treat individual migraine attacks occurred studies telcagepant acute intermittent treatment migraine continue following meetings regulatory agencies end 2009 merck planning conduct additional safety study part overall phase iii program telcagepant results study inform planned filings approval sch 900395 acadesine potential firstin class adenosine regulating agent ischemia reperfusioninjury patients undergoing heart bypass surgery patient enrollment red cabg phase iii clinical trial initiated 2009 sch 417690 vicriviroc treatment hiv infection treatment experienced evaluated two phase iii studies patient population announced january 2010 primary efficacy endpoint met merck submit nda fda vicriviroc treatmentexperienced hivinfected patients time continue evaluate vicriviroc firstline therapy treatmentnaive patients previously disclosed 2007 cubist pharmaceuticals inc “cubist” entered license agreement old merck development commercialization cubicin daptomycin injection mk3009 japan merck develop commercialize cubicin whollyowned subsidiary banyu pharmaceutical co ltd cubist commercializes cubicin united states mk3009 currently phase iii development mk4305 orexin receptor antagonist potential new approach treatment chronic insomnia currently phase iii development sch 900962 elonva corifollitropin alpha injection approved ec controlled ovarian stimulation combination gnrh antagonist development multiple follicles women participating assisted reproductive technology program currently phase iii development united states merck terminated internal clinical development program esmirtazapine sch 900265 hot flashes insomnia strategic reasons previously disclosed 2009 old merck announced preliminary results pivotal phase iii study rolofylline mk7418 investigational medicine treatment acute heart failure showed rolofylline meet primary secondary efficacy endpoints old merck terminated clinical development program rolofylline inprocess research development connection merger company recorded fair value human animal health research projects underway scheringplough approximately 50 billion consideration transferred merger allocated pharmaceutical segment iprd projects 13 billion allocated animal health operating segment iprd projects significant projects include bridion vorapaxar boceprevir phase iii clinical development well ezetimibeatorvastatin combination product projects discussed detail also noted company expects file ndas fda 2010 boceprevir 2011 vorapaxar ezetimibeatorvastatin combination product fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probability adjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using discount rates range 12 15 actual cash flows likely different assumed additional research development required programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2009 estimated costs complete projects phase iii development human health analogous stage development animal health approximately 16 billion iprd projects subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development result company’s portfolio prioritization process otherwise company realize future cash flows estimated recorded iprd merger date company may also recover research development expenditures made since merger develop program circumstances occur company’s future operating results could adversely affected acquisitions research collaborations license agreements merck continues remain focused augmenting internal efforts capitalizing growth opportunities drive near longterm growth 2009 transactions across broad range therapeutic categories well early stage technology transactions completed merck actively monitoring landscape growth opportunities meet company’s strategic criteria highlights activities include december 2009 merck avecia investments limited announced definitive agreement merck would acquire biologics business avecia group total purchase price 180 million avecia biologics contract manufacturing organization specific expertise microbialderived biologics terms agreement merck would acquire avecia biologics limited “avecia” assets including avecia’s process development scaleup manufacturing quality business support operations located billingham united kingdom transaction closed february 1 2010 accordingly results operations acquired business included merck’s results operations beginning acquisition date july 2009 old merck portola pharmaceuticals inc “portola” signed exclusive global collaboration license agreement development commercialization betrixaban mk4448 investigational oral factor xa inhibitor anticoagulant currently phase ii clinical development prevention stroke patients atrial fibrillation return exclusive worldwide license betrixaban old merck paid portola initial fee 50 million closing recorded research development expense portola eligible receive additional cash payments totaling 420 million upon achievement certain development regulatory commercialization milestones well doubledigit royalties worldwide sales betrixaban approved company assume development commercialization costs including costs phase iii clinical trials portola retained option cofund phase iii clinical trials return additional royalties b copromote betrixaban merck united states term agreement commenced august 2009 unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country agreement may terminated either party event material uncured breach bankruptcy party agreement may terminated merck event parties merck decide cease development betrixaban safety efficacy addition merck may terminate agreement time upon 180 days prior written notice portola may terminate agreement event merck challenges portola patent covering betrixaban upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization betrixaban case termination cause merck certain royalty obligations april 2009 old merck medarex inc “medarex” massachusetts biologic laboratories “mbl” university massachusetts medical school announced exclusive worldwide license agreement cda1 cdb1 mk3415a also known mdx066mdx1388 mblcda1mblcdb1 investigational fully human monoclonal antibody combination developed target neutralize clostridium difficile toxins b treatment c difficile infection cda1 cdb1 codeveloped medarex mbl terms agreement merck gained worldwide rights develop commercialize cda1 cdb1 medarex mbl received aggregate upfront payment 60 million upon closing recorded research development expense potentially eligible receive additional cash payments 165 million aggregate upon achievement certain milestones associated development approval drug candidate covered agreement upon commercialization medarex mbl also eligible receive doubledigit royalties product sales milestones certain sales targets met term agreement commenced closing date unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country either party may terminate agreement uncured material breach party bankruptcy insolvency party merck may terminate agreement time upon providing 180 days prior written notice medarex mbl also april 2009 old merck santen pharmaceutical co ltd “santen” announced worldwide licensing agreement tafluprost mk2452 prostaglandin analogue investigation united states tafluprost preserved preservativefree formulations received marketing approval reduction elevated intraocular pressure openangle glaucoma ocular hypertension several european nordic countries well japan filed approval additional european asia pacific markets terms agreement old merck paid fee capitalized amortized materials production costs life underlying patent pay milestones royalty payments based future sales tafluprost preserved preservativefree formulations exchange exclusive commercial rights tafluprost western europe excluding germany north america south america africa santen retain commercial rights tafluprost countries eastern europe northern europe asia pacific including japan merck provide promotion support santen germany poland tafluprost approved united states santen option copromote agreement old merck santen expires countrybycountry basis last occur expiry last expire valid patent claim b expiration last expire royalty merck may terminate agreement time upon 90 days prior written notice also time upon 60 days prior written notice merck determines product presents issues safety tolerability addition merck may terminate agreement event enumerated agreements santen coownerlicensor certain intellectual property terminate expire materially adversely affects merck either merck santen materially breaches agreement fails cure receiving notice nonbreaching party may terminate agreement provides termination noninsolvent party due bankruptcy party finally agreement terminate term merck develops commercializes competitive product term defined agreement addition april 2009 old merck cardiome pharma corp “cardiome” announced collaboration license agreement development commercialization vernakalant mk6621 investigational candidate treatment atrial fibrillation agreement provides merck exclusive global rights oral formulation vernakalant “vernakalant oral” maintenance normal heart rhythm patients atrial fibrillation provides merck affiliate merck sharp dohme switzerland gmbh exclusive rights outside united states canada mexico intravenous “iv” formulation vernakalant “vernakalant iv” rapid conversion acute atrial fibrillation normal heart rhythm terms agreement old merck paid cardiome initial fee 60 million upon closing recorded research development expense addition cardiome eligible receive 200 million payments based achievement certain milestones associated development approval vernakalant products including 15 million submission regulatory approval europe vernakalant iv old merck paid 2009 result submission 20 million initiation planned phase iii program vernakalant oral 100 million milestones associated approvals subsequent indications intravenous oral formulations also cardiome receive tiered royalty payments sales approved products potential receive 340 million milestone payments based achievement significant sales thresholds cardiome retained option copromote vernakalant oral merck hospitalbased sales force united states merck responsible future costs associated development manufacturing commercialization candidates merck granted cardiome secured interestbearing credit facility 100 million cardiome may access tranches several years commencing 2010 cardiome’s codevelopment partner north america astellas pharma us inc submitted nda fda kynapid vernakalant hydrochloride injection december 2006 included results two pivotal phase iii clinical trials december 2007 cardiovascular renal drugs advisory committee recommended fda approve vernakalant iv rapid conversion atrial fibrillation august 2008 fda issued approvable action letter requesting additional information phase iib doubleblind placebocontrolled randomized doseranging clinical trial patients risk recurrent atrial fibrillation showed 500 mg dose vernakalant oral significantly reduced rate atrial fibrillation relapse compared placebo agreement continues effect expiration cardiome’s copromotion rights royalty milestone payment obligations agreement may terminated event insolvency material uncured breach either party additionally collaboration may terminated merck event merck determines good faith advisable continue development commercialization vernakalant product result serious safety issue addition merck may terminate agreement time upon 12 months prior written notice cardiome may terminate agreement event merck challenges cardiome patent covering vernakalant upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vernakalant cases continuing royalty obligations march 2009 old merck acquired insmed inc’s “insmed” portfolio followon biologic therapeutic candidates commercial manufacturing facilities located boulder colorado terms agreement old merck paid insmed aggregate 130 million cash acquire rights boulder facilities insmed’s pipeline followon biologic candidates insmed’s followon biologics portfolio includes two clinical candidates mk4214 investigational recombinant granulocytecolony stimulating factor “gcsf” evaluated ability prevent infections patients cancer receiving chemotherapy mk6302 pegylated recombinant gcsf designed allow less frequent dosing transaction accounted business combination accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated insmed’s followon biologics portfolio mk4214 mk6302 indefinitelived intangible asset recorded fair value determined based upon present value expected future cash flows new product candidates resulting insmed’s followon biologics portfolio adjusted probability estimated technical marketing success utilizing income approach reflecting appropriate riskadjusted discount rates ongoing activity related mk4214 mk6302 expected material company’s research development expense remaining net assets acquired material milestone royalty obligations associated acquisition transaction closed march 31 2009 accordingly results operations acquired business included merck’s results operations beginning april 1 2009 company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources disease areas unmet medical needs scientific opportunity commercial opportunity merck managing research development portfolio across diverse approaches discovery development balancing investments appropriately novel innovative targets potential major impact human health developing bestinclass approaches delivering maximum value new medicines vaccines new indications new formulations another important component company’s sciencebased diversification based expanding company’s portfolio modalities include small molecules vaccines also biologics peptides rnai merck moved diversify portfolio creating new division merck bioventures potential harness market opportunity presented biological medicine patent expiries delivering high quality followon biologic products enhance access patients worldwide company continue pursue appropriate external licensing opportunities integration plans research development focused integrating research operations legacy companies including providing effective transition employees realizing projected merger synergies form cost savings revenue growth opportunities maintaining momentum company’s latestate pipeline 2009 merck continued implementing new model basic research global operating strategy legacy merck research laboratories sites new model align franchise function well align resources disease area priorities balance capacity across discovery phases allow company act upon programs highest probability success additionally across disease area priorities company’s strategy designed expand access worldwide external science incorporate external research key component company’s early discovery pipeline order translate basic research productivity latestage clinical success company’s clinical pipeline includes candidates multiple disease areas including anemia atherosclerosis cancer diabetes heart disease hypertension infectious diseases inflammatoryautoimmune diseases migraine neurodegenerative diseases ophthalmics osteoporosis psychiatric diseases respiratory disease women’s health company supplements internal research aggressive licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies selected joint venture affiliate information expand research base realize synergies combining capabilities opportunities assets previous years old merck formed number joint ventures see note 10 consolidated financial statements merckscheringplough partnership 2000 old merck scheringplough collectively “partners” entered agreement create equallyowned partnership develop market united states new prescription medicines cholesterol management agreement generally provided equal sharing development costs copromotion approved products company 2001 cholesterolmanagement partnership expanded include countries world excluding japan 2002 ezetimibe first new class cholesterollowering agents launched united states zetia marketed ezetrol outside united states 2004 combination product containing active ingredients zetia zocor approved united states vytorin marketed inegy outside united states vytorin combination tablet cholesterol treatment provide ldl cholesterol lowering dual inhibition cholesterol production absorption cholesterol agreements provided sharing operating income generated msp partnership based upon percentages vary product sales level country us market partners shared profits zetia vytorin sales equally exception first 300 million annual zetia sales scheringplough received greater share profits operating income included expenses partners contractually agreed share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services ongoing clinical research market support market research market expansion well specialty sales force physician education programs expenses incurred support msp partnership shared partners marketing administrative expenses including certain sales force costs well certain manufacturing costs included equity income affiliates however costs reflected overall results legacy company certain research development expenses generally shared equally partners adjusting earned milestones result merger msp partnership owned 100 company results msp partnership date merger reflected equity income affiliates results sales msp partnership products merger consolidated merck’s results sales joint venture products follows1 1 amounts exclude sales products partners outside msp partnership following previously announced enhance seas clinical trial results discussed sales vytorin zetia declined 2009 2008 previously disclosed january 2008 legacy companies announced results effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia “enhance” clinical trial imaging trial 720 patients heterozygous familial hypercholesterolemia rare genetic condition causes high levels ldl “bad” cholesterol greatly increases risk premature coronary artery disease previously reported despite fact ezetimibesimvastatin 1080 mg vytorin significantly lowered ldl “bad” cholesterol simvastatin 80 mg alone significant difference treatment ezetimibesimvastatin simvastatin alone prespecified primary endpoint change thickness carotid artery walls two years measured ultrasound improved reduction highrisk subjects presenting acute coronary syndrome “improveit” trial underway designed provide cardiovascular outcomes data ezetimibesimvastatin patients acute coronary syndrome incremental benefit ezetimibe simvastatin cardiovascular morbidity mortality demonstrated simvastatin established january 2009 fda announced completed review final clinical study report enhance fda stated results enhance change position elevated ldl cholesterol risk factor cardiovascular disease lowering ldl cholesterol reduces risk cardiovascular disease july 21 2008 efficacy safety results simvastatin ezetimibe aortic stenosis “seas” study announced seas designed evaluate whether intensive lipid lowering vytorin 1040 mg would reduce need aortic valve replacement risk cardiovascular morbidity mortality versus placebo patients asymptomatic mild moderate aortic stenosis indication statin therapy vytorin failed meet primary end point reduction major cardiovascular events study patients group took vytorin 1040 mg higher incidence cancer group took placebo also nonsignificant increase deaths cancer patients group took vytorin versus took placebo cancer deaths distributed across major organ systems company believes cancer finding seas likely anomaly taken light available data support association vytorin august 2008 fda announced investigating results seas trial december 2009 fda announced completed review data seas trial well review interim data study heart renal protection “sharp” improveit trials based currently available information fda indicated believed unlikely vytorin zetia increase risk cancerrelated death sharp trial expected completed 2010 improveit trial scheduled completion 2013 improveit trial blinded interim efficacy analysis conducted data safety monitoring board trial approximately 50 endpoints accrued interim analysis expected conducted 2010 company committed working regulatory agencies evaluate available data interpretations data however company believe changes clinical use vytorin warranted see note 12 consolidated financial statements information respect litigation involving partners msp partnership related sale promotion zetia vytorin results old merck’s interest msp partnership completion merger recorded equity income affiliates equity income 12 billion 2009 15 billion 2008 18 billion 2007 financial statements msp partnership 2008 included item 15 2 “financial statement schedules” astrazeneca lp 1982 old merck entered agreement astra ab “astra” develop market astra’s products royaltybearing license 1993 old merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” old merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 old merck astra completed restructuring ownership operations joint venture whereby old merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc “astrazeneca merger” became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales current future kbi products revenue 14 billion 16 billion 17 billion 2009 2008 2007 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates returns include priority return provided partnership agreement variable returns based part upon sales certain former astra usa inc products preferential return representing merck’s share undistributed azlp gaap earnings returns aggregated 6743 million 5984 million 8201 million 2009 2008 2007 respectively astrazeneca merger triggered partial redemption march 2008 old merck’s interest certain azlp product rights upon redemption old merck received 43 billion azlp amount based primarily multiple old merck’s average annual variable returns derived sales former astra usa inc products three years prior redemption “limited partner share agreed value” pretax gain 15 billion partial redemption recorded 2008 partial redemption old merck’s interest product rights result change old merck’s 1 limited partnership interest conjunction 1998 restructuring astra purchased option “asset option” payment 4430 million recorded deferred income buy old merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” astrazeneca exercise asset option first half 2010 exercise price 647 million represents net present value march 31 2008 projected future pretax revenue received old merck nonppi products “appraised value” february 26 2010 astrazeneca notified company exercising asset option old merck also right require astra purchase interest 2008 appraised value february 2008 old merck advised astrazeneca would exercise asset option thus 4430 million remains deferred recognized asset option consummated addition 1998 old merck granted astra option “shares option” buy old merck’s common stock interest kbi therefore old merck’s interest nexium prilosec exercisable two years astra’s exercise asset option astra also exercise shares option 2017 combined annual sales two products fall minimum amount provided case long astrazeneca’s asset option exercised 2010 exercise price shares option based net present value estimated future net sales nexium prilosec determined time exercise subject certain trueup mechanisms astrazeneca merger constituted trigger event kbi restructuring agreements result merger exchange old merck’s relinquishment rights future astra products existing pending us patents time merger astra paid 9674 million “advance payment” advance payment deferred remained subject trueup calculation “trueup amount” directly dependent fair market value march 2008 astra product rights retained old merck calculated trueup amount 2437 million returned azlp march 2008 pretax gain 7237 million recognized related residual advance payment balance provisions kbi restructuring agreements trigger event occurred sum limited partner share agreed value appraised value trueup amount guaranteed minimum 47 billion distribution limited partner share agreed value less payment trueup amount resulted cash receipts old merck 40 billion aggregate pretax gain 22 billion included income expense net 2008 astrazeneca’s purchase old merck’s interest nonppi products contingent upon exercise asset option astrazeneca 2010 therefore payment appraised value may occur also march 2008 138 billion outstanding loan astra plus interest redemption date settled result transactions old merck received net proceeds azlp 26 billion 2008 merial limited 1997 old merck rhônepoulenc sa sanofiaventis combined animal health businesses form merial limited “merial” fully integrated animal health company standalone joint venture 50 owned party merial provides comprehensive range pharmaceuticals vaccines enhance health wellbeing performance wide range animal species september 17 2009 old merck sold 50 interest merial sanofiaventis 4 billion cash sale resulted recognition 32 billion gain reflected income expense net 2009 also connection sale merial old merck sanofiaventis scheringplough signed call option agreement terms call option agreement following closing merger sanofiaventis option require company combine intervetscheringplough animal health business merial form animal health joint venture would owned equally company sanofiaventis part call option agreement value merial fixed 8 billion minimum total value received company affiliates contributing intervetscheringplough combined entity would 925 billion subject customary transaction adjustments consisting floor valuation intervetscheringplough fixed minimum 85 billion subject potential upward revision based valuation exercise two parties additional payment sanofiaventis 750 million based valuation exercise intervetscheringplough customary transaction adjustments merial intervetscheringplough combined payment may required paid either party make joint venture equally owned company sanofiaventis payment would trueup value contributions equal formation new animal health joint venture sanofiaventis subject customary closing conditions including antitrust review united states europe prior closing merger agreements provided old merck certain rights terminate call option fee 400 million recognition termination fee deferred fourth quarter 2009 conditions could triggered payment lapsed sales joint venture products follows 1amounts 2009 include sales september 17 2009 divestiture date sanofi pasteur msd 1994 old merck pasteur merieux connaught sanofi pasteur sa established 50 owned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows johnson°merck consumer pharmaceuticals company 1989 old merck formed joint venture johnson develop market broad range nonprescription medicines us consumers 50 owned joint venture subsequently expanded canada significant joint venture products pepcid ac overthecounter form company’s ulcer medication pepcid well pepcid complete overthecounter product combines company’s ulcer medication antacids sales joint venture products follows capital expenditures capital expenditures 15 billion 2009 13 billion 2008 10 billion 2007 expenditures united states 9816 million 2009 9466 million 2008 7880 million 2007 expenditures 2009 included 8015 million production facilities 1612 million research development facilities 336 million environmental projects 4643 million administrative safety general site projects approximately 25 represents capital investments related multiyear initiative standardize company’s information systems depreciation expense 17 billion 2009 14 billion 2008 18 billion 2007 10 billion 10 billion 14 billion respectively applied locations united states total depreciation expense 2009 2008 2007 included accelerated depreciation 3486 million 2167 million 4606 million respectively associated restructuring activities see note 4 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders selected data 18 billion cash portion consideration merger funded combination existing cash including proceeds sale old merck’s interest merial discussed sale redemption shortterm investments issuance debt preparation merger 2009 old merck closed underwritten public offering 425 billion senior unsecured notes discussed additionally significant portion longterm investments december 31 2008 liquidated anticipation merger cash provided operating activities 34 billion 2009 66 billion 2008 70 billion 2007 continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders cash provided operating activities 2009 reflects 41 billion payments vioxx settlement funds 660 million payment made connection previously disclosed settlement cra cash provided operating activities 2008 reflects 21 billion received connection partial redemption old merck’s partnership interest azlp representing distribution old merck’s accumulated earnings investment azlp since inception cash provided operating activities 2008 also affected 675 million payment made connection previously disclosed resolution investigations civil claims federal state authorities relating certain past marketing selling activities 750 million payments vioxx settlement funds cash provided operating activities 2007 reflects payment made previously disclosed settlement internal revenue service “irs” cash provided investing activities 32 billion 2009 compared cash used investing activities 18 billion 2008 change primarily driven release restricted cash primarily due release pledged collateral certain vioxxrelated matters lower purchases securities investments proceeds 2009 disposition old merck’s interest merial increases cash used investing activities partially offset use cash fund merger well 2008 distribution azlp representing return old merck’s investment azlp cash used investing activities 2008 18 billion compared 28 billion 2007 lower use cash investing activities primarily reflects distribution azlp 2008 11 billion payment 2007 connection december 2006 acquisition sirna therapeutics inc partially offset higher net purchases securities investments higher capital expenditures increase restricted assets cash used financing activities 16 billion 2009 compared 55 billion 2008 reflecting 2009 issuance 425 billion senior unsecured notes purchases treasury stock lower payments debt partially offset net decrease shortterm borrowings cash used financing activities 55 billion 2008 compared 49 billion 2007 reflecting higher purchases treasury stock lower proceeds exercise stock options higher payments debt connection settlement note due astra partially offset net increase shortterm borrowings dividends paid stockholders 32 billion 2009 33 billion 2008 2007 december 31 2009 total worldwide cash investments 100 billion including 96 billion cash equivalents shortterm investments 4323 million longterm investments addition company 290 million cash investments restricted certain collateral arrangements discussed working capital levels adequate meet operating requirements company august 2008 old merck executed 41 billion letter credit agreement financial institution satisfied certain conditions set forth us vioxx settlement agreement see note 12 consolidated financial statements old merck pledged collateral financial institution approximately 51 billion pursuant terms letter credit agreement although amount assets pledged collateral set letter credit agreement assets held custody third party assets managed old merck old merck considered assets pledged letter credit agreement restricted letter credit amount required collateral balances declined payments first 750 million settlement agreement made december 31 2008 38 billion recorded within deferred income taxes current assets 13 billion classified assets 2009 remaining payments vioxx settlement funds made pursuant us vioxx settlement agreement accordingly letter credit agreement terminated collateral released previously disclosed irs completed examination old merck’s tax returns years 1993 2001 result examination old merck made aggregate payment 279 billion february 2007 payment offset tax refund 165 million received 2007 amounts previously paid matters ii federal tax benefit approximately 360 million related interest included payment resulting net cash cost old merck approximately 23 billion 2007 impact years subsequent 2001 items reviewed part examination included payment although years remain open respects closing irs examination material impact results operations 2007 amounts previously accrued previously disclosed october 2006 cra issued old merck notice reassessment containing adjustments related certain intercompany pricing matters february 2009 old merck cra negotiated settlement agreement regard matters accordance settlement old merck paid additional tax approximately 300 million us dollars interest approximately 360 million us dollars additional amounts penalties due assessment settlement accounted first quarter 2009 old merck previously established reserves matters significant portion taxes paid expected creditable us tax purposes resolution matters material effect financial position liquidity respect associated collateral discussed addition july 2007 november 2008 cra proposed additional adjustments 1999 2000 respectively relating intercompany pricing matters adjustments would increase canadian tax due approximately 312 million us dollars plus 314 million us dollars interest december 31 2009 possible cra propose similar adjustments later years company disagrees positions taken cra believes without merit company intends contest assessments cra appeals process courts necessary management believes resolution matters material effect company’s financial position liquidity connection appeals process matters discussed 2007 old merck pledged collateral two financial institutions one provided guarantee cra quebec ministry revenue representing portion tax interest assessed result settlement noted guarantees required appeal disputes reduced eliminated approximately 960 million associated collateral released certain cash investments continue collateralized guarantees required appeal canadian tax disputes collateral included deferred income taxes current assets consolidated balance sheet totaled approximately 290 million 12 billion december 31 2009 2008 respectively irs examining old merck’s 2002 2005 federal income tax returns addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 1999 2009 second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns company seeking resolution issue raised examination irs administrative appeals process july 2007 scheringplough made payment 98 million irs pertaining 19972002 examination company’s income tax returns remain open irs 19972009 tax years 2008 irs commenced examination 20032006 federal income tax returns examination expected completed 2010 significant tax jurisdictions us state foreign company’s income tax returns open examination period 2002 2009 company’s contractual obligations december 31 2009 follows payments due period 1 december 31 2009 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 57 billion including 3240 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2010 made purchase obligations consist primarily goods services enforceable legally binding include obligations minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments loans payable current portion longterm debt also reflects 2982 million longdated notes subject repayment option holders annual basis required funding obligations 2010 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 950 million 50 million respectively pension plans postretirement benefit plans 2010 june 25 2009 old merck closed underwritten public offering 425 billion senior unsecured notes consisting 125 billion aggregate principal amount 1875 notes due 2011 10 billion aggregate principal amount 400 notes due 2015 125 billion aggregate principal amount 500 notes due 2019 750 million aggregate principal amount 585 notes due 2039 interest notes payable semiannually notes series redeemable whole part time company’s option redemption prices specified notes associated prospectus proceeds notes used fund portion cash consideration merger december 2009 company filed securities registration statement securities exchange commission “sec” automatic shelf registration process available “wellknown seasoned issuers” effective three years also connection merger march 8 2009 old merck entered financing commitment letter jpmorgan chase bank na jp morgan securities inc collectively “jpmorgan” jpmorgan committed provide 7 billion financing may 6 2009 old merck entered 3 billion 364day senior unsecured interim term loan facility “bridge loan facility” 3 billion 364day asset sale revolving credit facility “asset sale facility” 1 billion 364day corporate revolving credit facility “incremental facility” connection 425 billion offering bridge loan facility terminated commitment lenders 364day asset sale facility reduced upon completion sale merial sanofiaventis see note 10 consolidated financial statements asset sale facility terminated incremental facility available backstop commercial paper general corporate purposes facility drawn expire november 2010 merck incurred commitment fees approximately 150 million associated facilities amortized commitment period april 2009 old merck amended 15 billion 5year revolving credit facility maturing april 2013 allow facility remain place merger company’s existing 20 billion credit facility maturing august 2012 remains outstanding facilities provide backup liquidity company’s commercial paper borrowing facility general corporate purposes company drawn funding either facility also connection merger effective november 3 2009 new merck executed full unconditional guarantee existing debt old merck old merck executed full unconditional guarantee existing debt new merck excluding commercial paper including payments principal interest company’s longterm credit ratings assigned moody’s investors service standard poor’s aa3 stable outlook aa positive outlook respectively ratings continue allow access capital markets flexibility obtaining funds competitive terms company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer despite strong financial profile certain contingent events realized discussed note 12 consolidated financial statements could material adverse impact company’s liquidity capital resources company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2009 february 2010 board directors declared quarterly dividend 038 per share company’s common stock first second quarter 2010 respectively declared quarterly dividend 375 per share 6 mandatory convertible preferred stock first second quarter 2010 respectively november 2009 board directors approved purchases time 30 billion merck’s common stock treasury purchases treasury stock made 2009 old merck purchased 27 billion 14 billion treasury stock 2008 2007 respectively previous program approved old merck’s board directors july 2002 financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management significant portion company’s revenues denominated foreign currencies merck relies sustained cash flows generated foreign sources support longterm commitment us dollarbased research development extent dollar value cash flows diminished result strengthening dollar company’s ability fund research dollarbased strategic initiatives consistent level may impaired company established revenue hedging balance sheet risk management programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates us functional currency entities objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company partially hedge forecasted foreign currency denominated third party intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion third party intercompany distributor sales hedged gets closer expected date forecasted foreign currency denominated sales probable hedged transaction occur portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase value anticipated foreign currency cash flows company also utilizes forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined 2450 million 1947 million respectively uniform 10 weakening us dollar december 31 2009 2008 market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows us dollar functional currency company’s foreign subsidiaries primary objective balance sheet risk management program protect us dollar value foreign currency denominated net monetary assets effects volatility foreign exchange might occur prior conversion us dollars instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange amount us dollar cash flows derived net assets us dollar functional currency company’s foreign subsidiaries merck executes spot trades convert foreign currencies us dollars based shortterm forecast needs us dollar proceeds invested required company’s foreign subsidiaries merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level applicable company uses forward contracts hedge changes fair value certain foreign currency denominated availableforsale securities attributable fluctuations foreign currency exchange rates sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly strengthened 10 currency exposures company december 31 2009 income taxes would declined 114 million 2009 company net long position relative major foreign currencies consideration forward contracts uniform strengthening us dollar yield largest overall potential net loss earnings due exchange december 31 2008 old merck net short position relative major foreign currencies consideration forward contracts therefore uniform 10 weakening us dollar would reduced income taxes 158 million measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows venezuelan economy recently determined hyperinflationary requires company remeasure local currency operations us dollars accordingly accordance us gaap company remeasure monetary assets liabilities operations earnings first quarter effective january 11 2010 venezuelan government devalued currency bsf 215 per us dollar twotiered official exchange rate 1 “the essentials rate” bsf 260 per us dollar 2 “the nonessentials rate” bsf 430 per us dollar company’s products expected classified “essentials” anticipates majority transactions settled essential rate bsf 260 per us dollar actions adverse effect company’s results operations financial position cash flows interest rate risk management addition revenue hedging balance sheet risk management programs company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2009 company party seven payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes two swaps maturing 2011 notional amounts 125 million effectively convert company’s 250 million 5125 fixedrate notes due 2011 floating rate instruments five swaps maturing 2015 notional amounts 150 million effectively convert 750 million company’s 10 billion 40 fixedrate notes due 2015 floating rate instruments fair value changes notes attributable changes benchmark interest rate recorded interest expense offset fair value changes swap contracts 2008 old merck terminated four interest rate swap contracts notional amounts 250 million terminated one interest rate swap contract notional amount 500 million swaps effectively converted 10 billion 475 fixedrate notes due 2015 500 million 4375 fixedrate notes due 2013 variable rate debt result swap terminations old merck received 1283 million cash excluding accrued interest material corresponding gains related basis adjustment debt associated terminated swap contracts deferred amortized reduction interest expense remaining term notes cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt related swap contracts change interest rates indicated one percentage point increase interest rates december 31 2009 2008 would positively affected net aggregate market value instruments 9901 million 989 million respectively one percentage point decrease december 31 2009 2008 would negatively affected net aggregate market value 11527 million 1563 million respectively increased sensitivity interest rate movements prior year attributable sale redemption longterm fixed rate investments fund merger well increase debt included existing scheringplough debt well debt issued 2009 fund merger fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies matters company’s consolidated financial statements include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including fair value determinations assets liabilities additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements mergers acquisitions january 1 2009 new guidance issued fasb adopted changes way acquisition method applied business combination also changes way assets liabilities recognized purchase accounting prospective basis acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred company determines asset acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded fair value intangible assets including acquired inprocess research development based significant judgments made management accordingly significant items company typically obtains assistance third party valuation specialists amounts allocated acquired inprocess research development capitalized accounted similar indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization valuations useful life assumptions based information available near merger acquisition date based expectations assumptions deemed reasonable management judgments made determining estimated fair values assigned assets acquired liabilities assumed well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probability adjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2009 2008 2007 summarized information changes aggregate indirect customer discount accrual follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 1150 million 12576 million respectively december 31 2009 556 million 5607 million respectively december 31 2008 company maintains returns policy allows customers return product within specified period prior subsequent expiration date generally three six months twelve months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision well actual returns less 10 net sales 2009 2008 2007 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase iii clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2009 2008 significant contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions see note 12 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable december 31 2008 old merck aggregate reserve approximately 4379 billion “vioxx reserve” settlement program future legal defense costs worldwide related vioxx product liability lawsuits ii vioxx shareholder lawsuits iii vioxx foreign lawsuits iv vioxx investigations collectively “vioxx litigation” see note 12 consolidated financial statements 2009 merck spent approximately 244 million aggregate legal defense costs worldwide including approximately 54 million fourth quarter 2009 related vioxx litigation addition 2009 old merck paid additional 41 billion settlement funds connection settlement program also 2009 merck recorded charges 75 million including 35 million fourth quarter solely future legal defense costs vioxx litigation consequently december 31 2009 aggregate amount vioxx reserve approximately 110 million solely future legal defense costs vioxx litigation significant factors considered review vioxx reserve follows actual costs incurred company development company’s legal defense strategy structure light scope vioxx litigation including settlement agreement expectation certain lawsuits continue pending number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials vioxx litigation amount vioxx reserve december 31 2009 represents company’s best estimate minimum amount defense costs incurred connection remaining aspects vioxx litigation however events additional trials vioxx litigation events could arise course vioxx litigation could affect ultimate amount defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase vioxx reserve time future based upon factors set forth believes would appropriate two us vioxx product liability lawsuits trials scheduled 2010 company cannot predict timing trials related vioxx litigation company believes meritorious defenses vioxx lawsuits vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect vioxx lawsuits included settlement program company established reserves potential liability relating vioxx lawsuits included settlement program reserve established connection resolution shareholder derivative lawsuits see note 12 consolidated financial statements vioxx investigations unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations december 31 2008 old merck remaining reserve approximately 33 million solely future legal defense costs fosamax litigation 2009 merck spent approximately 35 million added 40 million reserve consequently december 31 2009 company reserve approximately 38 million solely future legal defense costs fosamax litigation significant factors considered establishment reserve fosamax litigation legal defense costs follows actual costs incurred company thus far development company’s legal defense strategy structure light creation fosamax multidistrict litigation number cases brought company anticipated timing progression related costs pretrial activities fosamax litigation company continue monitor legal defense costs review adequacy associated reserves due uncertain nature litigation company unable estimate costs beyond third quarter 2010 company established reserves potential liability relating fosamax litigation unfavorable outcomes fosamax litigation could material adverse effect company’s financial position liquidity results operations company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying providing costs past old merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually similar process followed legacy scheringplough sites company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 166 million 2009 estimated 55 million years 2010 2014 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 1618 million 895 million december 31 2009 december 31 2008 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 1700 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options pensions postretirement benefit plans net pension postretirement benefit cost totaled 5111 million 2009 3766 million 2008 4893 million 2007 increase 2009 compared 2008 primarily due 1182 million costs associated scheringplough benefit plans date merger december 31 2009 decrease 2008 compared 2007 primarily due lower amortization actuarial net losses higher expected return plan assets partially offset increase termination benefits attributable restructuring actions pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2009 discount rates company’s us pension postretirement benefit plans ranged 460 600 compared range 600 640 december 31 2008 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weighted average expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2010 company’s expected rate return range 800 875 compared range 750 875 2009 us pension postretirement benefit plans company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 543 million favorable unfavorable impact net pension postretirement benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 239 million favorable unfavorable impact net pension postretirement benefit cost required funding obligations 2010 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component accumulated comprehensive income expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts accumulated comprehensive income excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees amortization net losses company’s us plans december 31 2009 expected increase net pension postretirement benefit cost approximately 53 million annually 2010 2014 restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach company tests goodwill impairment least annually using fair value based test goodwill represents excess consideration transferred fair value net assets businesses purchased assigned reporting units acquired intangibles excluding inprocess research development recorded fair value amortized straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated cash flows company tests indefinitelived intangibles including inprocess research development impairment least annually onestep test compares fair value indefinite lived intangible asset’s carrying value impairment testing purposes company may combine separately recorded indefinitelived intangible assets one unit account based relevant facts circumstances generally company combine indefinitelived intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments april 1 2009 new authoritative guidance fasb adopted amended otherthantemporary recognition guidance debt securities pursuant new guidance otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized comprehensive income taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 17 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2009 foreign earnings 312 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings recently issued accounting standards june 2009 fasb issued amendment accounting disclosure requirements transfers financial assets effective january 1 2010 amendment eliminates concept qualifying specialpurpose entity changes requirements derecognizing financial assets requires enhanced disclosures provide financial statement users greater transparency transfers financial assets including securitization transactions entity’s continuing involvement exposure risks related transferred financial assets effect adoption company’s financial position results operations expected material also june 2009 fasb amended existing accounting disclosure guidance consolidation variable interest entities effective january 1 2010 amended guidance requires enhanced disclosures intended provide users financial statements transparent information enterprise’s involvement variable interest entity effect adoption company’s financial position results operations expected material october 2009 fasb issued new guidance revenue recognition multiple deliverables effective revenue arrangements entered materially modified fiscal years beginning june 15 2010 although early adoption permitted guidance eliminates residual method current guidance replaces “relative selling price” method allocating revenue multiple deliverable arrangement selling price deliverable shall determined using vendor specific objective evidence selling price exists otherwise thirdparty evidence selling price shall used neither exists deliverable vendor shall use best estimate selling price deliverable adoption guidance also require expanded qualitative quantitative disclosures company currently assessing impact adoption financial position results operations january 2010 fasb amended existing disclosure guidance fair value measurements effective january 1 2010 except disclosures purchases sales issuances settlements roll forward activity level 3 fair value measurements effective january 1 2011 among things updated guidance requires additional disclosure amounts significant transfers level 1 level 2 measurements requires certain level 3 disclosures gross basis additionally updates amend existing guidance require greater level disaggregated information robust disclosures valuation techniques inputs fair value measurements since amended guidance requires additional disclosures adoption affect company’s financial position results operations cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially forms 10k 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7ananitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc “merck” “company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels overview merck continued execute strategic priorities 2012 despite facing several business challenges including august us patent expiration singulair medicine indicated chronic treatment asthma relief symptoms allergic rhinitis worldwide sales 473 billion 2012 decline 2 compared 2011 including 3 unfavorable effect foreign exchange excluding impact foreign exchange sales increased 1 reflecting growth key products within key geographic regions offset impact us singulair patent expiration company also reduced operating expenses efficiently managing costs targeted reductions addition company generated new clinical data advanced certain key research development pipeline programs company’s fourpart growth strategy focused one executing core business includes largest markets core brands new launch brands research development efforts targeted therapeutic areas greatest future patient demand scientific opportunity two expanding geographically highgrowth markets three extending complementary businesses consumer care animal health four effectively managing costs continuing invest future growth beginning company’s sales performance largest markets 2012 despite adverse effects us singulair patent expiry caused significant rapid decline us singulair sales united states relatively flat compared prior year reflecting strong growth key brands including januvia janumet treatments type 2 diabetes zostavax vaccine help prevent shingles herpes zoster gardasil vaccine help prevent certain diseases caused four types human papillomavirus “hpv” victrelis treatment chronic hepatitis c isentress antiretroviral therapy use combination therapy treatment hiv1 infection turning europe canada company continues experience positive volume growth trends many key brands including victrelis januvia janumet simponi treatment inflammatory diseases however growth partially offset increased generic erosion price declines stemming economic issues related fiscal austerity measures region respect research development efforts company continued advancement drug candidates pipeline 2012 company currently three candidates review us food drug administration “fda” mk4305 suvorexant investigational treatment insomnia mk8616 sugammadex sodium injection medication reversal certain muscle relaxants used surgery mk0653c investigational combination ezetimibe atorvastatin treatment primary mixed hyperlipidemia mk8109 vintafolide investigational cancer candidate review european union “eu” addition company currently 16 candidates phase iii development anticipates filing new drug application “nda” biologics license application “bla” applicable fda respect several candidates 2013 december 2012 company announced hps2thrive heart protection study 2treatment hdl reduce incidence vascular events study tredaptive extendedrelease niacinlaropiprant meet primary endpoint result company plan seek regulatory approval medicine united states january 2013 merck began taking steps suspend availability tredaptive outside united states also february 1 2013 company announced recently received reviewing safety efficacy data phase iii study involving mk0822 odanacatib company’s investigational treatment osteoporosis postmenopausal women result review data company concluded review additional data previously planned ongoing extension study warranted filing application approval fda delayed previously announced company conducting blinded extension trial approximately 8200 women provide additional safety efficacy data merck anticipates file applications approval odanacatib 2014 additional data extension trial company continues believe odanacatib potential address unmet medical needs patients osteoporosis merck continues pursue opportunities establishing external alliances complement substantial internal research capabilities including research collaborations well licensing preclinical clinical compounds technology platforms potential drive near longterm growth 2012 company completed variety transactions spanning different therapeutic areas clinical stages including licensing agreements endocyte inc “endocyte” vintafolide mk8109 investigational cancer candidate aicuris portfolio investigational medicines targeting human cytomegalovirus including letermovir mk8228 consistent second element company’s strategy expand geographically highgrowth markets japan key emerging markets company continued invest markets 2012 emerging market sales grew 4 2012 including 4 unfavorable impact foreign exchange despite loss sales remicade simponi treatments inflammatory diseases markets relinquished johnson “jj” part arbitration settlement agreement 2011 discussed china continues important growth driver sales exceeding 10 billion 2012 representing growth 25 prior year including 3 favorable effect foreign exchange growth japan 6 2012 tempered generic competition biennial price cuts early year merck entered several transactions designed strengthen presence emerging markets longer term company’s joint venture simcere pharmaceutical group china began preliminary operations late2012 third component merck’s strategy relates complementary businesses consumer care animal health merck’s animal health business continues solid contributor 4 revenue growth 2012 including 5 unfavorable effect foreign exchange reflecting growth cattle poultry companion animal swine product lines sales consumer care products grew 6 2012 including 1 unfavorable effect foreign exchange led dr scholl’s franchise higher sales coppertone miralax claritin noted last element company’s strategy tightly manage costs also investing growth consistent efforts merck remains committed driving continuous productivity improvements across enterprise continues realize cost savings across areas company savings result various actions including merger restructuring program discussed previously announced ongoing cost reduction activities well nonrestructuringrelated activities end 2012 company achieved projected 35 billion annual net cost savings activities since merger scheringplough corporation “scheringplough” “merger” global restructuring program initiated conjunction integration legacy merck legacy scheringplough businesses “merger restructuring program” intended optimize cost structure combined company workforce reductions associated plan relate elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company recorded total pretax restructuring costs 951 million 2012 18 billion 2011 18 billion 2010 related program costs associated company’s restructuring actions included materials production costs marketing administrative expenses research development expenses restructuring costs restructuring actions merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated subsequent merger company rationalized number manufacturing sites worldwide remaining actions program result additional manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 72 billion 75 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company expects merger restructuring program yield annual savings end 2013 approximately 35 billion 40 billion annual savings upon completion program approximately 40 billion 46 billion november 2012 merck’s board directors raised company’s quarterly dividend 043 per share 042 per share february 2013 merck reached agreement principle plaintiffs resolve two federal securities classaction lawsuits pending us district court district new jersey merck scheringplough certain current former officers directors “enhance litigation” proposed agreement merck pay 215 million resolve securities class action merck defendants 473 million resolve securities class action scheringplough defendants connection settlement merck recorded pretax aftertax charge 493 million 2012 reflects 195 million anticipated insurance recoveries earnings per common share assuming dilution attributable common shareholders “eps” 2012 200 reflect net unfavorable impact resulting acquisitionrelated costs restructuring costs well charge related enhance litigation noted nongaap eps 2012 382 excluding items see “nongaap income nongaap eps” competition health care environment competition markets company conducts business pharmaceutical industry highly competitive highly regulated company’s competitors include worldwide researchbased pharmaceutical companies smaller research companies limited therapeutic focus generic drug consumer health care manufacturers company’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors generic availability competitors’ branded products new information clinical trials marketed products postmarketing surveillance generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect certain products competitive pressures intensified pressures industry grown effect operations competitive factors patent disputes cannot predicted pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources required meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances joint ventures licenses refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacements even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth company’s products therapeutic category highly competitive animal health business affected several factors including regulatory legislative issues scientific technological advances product innovation quality price company’s products effective promotional efforts frequent introduction generic products competitors company’s consumer care operations face competition consumer health care businesses well retailers carry private label brands company’s competitive position affected several factors including regulatory legislative issues scientific technological advances quality price company’s products promotional efforts growth lower cost private label brands health care environment global efforts toward health care cost containment continue exert pressure product pricing market access united states federal state governments many years also pursued methods reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities hospitals serving disproportionate share low income uninsured patients backdrop united states enacted major health care reform legislation 2010 began implemented 2010 various insurance market reforms advanced continue full implementation 2014 law expected expand access health care 32 million americans end decade previously insurance coverage respect effect law pharmaceutical industry mandated medicaid rebate increased 151 231 expanded rebate medicaid managed care utilization increased types entities eligible federal 340b drug discount program law also requires pharmaceutical manufacturers pay 50 point service discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” approximately 210 million 150 million recorded merck reduction revenue 2012 2011 respectively related donut hole provision also pharmaceutical manufacturers required pay annual health care reform fee total annual industry fee 28 billion 2012 28 billion 2013 fee assessed company proportion share sales certain government programs medicare medicaid company recorded 190 million 162 million costs within marketing administrative expenses 2012 2011 respectively annual health care reform fee company also faces increasing pricing pressure globally managed care organizations government agencies programs could negatively affect company’s sales profit margins united states include practices managed care groups institutional governmental purchasers ii us federal laws regulations related medicare medicaid including medicare prescription drug improvement modernization act 2003 patient protection affordable care act 2010 changes health care system enacted part health care reform united states well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries could result pricing pressures addition effort contain us federal deficit pharmaceutical industry could considered potential source savings via legislative proposals debated enacted types revenue generating cost saving proposals include additional direct price controls medicare prescription drug program part addition congress may consider proposals allow certain conditions importation medicines countries remains uncertain proposals may included part future federal budget deficit reduction proposals would directly indirectly affect company efforts toward health care cost containment remain intense several european countries many countries announced austerity measures include implementation pricing actions reduce prices generic patented drugs mandatory switches generic drugs company taking steps mitigate impact eu austerity measures continued negatively affect company’s revenue performance 2012 company anticipates austerity measures continue negatively affect revenue performance 2013 additionally global economic downturn sovereign debt issues certain european countries among factors adversely affected foreign receivables certain european countries company continues receive payment receivables conditions resulted increase average length time takes collect accounts receivable outstanding thereby adversely affecting cash flows governments many emerging markets also focused constraining health care costs enacted price controls related measures aim put pressure price pharmaceuticals constrain market access company anticipates pricing pressures market access challenges continue 2013 varying degrees emerging markets company’s focus share revenue emerging markets increased countries markets may subject conditions affect company’s efforts continue grow emerging markets including potential political instability significant currency fluctuation controls financial crises limited changing availability funding health care developments may adversely impact business environment company may engage thirdparty agents assist operating emerging market countries may affect ability realize continued growth may also increase company’s risk exposure full impact health care reform well continuing budget pressures governments around world cannot predicted time addressing cost containment pressures company engages public policy advocacy policymakers continues attempt demonstrate medicines provide value patients pay health care company seeks work government policymakers encourage longterm approach sustainable health care financing ensures access innovative medicines disproportionately target pharmaceuticals source budget savings markets historically low rates government health care spending company encourages governments increase investments order improve citizens’ access appropriate health care including medicines certain markets outside united states implemented health technology assessments cost management strategies require additional data reviews administrative processes increase complexity costs obtaining product reimbursement exert downward pressure reimbursement available obtained operating conditions become challenging global pressures competition industry regulation cost containment efforts although one predict effect factors company’s business company continually takes measures evaluate adapt improve organization business practices better meet customer needs believes well positioned respond evolving health care environment market forces government regulation pharmaceutical industry subject regulation regional country state local agencies around world governmental regulation legislation tend focus standards processes determining drug safety effectiveness well conditions sale reimbursement especially related pricing products particular importance fda united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals many cases fda requirements practices increased amount time resources necessary develop new products bring market united states eu adopted directives legislation concerning classification labeling advertising wholesale distribution integrity supply chain enhanced pharmacovigilance monitoring approval marketing medicinal products human use provide mandatory standards throughout eu may supplemented implemented additional regulations eu member states company’s policies procedures already consistent substance directives consequently believed material effect company’s business company believes continue able conduct operations including launching new drugs regulatory environment access medicines global health care company merck’s primary role discover develop innovative medicines vaccines company also recognizes important role play helping improve access products around world company’s efforts regard wideranging include set principles company strives embed operations business strategies guide company’s worldwide approach expanding access health care example company recognized pricing many products differential pricing framework taking consideration factors country’s level economic development public health need addition merck patient assistance program provides medicines adult vaccines free people united states prescription drug health insurance coverage without company’s assistance cannot afford merck medicine vaccines building company’s efforts merck undertaken collaborations many stakeholders improve access medicines enhance quality life people around world example 2011 merck announced would launch “merck mothers” longterm effort global health partners create world woman die preventable complications pregnancy childbirth launch includes 10year 500 million initiative applies merck’s scientific business expertise making proven solutions widely available developing new technologies improving public awareness policy efforts private sector engagement reduce maternal mortality merck also past provided funds merck foundation independent organization partnered variety organizations dedicated improving global health one partnerships african comprehensive hivaids partnership botswana collaboration government botswana renewed 2010 supports botswana’s response hivaids comprehensive sustainable approach hiv prevention care treatment support privacy data protection company subject number privacy data protection laws regulations globally legislative regulatory landscape privacy data protection continues evolve increased attention privacy data protection issues developed emerging markets potential affect directly company’s business including recently enacted laws regulations united states europe asia latin america increased enforcement activity united states developed markets operating results sales worldwide sales totaled 473 billion 2012 decline 2 compared 480 billion 2011 foreign exchange unfavorably affected global sales performance 3 sales decrease driven primarily singulair lost market exclusivity united states august 2012 resulting significant rapid decline us singulair sales decline also driven lower sales remicade treatment inflammatory diseases largely result arbitration settlement agreement jj 2011 discussed addition lower sales cozaar hyzaar treatments hypertension clarinex nonsedating antihistamine fosamax treatment osteoporosis vytorin cholesterol modifying medicine primaxin antibacterial product avelox broadspectrum fluoroquinolone antibiotic treatment certain respiratory skin infections well lower revenue company’s relationship astrazeneca lp “azlp” also contributed sales decline 2012 declines largely offset higher sales januvia gardasil victrelis zostavax janumet isentress zetia cholesterol modifying medicine dulera combination medicine treatment asthma well higher sales company’s animal health consumer care products sales united states 204 billion 2012 decline 1 compared 205 billion 2011 sales decrease driven lower sales singulair vytorin avelox cozaar hyzaar well lower revenue company’s relationship azlp declines largely offset higher sales januvia zostavax gardasil victrelis janumet isentress pneumovax vaccine help prevent pneumococcal disease zetia dulera well higher sales animal health consumer care products international sales 269 billion 2012 decline 2 compared 276 billion 2011 foreign exchange unfavorably affected international sales performance 4 2012 declines europe canada partially offset growth japan certain emerging markets particularly china lower sales remicade led decline along lower sales cozaar hyzaar singulair fosamax clarinex partially offset growth januvia victrelis gardasil janumet international sales represented 57 total sales 2012 2011 global efforts toward health care cost containment continue exert pressure product pricing market access worldwide many international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2012 company anticipates pricing actions austerity measures continue negatively affect revenue performance 2013 worldwide sales totaled 480 billion 2011 increase 4 compared 460 billion 2010 foreign exchange favorably affected global sales performance 2 revenue increase driven largely growth januvia janumet singulair isentress gardasil simponi rotateq vaccine help protect rotavirus gastroenteritis infants children zetia pneumovax bridion reversal certain muscle relaxants used surgery addition revenue 2011 benefited higher sales company’s animal health products launch victrelis increases partially offset lower sales cozaar hyzaar vytorin temodar treatment certain types brain tumors proquad pediatric combination vaccine help protect measles mumps rubella varicella varivax vaccine help prevent chickenpox varicella revenue also negatively affected lower sales caelyx subutex suboxone company longer marketing rights products addition ongoing implementation certain provisions us health care reform legislation 2011 resulted increases medicaid rebates impacts reduced revenues compared 2010 sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health consumer care alliances segment includes revenue company’s relationship azlp 4 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results pharmaceutical segment primary care women’s health cardiovascular worldwide sales zetia also marketed ezetrol outside united states cholesterol absorption inhibitor increased 6 2012 26 billion including 2 unfavorable effect foreign exchange sales increase reflects positive performance united states due pricing well volume growth japan partially offset volume declines united states sales zetia increased 6 2011 24 billion including 3 favorable effect foreign exchange increase reflects higher sales international markets particularly japan partially offset volume declines united states global sales vytorin marketed outside united states inegy combination product containing active ingredients zetia zocor declined 7 2012 17 billion including 3 unfavorable effect foreign exchange sales decline reflects volume declines united states partially offset pricing united states volume growth certain international markets worldwide sales vytorin declined 7 2011 19 billion reflecting volume declines united states partially offset increases international markets march 2012 data safety monitoring board “dsmb” improveit trial large cardiovascular outcomes study evaluating ezetimibesimvastatin simvastatin alone patients presenting acute coronary syndrome completed second prespecified interim efficacy analysis study dsmb conducted planned interim efficacy analysis trial reached approximately 75 targeted 5250 clinical endpoints called study design dsmb recommended study continue without change design stated planned review data approximately nine months review scheduled march 2013 point nine months additional data adjudicated merck remains blinded improveit safety efficacy data improveit 18000 patient eventdriven trial based current rate events reported company anticipates targeted 5250 clinical endpoints study completion reached 2014 december 2012 merck announced hps2thrive study tredaptive meet primary endpoint see “research development” subsequently based understanding preliminary data hps2thrive study consultation regulatory authorities merck began taking steps suspend availability tredaptive approved use certain countries outside united states company recognized approximately 40 million costs 2012 associated suspending availability tredaptive sales tredaptive 17 million 2012 diabetes obesity global sales januvia merck’s dipeptidyl peptidase4 “dpp4” inhibitor treatment type 2 diabetes rose 23 2012 41 billion grew 39 2011 33 billion reflecting volume growth united states well international markets particularly japan foreign exchange unfavorably affected sales performance 2 2012 favorably affected sales performance 3 2011 worldwide sales janumet merck’s oral antihyperglycemic agent combines sitagliptin januvia metformin single tablet target three key defects type 2 diabetes 17 billion 2012 increase 22 compared 2011 reflecting volume growth united states emerging markets europe global sales janumet 14 billion 2011 compared 954 million 2010 reflecting growth internationally due part ongoing launches certain markets well growth united states foreign exchange unfavorably affected sales performance 4 2012 favorably affected sales performance 2 2011 february 2012 fda approved janumet xr new treatment type 2 diabetes combines sitagliptin extendedrelease metformin janumet xr provides convenient oncedaily treatment option health care providers patients need help control blood sugar previously disclosed february 17 2012 fda sent warning letter company relating januvia janumet stating company fulfill postmarketing requirement 3month pancreatic safety study diabetic rodent model treated sitagliptin company completed study submitted study report fda december 2012 fda recently reviewed submission concluded postmarketing requirement fulfilled respiratory worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis declined 30 39 billion 2012 driven primarily lower sales united states revenue declines europe canada latin america also contributed singulair sales decline patent provided us market exclusivity singulair expired august 3 2012 company experienced significant rapid decline us singulair sales thereafter us sales singulair declined 97 fourth quarter 25 million us sales singulair decreased 39 22 billion full year 2012 driven lower sales us patent expiry august addition patent provided market exclusivity singulair expired number major european markets february 2013 company expects significant rapid reduction sales singulair markets patent provides market exclusivity singulair japan expire 2016 2012 sales singulair 602 million europe 668 million japan global sales singulair grew 10 2011 55 billion including 2 favorable impact foreign exchange driven primarily favorable pricing united states well volume growth japan emerging markets global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms declined 1 2012 13 billion including 1 unfavorable impact foreign exchange sales performance reflects price declines europe lower volumes united states largely offset higher prices united states 2009 apotex inc apotex corp collectively “apotex” filed abbreviated new drug application fda seeking approval sell generic version nasonex june 2012 us district court district new jersey ruled company patent infringement suit apotex holding apotex’s generic version nasonex infringe company’s formulation patent see note 11 consolidated financial statements company appealed us district court decision generic versions become available significant losses nasonex sales could occur company may take noncash impairment charge respect value nasonex intangible asset carrying value approximately 19 billion december 31 2012 nasonex intangible asset determined impaired impairment charge could material result unfavorable us district court decision company evaluated nasonex intangible asset impairment concluded impaired us sales nasonex 597 million 2012 worldwide sales nasonex increased 5 2011 13 billion including 1 favorable effect foreign exchange sales increase driven largely volume growth japan latin america partially offset volume declines united states global sales clarinex marketed aerius many countries outside united states nonsedating antihistamine declined 37 2012 393 million driven lower volumes europe united states result generic competition previously disclosed virtue litigation settlements certain generic manufacturers given right enter us market 2012 several generic versions launched company anticipates sales clarinex continue decline worldwide sales clarinex 621 million 2011 compared 623 million 2010 global sales dulera inhalation aerosol combination medicine treatment asthma 207 million 2012 compared 96 million 2011 reflecting volume growth united states dulera inhalation aerosol approved fda june 2010 january 2012 merck received complete response letter fda company’s supplemental new drug application dulera treatment chronic obstructive pulmonary disease company planning conduct additional clinical study update application future women’s health endocrine worldwide sales fosamax plus marketed fosavance throughout eu fosamac japan treatment case fosamax prevention osteoporosis declined 21 2012 676 million decreased 8 2011 855 million medicines lost market exclusivity united states major european markets 2012 declines japan emerging markets also contributed sales decrease company expects declines within fosamax product franchise continue worldwide sales nuvaring vaginal contraceptive product 623 million 2012 comparable sales 2011 foreign exchange unfavorably affected sales performance 3 2012 excluding unfavorable impact foreign exchange sales performance 2012 reflects volume growth emerging markets positive performance europe global sales nuvaring grew 12 623 million 2011 including 3 beneficial effect foreign exchange driven positive performance united states internationally global sales follistim aq marketed countries outside united states puregon biological fertility treatment declined 12 2012 468 million including 3 unfavorable effect foreign exchange driven largely declines europe resulting supply issues pricing sales follistim aq 530 million 2011 compared 528 million 2010 reflecting growth emerging markets offset declines europe due primarily supply constraints puregon lost market exclusivity eu august 2009 company currently experiencing difficulty manufacturing certain women’s health products company working resolve issues material company’s results operations global sales maxalt product acute treatment migraine 638 million 2012 comparable sales 2011 sales performance 2012 reflects higher sales united states driven favorable pricing offset volume declines europe canada due generic erosion sales maxalt increased 16 2011 639 million reflecting higher inventory level favorable pricing united states patent provided us market exclusivity maxalt expired december 2012 company experiencing decline us maxalt sales expects decline continue addition patent provides market exclusivity maxalt expire number major european markets august 2013 company anticipates sales european markets decline significantly patent expiries 2012 sales maxalt 491 million united states 92 million europe sales avelox broadspectrum fluoroquinolone antibiotic treatment certain respiratory skin infections marketed company united states declined 37 2012 201 million due primarily competitor’s product becoming available generic form sales avelox grew 2 2011 322 million patent provides us market exclusivity avelox expires march 2014 however agreement generic manufacturer may launch generic version avelox february 2014 products included primary care women’s health include among others asmanex twisthaler inhaled corticosteroid asthma implanon singlerod subdermal contraceptive implant cerazette progestin oral contraceptive arcoxia treatment arthritis pain hospital specialty immunology sales remicade treatment inflammatory diseases 21 billion 2012 decline 22 compared 2011 27 billion 2011 decline 2 compared 2010 foreign exchange unfavorably affected global sales performance 6 2012 favorably affected sales performance 5 2011 prior july 1 2011 remicade marketed company outside united states except japan certain asian markets result agreement reached april 2011 amend agreement governing distribution rights remicade simponi effective july 1 2011 merck relinquished marketing rights products certain territories including canada central south america middle east africa asia pacific merck retained exclusive marketing rights throughout europe russia turkey “retained territories” retained territories remicade sales declined 2 2012 reflects 8 unfavorable effect foreign exchange volume growth europe sales remicade retained territories grew 13 2011 reflects 6 favorable impact foreign exchange simponi oncemonthly subcutaneous treatment certain inflammatory diseases approved european commission “ec” october 2009 sales simponi 331 million 2012 264 million 2011 97 million 2010 revenue increases driven growth retained territories due part ongoing launches july 2012 submission made european medicines agency “ema” requesting approval simponi treatment adult patients moderately severely active ulcerative colitis inadequate response conventional therapy infectious disease worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection grew 11 2012 15 billion driven primarily volume growth united states latin america asia pacific region global sales isentress rose 25 2011 14 billion reflecting volume growth united states internationally partially offset unfavorable pricing european markets foreign exchange unfavorably affected global sales performance 4 2012 favorably affected sales performance 3 2011 worldwide sales pegintron treatment chronic hepatitis c declined 1 2012 653 million including unfavorable effect foreign exchange 4 excluding unfavorable impact foreign exchange sales performance reflects volume growth favorable pricing united states volume growth certain emerging markets sales pegintron declined 11 2011 657 million including 4 favorable effect foreign exchange reflecting competitive pressures global sales cancidas antifungal product declined 3 2012 619 million including 5 unfavorable effect foreign exchange excluding unfavorable impact foreign exchange sales performance 2012 reflects growth emerging markets sales cancidas grew 5 2011 640 million including 4 favorable effect foreign exchange reflecting higher sales europe canada partially offset declines united states global sales victrelis company’s innovative oral medicine treatment chronic hepatitis c 502 million 2012 compared 140 million 2011 driven postlaunch growth united states internationally particularly europe victrelis approved fda may 2011 ec july 2011 victrelis approved 70 countries launched 45 markets sales primaxin antibacterial product declined 25 2012 384 million decreased 16 2011 515 million patents primaxin expired worldwide multiple generics launched oncology sales temodar marketed temodal outside united states treatment certain types brain tumors declined 2 2012 917 million including 2 unfavorable effect foreign exchange sales declines europe generic competition offset price increases united states sales temodar decreased 12 2011 935 million including 3 favorable effect foreign exchange primarily reflecting generic competition europe temodar lost patent exclusivity eu 2009 previously disclosed agreement generic manufacturer may launch generic version temodar united states august 2013 accordingly company anticipates us sales temodar 423 million 2012 decline significantly 2013 us patent exclusivity periods otherwise expire february 2014 global sales emend prevention chemotherapyinduced postoperative nausea vomiting increased 17 2012 489 million including 2 unfavorable effect foreign exchange sales increase reflects volume growth united states japan sales emend increased 11 2011 419 million primarily reflecting growth international markets worldwide sales ophthalmic products cosopt trusopt declined 7 2012 444 million including 4 unfavorable effect foreign exchange sales decline primarily reflects lower sales europe due generic erosion price reductions mitigated part higher cosopt sales japan sales cosopt trusopt declined 1 2011 477 million including 5 favorable impact foreign exchange reflecting unfavorable pricing volume declines europe partially offset higher cosopt sales japan patent provided us market exclusivity cosopt trusopt expired trusopt also lost market exclusivity number major european markets patent cosopt expire number major european markets march 2013 company expects sales markets decline significantly thereafter bridion sugammadex sodium injection reversal certain muscle relaxants used surgery approved launched many countries outside united states sales bridion 261 million 2012 201 million 2011 103 million 2010 sugammadex sodium injection currently review fda 2009 fda approved saphris asenapine antipsychotic indicated treatment schizophrenia bipolar disorder adults 2010 asenapine sold brand name sycrest received marketing approval eu treatment bipolar disorder adults 2010 merck h lundbeck “lundbeck” announced worldwide commercialization agreement sycrest sublingual tablets 5 mg 10 mg terms agreement lundbeck paid fee makes product supply payments exchange exclusive commercial rights sycrest markets outside united states china japan merck’s sales saphris 166 million 2012 120 million 2011 merck continues focus building maintaining brand awareness saphris united states efforts united states lundbeck’s ongoing launch product eu successful company may take noncash impairment charge respect value saphrissycrest intangible asset carrying value approximately 550 million december 31 2012 saphrissycrest intangible asset determined impaired impairment charge could material products contained hospital specialty include among others invanz treatment certain infections noxafil prevention certain invasive fungal infections integrilin treatment patients acute coronary syndrome sold company united states canada diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatments hypertension declined 23 2012 13 billion decreased 21 2011 17 billion patents provided market exclusivity cozaar hyzaar united states number major international markets expired accordingly company experiencing significant declines cozaar hyzaar sales company expects declines continue products contained diversified brands include among others propecia product treatment male pattern hair loss zocor statin modifying cholesterol prescription claritin treatment seasonal outdoor allergies yearround indoor allergies remeron antidepressant proscar urology product treatment symptomatic benign prostate enlargement vasotec vaseretic hypertension andor heart failure products formulationuse patent provides us market exclusivity propecia expires october 2013 however previously disclosed agreement one generic manufacturer entered us market january 2013 another given right enter july 2013 accordingly company anticipates us sales propecia 124 million 2012 decline significantly 2013 vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd “spmsd” company’s joint venture sanofi pasteur results reflected equity income affiliates see “selected joint venture affiliate information” supply sales spmsd however included worldwide sales gardasil recorded merck grew 35 2012 16 billion driven primarily growth united states reflecting continued uptake males approximately 45 million government purchases us centers disease control prevention “cdc” pediatric vaccine stockpile well growth emerging markets particularly latin america asia pacific region japan sales gardasil rose 22 2011 12 billion driven greater uptake males united states higher sales conjunction launch japan growth emerging markets partially offset lower government orders canada gardasil world’s topselling hpv vaccine indicated girls women 9 26 years age prevention cervical vulvar vaginal anal cancer caused hpv types 16 18 certain precancerous dysplastic lesions caused hpv types 6 11 16 18 genital warts caused hpv types 6 11 gardasil also approved united states use boys men 9 26 years age prevention anal cancer caused hpv types 16 18 anal dysplasias precancerous lesions caused hpv types 6 11 16 18 genital warts caused hpv types 6 11 company party certain thirdparty license agreements respect gardasil including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasil sales 21 27 vary country included materials production costs recent years company experienced difficulties producing varicella zoster virus “vzv”containing vaccines difficulties resulted supply constraints proquad varivax zostavax company resolved supply constraints united states anticipates limited launches international markets zostavax 2013 noted proquad pediatric combination vaccine help protect measles mumps rubella varicella one vzvcontaining vaccines became available united states ordering october 2012 merck’s sales proquad 61 million 2012 34 million 2011 134 million 2010 sales years affected supply constraints merck’s sales varivax vaccine help prevent chickenpox varicella 846 million 2012 831 million 2011 929 million 2010 sales 2010 reflect 48 million government purchases cdc’s pediatric vaccine stockpile merck’s sales mmr ii vaccine help protect measles mumps rubella 365 million 2012 337 million 2011 315 million 2010 sales growth 2012 driven primarily higher volumes united states sales varivax mmr ii affected proquad supply constraints discussed merck’s sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 651 million 2012 332 million 2011 243 million 2010 sales performance 2012 reflects supply availability increased promotional efforts united states sales 2011 2010 affected supply issues company anticipates limited launches outside united states later 2013 merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children declined 8 2012 601 million reflecting favorable public sector inventory fluctuations 2011 partially offset volume growth emerging markets japan 2012 merck’s sales rotateq grew 25 2011 651 million reflecting favorable public sector inventory fluctuations growth emerging markets merck’s sales pneumovax vaccine help prevent pneumococcal disease grew 17 2012 580 million due primarily growth united states result price increases higher volumes partially offset declines japan sales pneumovax increased 33 2011 498 million due positive performance united states due part favorable pricing growth japan merck’s adult formulation vaqta vaccine hepatitis experiencing supply issues became available third quarter 2012 segments animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected intense competition frequent introduction generic products global sales animal health products grew 4 2012 34 billion increased 11 2011 33 billion foreign exchange unfavorably affected global sales performance 5 2012 favorably affected global sales performance 4 2011 increase sales periods driven positive performance among cattle poultry companion animal swine products consumer care consumer care products include overthecounter foot care sun care products claritin nondrowsy antihistamines miralax relief occasional constipation dr scholl’s foot care products coppertone sun care products global sales consumer care products grew 6 2012 including 1 unfavorable effect foreign exchange 20 billion reflecting higher sales dr scholl’s coppertone miralax claritin partially offset lower sales marvelon oral contraceptive overthe counter product china sales increased 1 2011 18 billion reflecting strong performance coppertone offset declines dr scholl’s claritin consumer care product sales affected competition consumer spending patterns january 2013 fda approved oxytrol women first overthecounter treatment overactive bladder women company anticipates available customers fall 2013 alliances segment includes results company’s relationship azlp revenue azlp primarily relating sales nexium prilosec 915 million 2012 12 billion 2011 13 billion 2010 astrazeneca option buy merck’s interest subsidiary merck’s interest nexium prilosec exercisable 2014 company believes likely astrazeneca exercise option see “selected joint venture affiliate information” astrazeneca exercises option company longer record equity income azlp supply sales azlp decline substantially costs expenses 1 includes 200 million 587 million 24 billion iprd impairment charges 2012 2011 2010 respectively materials production materials production costs 164 billion 2012 169 billion 2011 184 billion 2010 costs include expenses amortization intangible assets recorded connection mergers acquisitions totaled 49 billion 2012 2011 46 billion 2010 additionally expenses 2011 2010 include 89 million 20 billion respectively amortization purchase accounting adjustments scheringplough’s inventories recognized result merger costs 2011 include intangible asset impairment charge 118 million company may recognize additional noncash impairment charges future related product intangibles measured fair value capitalized connection mergers acquisitions charges could material also included materials production costs associated restructuring activities amounted 188 million 348 million 429 million 2012 2011 2010 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 652 2012 compared 649 2011 600 2010 amortization intangible assets purchase accounting adjustments inventories well restructuring impairment charges noted reduced gross margin 107 percentage points 2012 114 percentage points 2011 152 percentage points 2010 excluding impacts gross margin decline 2012 compared 2011 reflects significant decline singulair sales result loss us market exclusivity partially offset improvements resulting changes product mix company anticipates gross margin continue negatively affected singulair us patent expiry occurred august 2012 singulair patent expiries major european markets occurred february 2013 addition anticipated generic competition united states maxalt propecia also negatively impact gross margin 2013 gross margin improvement 2011 compared 2010 reflects changes product mix manufacturing efficiencies well benefit foreign exchange marketing administrative marketing administrative expenses declined 7 2012 128 billion due favorable effect foreign exchange decline promotion costs lower selling costs resulting restructuring activities marketing administrative expenses grew 5 137 billion 2011 due part unfavorable effect foreign exchange strategic investments made emerging markets marketing administrative expenses 2012 2011 include 190 million 162 million respectively expenses annual health care reform fee required part us health care reform legislation expenses 2012 2011 2010 include restructuring costs 90 million 119 million 144 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include 272 million 278 million 379 million acquisitionrelated costs 2012 2011 2010 respectively consisting incremental thirdparty integration costs related merger including costs related legal entity system integration acquisition related costs 2011 also consist severance costs associated acquisition inspire pharmaceuticals inc part company’s formal restructuring programs research development research development expenses 82 billion 2012 85 billion 2011 111 billion 2010 research development expenses comprised costs directly incurred merck research laboratories “mrl” company’s research development division focuses human healthrelated activities approximately 45 billion 2012 2011 49 billion 2010 also included research development expenses costs incurred divisions support research development activities including depreciation production general administrative well certain costs operating segments including pharmaceutical animal health consumer care segments aggregate 34 billion 32 billion 34 billion 2012 2011 2010 respectively research development expenses 2012 2011 favorably affected cost savings resulting restructuring activities included research development expenses 2012 upfront payments approximately 260 million related agreements endocyte aicuris see “research development” research development expenses also include inprocess research development “iprd” impairment charges research developmentrelated restructuring charges 2012 company recorded 200 million iprd impairment charges primarily pipeline programs previously deprioritized subsequently deemed alternative use period 2011 company recorded iprd impairment charges 587 million primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges amount 17 billion related writedown intangible asset vorapaxar resulting developments clinical program compound remaining 763 million iprd impairment charges recorded 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds company may recognize additional noncash impairment charges future cancellation delay pipeline programs measured fair value capitalized connection mergers acquisitions charges could material research development expenses 2012 2011 2010 reflect 57 million 138 million 428 million respectively accelerated depreciation asset abandonment costs associated restructuring activities 2012 company recorded adjustment accelerated depreciation costs included research development expenses revising previously recorded amounts certain facilities sharebased compensation total pretax sharebased compensation expense 335 million 2012 369 million 2011 509 million 2010 december 31 2012 370 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 18 years segment reporting sharebased compensation costs unallocated expenses restructuring costs restructuring costs 664 million 13 billion 985 million 2012 2011 2010 respectively nearly costs recorded 2012 2011 relate merger restructuring program restructuring costs recorded 2010 915 million related merger restructuring program 77 million related global restructuring program initiated 2008 “2008 restructuring program” remaining activity related legacy scheringplough program included gain sale manufacturing facility 2012 2011 2010 separation costs 489 million 11 billion 768 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated approximately 4255 positions 2012 3975 related merger restructuring program 155 related 2008 restructuring program 125 related legacy scheringplough program approximately 7590 positions 2011 6880 related merger restructuring program 450 related 2008 restructuring program 260 related legacy scheringplough program approximately 12465 positions 2010 11410 related merger restructuring program 890 related 2008 restructuring program 165 legacy scheringplough program position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs well contract termination shutdown costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed equity income affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates increased 5 2012 642 million grew 4 2011 610 million due primarily higher partnership returns azlp 2011 company divested interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture see “selected joint venture affiliate information” income expense net income expense net 11 billion expense 2012 compared 946 million expense 2011 driven primarily 493 million net charge 2012 relating settlement enhance litigation see note 11 consolidated financial statements gains recognized 2011 136 million disposition company’s interest jjmcp joint venture see note 9 consolidated financial statements 127 million sale certain manufacturing facilities related assets see note 4 consolidated financial statements partially offset 500 million charge 2011 related resolution arbitration proceeding involving company’s rights market remicade simponi see note 5 consolidated financial statements higher interest income 2012 income expense net 2010 13 billion expense reflecting 950 million charge settle certain litigation related vioxx “vioxx liability reserve” charges related settlement certain pending awp litigation 200 million exchange losses due two venezuelan currency devaluations discussed partially offset 443 million income recognized upon astrazeneca’s asset option exercise see note 9 consolidated financial statements 102 million income recognized settlement certain disputed royalties february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company anticipates recognize losses due exchange approximately 150 million first quarter 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations noted exchange losses 2010 reflect losses relating venezuelan currency devaluations effective january 11 2010 venezuelan government devalued currency twotiered official exchange rate “essentials rate” “nonessentials rate” december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 result announcement company remeasured december 31 2010 monetary assets liabilities new official rate segment profits segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits charge related settlement enhance litigation recorded 2012 arbitration settlement charge gain divestiture company’s interest jjmcp joint venture gain sale certain manufacturing facilities related assets recorded 2011 charge vioxx liability reserve income recognized astrazeneca’s asset option exercise recognized 2010 addition amortization purchase accounting adjustments acquisitionrelated costs intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income also excluded determination segment profits additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales pharmaceutical segment profits increased 1 2012 driven primarily lower operating expenses mostly offset effects loss us market exclusivity singulair pharmaceutical segment profits rose 7 2011 driven largely increase sales gross margin improvement discussed taxes income effective income tax rates 279 2012 128 2011 406 2010 reflect impacts acquisitionrelated costs restructuring costs partially offset beneficial impact foreign earnings effective tax rate 2012 also reflects favorable impacts tax settlement canada revenue agency “cra” realization foreign tax credits impact favorable ruling state tax matter addition 2012 effective tax rate reflects unfavorable impact net charge recorded connection settlement enhance litigation tax benefit recorded reflect impacts rd tax credit expired december 31 2011 result legislation passed 2013 extended rd tax credit 2012 2013 rd tax credits recognized 2013 however entire 2012 rd tax credit recognized first quarter 2013 effective tax rate 2011 reflects net favorable impact approximately 700 million relating settlement merck’s 20022005 federal income tax audit favorable impact certain foreign state tax rate changes resulted net 270 million reduction deferred tax liabilities intangibles established purchase accounting unfavorable impact 500 million charge related resolution arbitration proceeding jj 2010 effective tax rate reflects impact vioxx liability reserve tax impact recorded 147 million charge associated change tax law requires taxation prescription drug subsidy company’s retiree health benefit plans enacted first quarter 2010 part us health care reform legislation impact astrazeneca’s asset option exercise unfavorable impacts partially offset 391 million tax benefit changes foreign entity’s tax rate resulted reduction deferred tax liabilities product intangibles recorded conjunction merger favorable impact foreign earnings dividends company’s foreign subsidiaries net income earnings per common share net income attributable merck co inc 62 billion 2012 63 billion 2011 861 million 2010 eps 200 2012 202 2011 028 2010 decreases net income eps 2012 compared 2011 due primarily net charge recorded connection settlement enhance litigation effects loss us market exclusivity singulair 2012 favorable impact tax items 2011 partially offset lower marketing administrative expenses lower restructuring costs lower intangible asset impairment charges 2012 arbitration settlement charge recorded 2011 increases net income eps 2011 compared 2010 primarily due lower iprd impairment charges amortization inventory stepup lower legal reserves favorable impact tax settlements partially offset arbitration settlement charge recorded 2011 income recognized 2010 astrazeneca’s asset option exercise nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items consist acquisitionrelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income eps prepared accordance generally accepted accounting principles united states “gaap” additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows 1 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisitionrelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection mergers acquisitions amounts include amortization intangible assets inventory stepup well intangible asset impairment charges also excluded incremental thirdparty integration costs associated merger costs related legal entity system integration well costs associated mergers acquisitions severance costs part company’s formal restructuring programs costs excluded management believes costs representative ongoing normal business activities restructuring costs nongaap income nongaap eps exclude costs related restructuring actions including restructuring activities related merger see note 3 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis certain items comprised net charge recorded connection settlement enhance litigation arbitration settlement charge gain disposition company’s interest jjmcp joint venture gain associated sale certain manufacturing facilities related assets charge establish vioxx liability reserve income recognized upon astrazeneca’s asset option exercise also excluded nongaap income nongaap eps tax benefits settlement federal income tax audit favorable impact certain foreign state tax rate changes resulted net reduction deferred tax liabilities intangibles established purchase accounting tax charge related us health care reform legislation research development chart reflecting company’s current research pipeline february 22 2013 set forth item 1 “business research development” research development update company currently four candidates regulatory review united states internationally mk4305 suvorexant investigational insomnia medicine new class medicines called orexin receptor antagonists use patients difficulty falling staying asleep review fda suvorexant evaluated controlled substance staff fda nda review approved fda suvorexant become available schedule assessment determination completed us drug enforcement administration routinely occurs fda approval company also submitted new drug application suvorexant health authorities japan continuing plans seek approval suvorexant countries around world mk8616 sugammadex sodium injection investigational agent reversal neuromuscular blockade induced rocuronium vecuronium neuromuscular blocking agents review fda neuromuscular blockade used anesthesiology induce muscle relaxation surgery approved mk8616 would first new class medicines united states known selective relaxant binding agents used surgical setting 2008 fda approve original nda sugammadex sodium injection requesting additional data related hypersensitivity allergic reactions coagulation bleeding events merck submitted requested data within nda resubmission fda deemed complete review company expects fda’s review completed first half 2013 sugammadex sodium injection approved launched many countries outside united states marketed bridion mk8109 vintafolide investigational cancer candidate review ema part exclusive license agreement endocyte merck responsible development worldwide commercialization vintafolide oncology ema accepted marketing authorization application filings vintafolide endocyte’s investigational companion diagnostic imaging agent etarfolatide targeted treatment patients folatereceptor positive platinumresistant ovarian cancer combination pegylated liposomal doxorubicin vintafolide etarfolatide granted orphan drug status ec vintafolide phase iii development united states mk0653c investigational combination ezetimibe atorvastatin treatment primary mixed hyperlipidemia review fda updated nda mk0653c deemed complete review fda merck submitted additional data response fda’s complete response letter issued 2012 merck expects fda’s review completed first half 2013 merck continuing move forward planned filings ezetimibe atorvastatin combination tablet additional countries around world addition candidates regulatory review company 16 drug candidates phase iii development targeting broad range diseases company anticipates filing nda bla applicable fda respect several candidates 2013 v503 ninevalent hpv vaccine development help protect certain hpvrelated diseases v503 incorporates antigens five additional cancercausing hpv types compared gardasil previously disclosed 14000patient phase iii eventdriven clinical study v503 ongoing merck anticipates filing bla v503 fda 2013 mk8962 corifollitropin alpha injection marketed elonva eu investigational fertility treatment controlled ovarian stimulation women participating vitro fertilization intracytoplasmic sperm injection currently phase iii development united states merck continues anticipate filing nda mk8962 fda 2013 mk5348 vorapaxar thrombin receptor antagonist developed prevention thrombosis clot formation reduction cardiovascular events vorapaxar evaluated two major clinical outcomes studies different patient groups tracer thrombin receptor antagonist clinical event reduction acute coronary syndrome clinical outcomes trial patients acute coronary syndrome tra2p thrombin receptor antagonist secondary prevention atherothrombotic ischemic events secondary prevention study patients previous heart attack ischemic stroke documented peripheral vascular disease march 2012 results tra2p study vorapaxar presented american college cardiology annual scientific session published concurrently online edition new england journal medicine study addition vorapaxar standard care eg aspirin thienopyridine resulted significantly greater reduction risk composite cardiovascular death heart attack stroke urgent coronary revascularization also significant increase bleeding including intracranial hemorrhage among patients taking vorapaxar addition standard care although risk intracranial hemorrhage lower patients without history stroke november 2011 researchers presented results tracer outcomes study american heart association scientific sessions results published tracer achieve primary endpoint january 2011 merck external study investigators announced combined dsmb two clinical trials reviewed available safety efficacy data recommended patients tracer trial discontinue study drug investigators close study following review clinical trial data discussions external experts merck plans file applications vorapaxar united states eu 2013 seeking indication prevention cardiovascular events patients history heart attack history transient ischemic attack stroke mk7243 investigational allergy immunotherapy sublingual tablet “ait” phase iii development grass pollen allergy company north american rights ait dissolvable oral tablet designed prevent allergy symptoms inducing protective immune response allergies thereby treating underlying cause disease merck investigating ait treatment grass pollen allergic rhinoconjunctivitis children adults company submitted bla mk7243 fda mk3641 ait ragweed allergy also phase iii development north american market company anticipates filing bla mk3641 fda 2013 mk8175a nomace2 marketed zoely eu investigational oral contraceptive use women prevent pregnancy nomace2 combined oral contraceptive tablet containing unique monophasic combination two hormones nomegestrol acetate highly selective progesteronederived progestin 17beta estradiol estrogen similar one naturally present women’s body november 2011 merck received complete response letter fda nomace2 company conducting additional clinical study requested fda plans update application future mk0822 odanacatib oral onceweekly investigational treatment osteoporosis postmenopausal women osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis july 2012 merck announced update phase iii trial assessing fracture risk reduction odanacatib independent data monitoring committee “dmc” study completed first planned interim analysis efficacy recommended study closed early due robust efficacy favorable benefitrisk profile dmc noted safety issues remain certain selected areas made recommendations respect following february 1 2013 merck announced recently received reviewing safety efficacy data phase iii trial result review data company concluded review additional data previously planned ongoing extension study warranted filing application approval fda delayed previously announced company conducting blinded extension trial approximately 8200 women provide additional safety efficacy data merck anticipates file applications approval odanacatib 2014 additional data extension trial company continues believe odanacatib potential address unmet medical needs patients osteoporosis mk3814 preladenant selective adenosine 2a receptor antagonist phase iii development treatment parkinson’s disease company anticipates filing nda mk3814 fda 2014 v212 inactivated vzv vaccine development prevention herpes zoster company enrolling two phase iii trials one autologous hematopoietic cell transplant patients solid tumor malignancies undergoing chemotherapy hematological malignancies company anticipates filing bla first autologous hematopoietic cell transplant data 2014 filing second indication cancer patients later date v419 investigational hexavalent pediatric combination vaccine contains components current vaccines designed help protect six potentially serious diseases diphtheria tetanus whooping cough bordetella pertussis polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hepatitis b developed collaboration sanofipasteur company anticipates filing bla v419 fda 2014 mk7009 vaniprevir investigational oral twicedaily protease inhibitor treatment chronic hepatitis c virus development japan company anticipates filing new drug application mk7009 japan 2014 mk3102 investigational onceweekly dpp4 inhibitor development treatment type 2 diabetes company anticipates filing nda mk3102 fda beyond 2014 mk3222 antiinterleukin23 monoclonal antibody candidate investigated treatment psoriasis company anticipates filing bla mk3222 fda beyond 2014 mk3415a actoxumabbezlotoxumab investigational candidate treatment clostridium difficile infection combination two monoclonal antibodies used treat patients single infusion company anticipates filing bla mk3415a fda 2015 mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein “cetp” investigated lipid management raise hdlc reduce ldlc based results phase iii define determining efficacy tolerability cetp inhibition anacetrapib safety study 1623 patients coronary heart disease coronary heart disease risk equivalents company initiated large eventdriven cardiovascular clinical outcomes trial reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease predicted completed 2017 company continues anticipate filing nda anacetrapib fda beyond 2015 mk8931 merck’s novel investigational oral ßamyloid precursor protein sitecleaving enzyme bace inhibitor treatment alzheimer’s disease december 2012 merck announced initiation phase iiiii clinical trial epoch designed evaluate safety efficacy mk8931 versus placebo patients mildtomoderate alzheimer’s disease mk8669 ridaforolimus investigational oral mtor mammalian target rapamycin inhibitor development cancer indications june 2012 merck announced fda issued complete response letter regarding nda ridaforolimus treatment metastatic soft tissue bone sarcoma complete response letter states fda cannot approve application present form additional clinical trials would need conducted assess safety efficacy november 2012 merck formally notified ema decision withdraw marketing authorization application ridaforolimus accepted ema 2011 company longer plans pursue sarcoma indication united states eu continue support patients enrolled ongoing clinical trials merck remains committed pursuing ridaforolimus cancer indications part exclusive license agreement ariad pharmaceuticals inc “ariad” merck responsible development worldwide commercialization ridaforolimus oncology december 2012 merck announced hps2thrive study mk0524a tredaptive meet primary endpoint study adding combination extendedrelease niacin laropiprant statin therapy significantly reduce risk combination coronary deaths nonfatal heart attacks strokes revascularizations compared statin therapy addition statistically significant increase incidence types nonfatal serious adverse events group received extendedrelease niacinlaropiprant compared statin therapy merck plan seek regulatory approval medicine united states january 2013 based understanding preliminary data hps2thrive study consultation regulatory authorities merck began taking steps suspend availability tredaptive approved use certain countries outside united states clinical development program mk0524b combination product extendedrelease niacin laropiprant simvastatin previously discontinued 2012 merck announced return global marketing development rights intravenous oral formulations vernakalant treatment atrial fibrillation cardiome pharma corp business reasons merck also decided 2012 discontinue clinical development program mk0431e combination product sitagliptin atorvastatin treatment type 2 diabetes business reasons company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources disease areas unmet medical needs scientific opportunity commercial opportunity merck managing research development portfolio across diverse approaches discovery development balancing investments appropriately novel innovative targets potential major impact human health developing bestinclass approaches delivering maximum value approved medicines vaccines new indications new formulations another important component company’s sciencebased diversification based expanding company’s portfolio modalities include small molecules vaccines also biologics peptides small proteins antibodies rnai merck moved diversify portfolio biosimilars potential harness market opportunity presented biological medicine patent expiries delivering high quality followon biologic products enhance access patients worldwide company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases insomnia neurodegenerative diseases osteoporosis respiratory diseases women’s health inprocess research development connection mergers acquisitions company recorded fair value incomplete research projects time acquisition yet reached technological feasibility december 31 2012 balance iprd 24 billion significant projects latestage development include sugammadex sodium injection ezetimibeatorvastatin combination product currently review fda noted well vorapaxar remains phase iii clinical development 2012 2011 2010 approximately 78 million 666 million 378 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2012 company recorded 200 million iprd impairment charges within research development expenses primarily pipeline programs previously deprioritized subsequently deemed alternative use period 2011 company recorded 587 million iprd impairment charges primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges company determined developments clinical research program vorapaxar constituted triggering event required company evaluate vorapaxar intangible asset impairment utilizing market participant assumptions considering several different scenarios company concluded best estimate current fair value intangible asset related vorapaxar 350 million resulted recognition impairment charge 17 billion 2010 remaining 763 million iprd impairment charges recorded 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2012 estimated costs complete projects acquired connection mergers acquisitions phase iii development human health analogous stage development animal health approximately 12 billion acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth 2012 company completed transactions across broad range therapeutic categories including earlystage technology transactions merck actively monitoring landscape growth opportunities meet company’s strategic criteria october 2012 merck aicuris entered exclusive licensing agreement provides merck worldwide rights develop commercialize candidates aicuris’ novel portfolio investigational medicines targeting human cytomegalovirus “hcmv” including letermovir mk8228 oral latestage antiviral candidate investigated treatment prevention hcmv infection transplant recipients aicuris received upfront payment 110 million approximately 140 million company recorded research development expense eligible milestone payments 3325 million based successful achievement development regulatory commercialization goals hcmv candidates including letermovir additional backup candidate well phase candidates designed act via alternate mechanism addition aicuris entitled receive royalty payments reflecting advanced stage clinical program potential products result agreement merck responsible development activities costs agreement may terminated either party event material uncured breach insolvency agreement may terminated merck time event compounds licensed aicuris develop adverse safety profile material adverse issue arises related development efficacy dosing regimen compounds andor event certain patents invalid andor unenforceable certain jurisdictions merck may terminate agreement respect certain compounds successful completion first proof concept clinical trial ii must terminate agreement respect certain compounds merck fails minimally invest compounds addition merck may terminate agreement whole time upon six months prior written notice time completion first phase iii clinical trial compound aicuris may terminate agreement event merck challenges aicuris patent covering compounds licensed aicuris upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization compounds case termination cause merck certain royalty obligations april 2012 company entered agreement endocyte develop commercialize endocyte’s novel investigational therapeutic candidate vintafolide mk8109 vintafolide currently evaluated phase iii clinical trial folatereceptor positive platinumresistant ovarian cancer proceed phase ii trial nonsmall cell lung cancer agreement merck gained worldwide rights develop commercialize vintafolide endocyte received 120 million upfront payment company recorded research development expense eligible milestone payments 880 million based successful achievement development regulatory commercialization goals vintafolide total six cancer indications addition vintafolide receives regulatory approval merck endocyte share equally profit losses united states endocyte receive royalty sales product rest world endocyte retained right copromote vintafolide merck united states merck exclusive right promote vintafolide rest world endocyte responsible majority funding completion proceed trial merck responsible development activities development costs decision rights vintafolide merck right terminate agreement 90 days notice merck endocyte right terminate agreement due material breach insolvency party endocyte right terminate agreement event merck challenges endocyte patent right relating vintafolide upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vintafolide case termination cause merck certain royalty obligations us profit loss sharing endocyte responsible development manufacture commercialization worldwide etarfolatide noninvasive companion diagnostic imaging agent used identify folate receptor positive tumor cells discussed 2012 ema accepted marketing authorization application filings vintafolide etarfolatide platinum resistant ovarian cancer selected joint venture affiliate information expand research base realize synergies combining capabilities opportunities assets previous years merck formed number joint ventures astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 915 million 12 billion 13 billion 2012 2011 2010 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest returns aggregated 621 million 574 million 546 million 2012 2011 2010 respectively conjunction 1998 restructuring discussed astra purchased option “asset option” payment 443 million recorded deferred income buy merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” april 2010 astrazeneca exercised asset option merck received 647 million astrazeneca representing net present value march 31 2008 projected future pretax revenue received merck nonppi products recorded reduction company’s investment azlp company recognized 443 million deferred income 2010 component income expense net addition 1998 merck granted astra option buy merck’s common stock interest kbi merck’s interest nexium prilosec well azlp exercisable 2012 june 2012 merck astrazeneca amended 1998 option agreement updated agreement eliminated astrazeneca’s option acquire merck’s interest kbi 2012 provides astrazeneca new option acquire merck’s interest kbi june 2014 result amended agreement merck continues record supply sales equity income partnership 2014 astrazeneca option purchase merck’s interest kbi based part value merck’s interest nexium prilosec astrazeneca’s option exercisable march 1 2014 april 30 2014 astrazeneca chooses exercise option closing date expected june 30 2014 amended agreement astrazeneca make payment merck upon closing 327 million reflecting estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 exercise price also include additional amount equal multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise company believes likely astrazeneca exercise option 2014 astrazeneca exercises option company longer record equity income azlp supply sales azlp decline substantially sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows johnson°merck consumer pharmaceuticals company september 2011 merck sold 50 interest jjmcp joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net partnership assets also included manufacturing facility sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date 129 million 2010 capital expenditures capital expenditures 20 billion 2012 17 billion 2011 17 billion 2010 expenditures united states 13 billion 2012 12 billion 2011 990 million 2010 depreciation expense 20 billion 2012 24 billion 2011 26 billion 2010 13 billion 14 billion 17 billion respectively applied locations united states total depreciation expense 2012 2011 2010 included accelerated depreciation 235 million 589 million 849 million respectively associated restructuring activities see note 3 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders selected data cash provided operating activities 100 billion 2012 124 billion 2011 108 billion 2010 cash provided operating activities 2012 reflects higher contributions 13 billion defined benefit plans compared 2011 cash provided operating activities 2012 also reflects payment 960 million including interest related resolution certain litigation related vioxx increase cash provided operating activities 2011 compared 2010 reflects increased results operations partially offset 500 million payment made jj result arbitration settlement well net payments approximately 465 million internal revenue service “irs” result conclusion examination certain merck’s federal income tax returns discussed cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders global economic downturn sovereign debt issues among factors adversely affected foreign receivables certain european countries see note 6 consolidated financial statements company continues receive payment receivables including significant collections 2012 connection spanish government’s debt stabilizationstimulus plan additionally company continues expand emerging markets payment terms tend longer conditions eu emerging markets resulted increase average length time takes collect accounts receivable outstanding thereby adversely affecting cash provided operating activities cash used investing activities 68 billion 2012 compared 29 billion 2011 primarily reflecting higher purchases securities investments partially offset higher proceeds sales securities investments cash used investing activities 29 billion 2011 compared 35 billion 2010 primarily reflecting higher proceeds sales securities investments proceeds disposition certain businesses partially offset higher purchases securities investments addition 2010 proceeds astrazeneca’s asset option exercise decrease restricted assets contributed cash flows investing activities cash used financing activities 2012 33 billion compared 69 billion 2011 lower use cash financing activities primarily driven proceeds issuance debt lower payments debt higher proceeds exercise stock options partially offset increased purchases treasury stock decrease shortterm borrowings higher dividends paid stockholders cash used financing activities 69 billion 2011 compared 54 billion 2010 higher use cash financing activities primarily driven lower proceeds issuance debt higher purchases treasury stock higher payments debt partially offset increase shortterm borrowings effort implement merck’s strategy expand product offerings capabilities emerging markets company anticipates future allocate capital resources across regions december 31 2012 total worldwide cash investments 234 billion including 161 billion cash equivalents shortterm investments 73 billion longterm investments generally 8090 cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated form dividends company records us deferred tax liabilities certain unremitted earnings amounts earned overseas expected indefinitely reinvested outside united states accrual us taxes provided amount cash investments held us foreign subsidiaries fluctuates due variety factors including timing receipt payments normal course business cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures treasury stock purchases dividends paid shareholders previously disclosed canada revenue agency “cra” proposed adjustments 1999 2000 relating intercompany pricing matters july 2011 cra issued assessments miscellaneous audit issues tax years 20012004 2012 merck cra reached settlement years calls merck pay additional canadian tax approximately 65 million company’s unrecognized tax benefits related matters exceeded settlement amount therefore company recorded net 112 million tax provision benefit 2012 portion taxes paid expected creditable us tax purposes company previously established reserves matters resolution matters material effect company’s results operations financial position liquidity april 2011 irs concluded examination merck’s 20022005 federal income tax returns result company required make net payments approximately 465 million company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 700 million tax provision benefit 2011 net benefit reflects decrease unrecognized tax benefits years examination partially offset increases unrecognized tax benefits years subsequent examination period result settlement company disagrees irs treatment one issue raised examination appealing matter irs administrative process company’s contractual obligations december 31 2012 follows payments due period 1 2011 merck entered transaction require company make future bulk supply purchases 150 million maximum fouryear period commencing upon occurrence certain predetermined events amount reflected table predetermined events yet occurred therefore timing resulting payments given year cannot yet determined 2 discussed note 11 consolidated financial statements company settled enhance litigation assuming settlement approved court company anticipates pay 688 million 2013 connection settlement however company expects 195 million amount recovered insurance 3 december 31 2012 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 56 billion including 739 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2013 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments also excluded research development obligations potential future funding commitments approximately 130 million investments research venture capital funds loans payable current portion longterm debt reflects 328 million longdated notes subject repayment option holders required funding obligations 2013 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 340 million 40 million respectively pension plans postretirement benefit plans 2013 may 2012 company terminated existing credit facilities entered new 40 billion fiveyear credit facility maturing may 2017 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility september 2012 company closed underwritten public offering 25 billion senior unsecured notes consisting 10 billion aggregate principal amount 11 notes due 2018 10 billion aggregate principal amount 24 notes due 2022 500 million aggregate principal amount 36 notes due 2042 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices proceeds notes used general corporate purposes including contributions company’s pension plans repayment outstanding commercial paper certain debt maturities december 2012 company filed securities registration statement securities exchange commission “sec” automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company’s longterm credit ratings assigned moody’s investors service standard poor’s aa3 stable outlook aa stable outlook respectively ratings continue allow access capital markets flexibility obtaining funds competitive terms company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer despite strong financial profile certain contingent events realized discussed note 11 consolidated financial statements could material adverse impact company’s liquidity capital resources company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2012 board directors declared quarterly dividend 043 per share company’s common stock payable january 2013 april 2011 merck’s board directors approved additional purchases 50 billion merck’s common stock treasury company purchased 26 billion common stock 62 million shares treasury 2012 company approximately 19 billion remaining program treasury stock purchases time limit made time open market block transactions privately negotiated transactions company purchased 19 billion 16 billion common stock 2011 2010 respectively financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined estimated 453 million 330 million respectively uniform 10 weakening us dollar december 31 2012 2011 market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar would yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2012 income taxes would declined approximately 20 million 2012 company net short position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange december 31 2011 company net long position relative major foreign currencies consideration forward contracts therefore uniform 10 strengthening us dollar would reduced income taxes approximately 165 million measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company anticipates recognize losses due exchange approximately 150 million first quarter 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations addition effective january 11 2010 venezuelan government devalued currency twotiered official exchange rate “essentials rate” “nonessentials rate” december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 result announcement company remeasured december 31 2010 monetary assets liabilities new official rate company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income “oci” remains accumulated comprehensive income “aoci” either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted certain fixedrate notes floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate result swap terminations company received 288 million cash included 43 million accrued interest corresponding 245 million basis adjustment debt associated terminated interest rate swap contracts deferred amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2012 2011 would positively affected net aggregate market value instruments 12 billion year one percentage point decrease december 31 2012 2011 would negatively affected net aggregate market value 14 billion year fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded fair values intangible assets including acquired iprd determined utilizing information available near merger acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2012 2011 2010 summarized information changes aggregate indirect customer discount accrual follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 120 million 18 billion respectively december 31 2012 87 million 17 billion respectively december 31 2011 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales approximately 10 us net pharmaceutical sales 2012 2011 2010 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase iii clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2012 2011 196 million 127 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions see note 11 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2012 2011 approximately 260 million 240 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying providing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 14 million 2012 estimated 84 million aggregate years 2013 2017 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 145 million 171 million december 31 2012 2011 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 112 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 509 million 2012 665 million 2011 696 million 2010 decline net periodic benefit cost pension postretirement benefit plans 2012 compared 2011 2010 largely attributable benefit plan design changes approved december 2011 see note 14 consolidated financial statements pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2012 discount rates company’s us pension postretirement benefit plans ranged 300 420 compared range 400 500 december 31 2011 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2013 company’s expected rate return range 600 875 compared range 575 875 2012 us pension postretirement benefit plans company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 67 million favorable unfavorable impact net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 34 million favorable unfavorable impact net periodic benefit cost required funding obligations 2013 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees amortization net losses company’s us plans december 31 2012 expected increase net periodic benefit cost approximately 7 million annually 2013 2017 restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses purchased assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macro economic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist onestep test compares fair value iprd intangible asset carrying value impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 16 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2012 foreign earnings 534 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability recently issued accounting standards july 2012 fasb issued amended guidance simplifies entity tests indefinitelived intangibles impairment amended guidance allow companies first assess qualitative factors determine whether morelikelythannot indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test updated guidance effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted effect adoption company’s financial position results operations expected material cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc “merck” “company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels overview company’s revenue performance 2013 tempered ongoing business challenges including recent product patent expiries ongoing global efforts toward health care cost containment continue exert pressure product pricing market access worldwide sales 440 billion 2013 decline 7 compared 2012 including 2 unfavorable effect foreign exchange decline driven primarily recent loss market exclusivity several products particularly singulair medicine indicated chronic treatment asthma relief symptoms allergic rhinitis well maxalt product acute treatment migraine propecia product treatment male pattern hair loss temodar treatment certain types brain tumors company experienced significant rapid decline sales products following loss market exclusivity declines partially offset higher sales vaccines immunology diabetes hiv products company continued successfully execute cost reduction initiatives 2013 marketing administrative expenses research development costs 15 billion combined basis 2013 compared 2012 reflecting targeted reductions promotional spending lower costs result portfolio prioritization effort drive companywide efficiencies merck taking several strategic operating actions response business challenges rapidly changing external environment facing designed drive short longterm growth october 2013 company announced multiyear global initiative sharpen commercial research development focus designed enable merck better allocate resources candidates believes capable providing unambiguous promotable advantages patients payers includes bolstering pipeline implementing agile operating model significantly reduced flexible cost structure still maintaining high level cash returned shareholders geographically company increase focus ten prioritized markets account majority revenue pharmaceutical vaccine business markets united states japan france germany canada united kingdom china brazil russia korea company continue invest highgrowth key emerging markets within core human pharmaceutical vaccine business merck continue support inline portfolio prepare promising launches pipeline company increase focus key therapeutic areas meet unmet medical needs provide best opportunities business deliver greatest value customers diabetes acute hospital care vaccines oncology part intensified portfolio assessment process company divested portion us ophthalmics business sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults company’s portfolio assessment process ongoing future product divestitures may occur addition january 2014 company announced evaluating respective roles merck’s animal health consumer care businesses company’s strategy longterm value creation company expects complete evaluation process take action 2014 company could reach different decisions two businesses company’s refocused research development efforts include programs company’s antipd1 immunotherapy mk3475 oncology received breakthrough therapy designation us food drug administration “fda” advanced melanoma merck’s bace inhibitor alzheimer’s disease mk8931 company’s oral combination regimen treatment chronic hepatitis c virus infection mk5172mk8742 v503 ninevalent human papillomavirus “hpv” vaccine january 2014 company announced initiated rolling submission biologics license application “bla” fda mk3475 patients advanced melanoma previously treated ipilimumab 2013 company received breakthrough therapy designation mk5172mk8742 advanced combination phase 2b diverse range chronic hepatitis c patients company initiated phase 3 trials bace inhibitor mk8931 filed bla fda v503 merck pursuing emerging product opportunities independent therapeutic area modality building biologics capabilities company expects make externally sourced programs greater component pipeline strategy 2013 company entered collaboration agreement development commercialization ertugliflozin investigational oral sodium glucose cotransporter “sglt2” inhibitor evaluated treatment type 2 diabetes phase 3 clinical development company outlicensing discontinuing selected latestage clinical development assets reducing focus platform technologies 2013 company outlicensed mk1775 investigational treatment certain types ovarian cancer january 2014 entered agreement divest sirna therapeutics inc subsidiary related rnai technology assets company currently several candidates review fda mk5348 vorapaxar investigational antithrombotic medicine also review european union “eu” v503 ninevalent hpv vaccine mk8962 corifollitropin alfa injection investigational fertility treatment mk7243 grastek investigational timothy grass pollen allergy immunotherapy tablet “ait” mk3641 ragwitek investigational ragweed pollen ait also mk8109 vintafolide investigational cancer candidate review eu mk7009 vaniprevir investigational oral twicedaily protease inhibitor treatment chronic hepatitis c virus infection review japan february 2014 company resubmitted new drug application “nda” fda mk4305 suvorexant responding agency’s complete response letter “crl” received 2013 addition company anticipates resubmitting nda application 2014 fda mk8616 sugammadex sodium injection medication reversal certain muscle relaxants used surgery company received crl 2013 see “research development” company also 12 candidates phase 3 development anticipates filing new drug application “nda” bla applicable fda respect several candidates 2014 including completion rolling submission bla mk3475 patients advanced melanoma previously treated ipilimumab october 2013 connection implementation company’s new global initiative company announced global restructuring program “2013 restructuring program” part program company expects reduce total workforce approximately 8500 positions workforce reductions primarily come elimination positions sales administrative headquarters organizations well research development company also reduce global real estate footprint continue improve efficiency manufacturing supply network company recorded total pretax costs 12 billion 2013 related restructuring program actions 2013 restructuring program expected substantially completed end 2015 cumulative pretax costs estimated approximately 25 billion 30 billion company expects actions 2013 restructuring program result annual net cost savings approximately 20 billion end 2015 company anticipates actions 2013 restructuring program combined remaining actions merger restructuring program discussed result annual net cost savings 25 billion end 2015 compared fullyear 2012 expense levels global restructuring program “merger restructuring program” initiated 2010 subsequent merck scheringplough corporation “scheringplough” merger “merger” intended streamline cost structure combined company workforce reductions associated plan relate elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company recorded total pretax costs 11 billion 2013 951 million 2012 18 billion 2011 related restructuring program restructuring actions merger restructuring program substantially completed end 2013 exception certain actions principally manufacturingrelated subsequent merger company rationalized number manufacturing sites worldwide remaining actions program result additional manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 74 billion 77 billion yield annual savings upon completion program approximately 40 billion 46 billion costs associated company’s restructuring actions included materials production costs marketing administrative expenses research development expenses restructuring costs company estimates projected costs associated mentioned restructuring programs approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested 2013 company returned 117 billion cash shareholders stock buyback activity dividend payments pursuant 15 billion share repurchase program approved may 2013 merck’s board directors merck entered accelerated share repurchase “asr” agreement goldman sachs co “goldman sachs” asr merck repurchased 105 million shares common stock 5 billion utilizing funding underwritten public debt offering also november 2013 merck’s board directors raised company’s quarterly dividend 044 per share 043 per share earnings per common share assuming dilution attributable common shareholders “eps” 2013 147 compared 200 2012 eps years reflect net unfavorable impact resulting acquisitionrelated costs restructuring costs certain items nongaap eps excludes items 349 2013 compared 382 2012 see “nongaap income nongaap eps” decline nongaap eps 2013 compared 2012 due primarily lower sales reflecting loss market exclusivity certain products particularly singulair lower equity income higher foreign exchange losses partially offset lower operating expenses eps 2013 benefited lower average shares outstanding due asr program discussed competition health care environment competition markets company conducts business pharmaceutical industry highly competitive highly regulated company’s competitors include worldwide researchbased pharmaceutical companies smaller research companies limited therapeutic focus generic drug consumer animal health care manufacturers company’s operations may adversely affected generic biosimilar competition company’s products mature well technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors generic availability competitors’ branded products new information clinical trials marketed products postmarketing surveillance addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect intangible assets associated certain products competitive pressures intensified pressures industry grown effect operations competitive factors patent disputes cannot predicted pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources required meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances joint ventures licenses refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacements even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth reduced sales company’s products therapeutic category highly competitive animal health business affected several factors including regulatory legislative issues scientific technological advances product innovation quality price company’s products effective promotional efforts frequent introduction generic products competitors company’s consumer care operations face competition consumer health care businesses well retailers carry private label brands company’s competitive position affected several factors including regulatory legislative issues scientific technological advances quality price company’s products promotional efforts growth lower cost private label brands health care environment global efforts toward health care cost containment continue exert pressure product pricing market access united states federal state governments many years also pursued methods reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities hospitals serving disproportionate share low income uninsured patients backdrop united states enacted major health care reform legislation 2010 began implemented 2010 various insurance market reforms advanced continue full implementation 2014 law expected expand access health care 32 million americans end decade previously insurance coverage respect effect law pharmaceutical industry law increased mandated medicaid rebate 151 231 expanded rebate medicaid managed care utilization increased types entities eligible federal 340b drug discount program law also requires pharmaceutical manufacturers pay 50 point service discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” approximately 280 million 210 million 150 million recorded merck reduction revenue 2013 2012 2011 respectively related donut hole provision also pharmaceutical manufacturers required pay annual health care reform fee total annual industry fee 28 billion 2013 30 billion 2014 fee assessed company proportion share sales certain government programs medicare medicaid company recorded 151 million 190 million 162 million costs within marketing administrative expenses 2013 2012 2011 respectively annual health care reform fee full impact us health care reform cannot predicted time company also faces increasing pricing pressure globally managed care organizations government agencies programs could negatively affect company’s sales profit margins united states include practices managed care groups federal state exchanges institutional governmental purchasers ii us federal laws regulations related medicare medicaid including medicare prescription drug improvement modernization act 2003 patient protection affordable care act 2010 changes health care system enacted part health care reform united states well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries could result pricing pressures addition effort contain us federal deficit pharmaceutical industry could considered potential source savings via legislative proposals debated enacted types revenue generating cost saving proposals include additional direct price controls medicare prescription drug program part addition congress may consider proposals allow certain conditions importation medicines countries remains uncertain proposals may included part future federal budget deficit reduction proposals would directly indirectly affect company efforts toward health care cost containment remain intense several european countries many countries continued announce execute austerity measures include implementation pricing actions reduce prices generic patented drugs mandatory switches generic drugs company taking steps mitigate impact countries austerity measures continued negatively affect company’s revenue performance 2013 company anticipates austerity measures continue negatively affect revenue performance 2014 addition majority countries attempt contain drug costs engaging reference pricing authorities examine predetermined markets published prices drugs brand authorities use price data markets set new local prices brandname drugs including company’s guidelines examining reference pricing usually set local markets changed pursuant local regulations addition japan pharmaceutical industry subject governmentmandated biennial price reductions pharmaceutical products certain vaccines furthermore government order repricings classes drugs determines appropriate applicable rules certain markets outside united states also implemented cost management strategies health technology assessments require additional data reviews administrative processes increase complexity timing costs obtaining product reimbursement exert downward pressure available reimbursement company’s focus share revenue emerging markets increased governments many emerging markets also focused constraining health care costs enacted price controls related measures compulsory licenses aim put pressure price pharmaceuticals constrain market access company anticipates pricing pressures market access challenges continue 2014 varying degrees emerging markets beyond pricing market access challenges conditions emerging market countries affect company’s efforts continue grow markets including potential political instability significant currency fluctuation controls financial crises limited changing availability funding health care developments may adversely impact business environment company may engage thirdparty agents assist operating emerging market countries may affect ability realize continued growth may also increase company’s risk exposure addressing cost containment pressures company engages public policy advocacy policymakers continues work demonstrate medicines provide value patients pay health care company advocates government policymakers encourage longterm approach sustainable health care financing ensures access innovative medicines disproportionately target pharmaceuticals source budget savings markets historically low rates health care spending company encourages governments increase investments adopt market reforms order improve citizens’ access appropriate health care including medicines operating conditions become challenging global pressures competition industry regulation cost containment efforts although one predict effect factors company’s business company continually takes measures evaluate adapt improve organization business practices better meet customer needs believes well positioned respond evolving health care environment market forces government regulation pharmaceutical industry subject regulation regional country state local agencies around world governmental regulation legislation tend focus standards processes determining drug safety effectiveness well conditions sale reimbursement especially related pricing products particular importance fda united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals many cases fda requirements practices increased amount time resources necessary develop new products bring market united states eu adopted directives legislation concerning classification labeling advertising wholesale distribution integrity supply chain enhanced pharmacovigilance monitoring approval marketing medicinal products human use provide mandatory standards throughout eu may supplemented implemented additional regulations eu member states company’s policies procedures already consistent substance directives consequently believed material effect company’s business company believes continue able conduct operations including launching new drugs regulatory environment access medicines global health care company merck’s primary role discover develop innovative medicines vaccines company also recognizes important role play helping improve access products around world company’s efforts regard wideranging include set principles company strives embed operations business strategies guide company’s worldwide approach expanding access health care addition company many farreaching philanthropic programs merck patient assistance program provides medicines adult vaccines free people united states prescription drug health insurance coverage without company’s assistance cannot afford merck medicine vaccines 2011 merck announced would launch “merck mothers” longterm effort global health partners end preventable deaths complications pregnancy childbirth initiative merck leveraging scientific business expertise help make proven solutions widely available develop new technologies improve public policymaker awareness issues merck also past provided funds merck foundation independent organization partnered variety organizations dedicated improving global health one partnerships african comprehensive hivaids partnership botswana collaboration government botswana renewed 2010 supports botswana’s response hivaids comprehensive sustainable approach hiv prevention care treatment support privacy data protection company subject number privacy data protection laws regulations globally legislative regulatory landscape privacy data protection continues evolve increased attention privacy data protection issues developed emerging markets potential affect directly company’s business including recently enacted laws regulations united states europe asia latin america increased enforcement litigation activity united states developed markets operating results sales worldwide sales totaled 440 billion 2013 decline 7 compared 473 billion 2012 sales decline driven primarily lower sales singulair patents provided us market exclusivity market exclusivity number major european markets singulair expired august 2012 february 2013 respectively company experienced significant rapid decline singulair sales markets thereafter foreign exchange unfavorably affected global sales performance 2 2013 revenue decline 2013 also reflects lower sales maxalt cozaar hyzaar treatments hypertension temodar clarinex nonsedating antihistamine pegintron treatment chronic hepatitis c propecia fosamax treatment osteoporosis vytorin cholesterol modifying medicine declines partially offset growth gardasil vaccine help prevent certain diseases caused four types hpv remicade simponi treatments inflammatory diseases janumet treatment type 2 diabetes isentress treatment hiv1 infection dulera inhalation aerosol combination medicine treatment asthma zostavax vaccine help prevent shingles herpes zoster sales united states 182 billion 2013 decline 11 compared 204 billion 2012 sales decrease driven primarily lower sales singulair well maxalt temodar victrelis oral medicine treatment chronic hepatitis c virus clarinex partially offset higher sales gardasil zetia cholesterol absorption inhibitor dulera inhalation aerosol international sales 258 billion 2013 decline 4 compared 269 billion 2012 foreign exchange unfavorably affected international sales performance 4 2013 decline driven primarily lower sales pharmaceutical segment reflecting declines japan largely attributable unfavorable effect foreign exchange europe partially offset growth emerging markets sales japan declined 21 2013 39 billion 17 due unfavorable effect foreign exchange sales decline reflects ongoing impacts loss market exclusivity several products including cozaar hyzaar well lower sales gardasil reflecting japanese government’s decision suspend proactive recommendation hpv vaccines declines pegintron rebetol products treatment chronic hepatitis c declines partially offset volume growth januvia treatment type 2 diabetes nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms zetia rotateq vaccine help protect rotavirus gastroenteritis infants children sales europe declined 1 2013 96 billion including 2 favorable effect foreign exchange driven ongoing generic erosion fiscal austerity measures region partially offset growth remicade simponi janumet januvia isentress sales emerging markets grew 3 2013 78 billion including 4 unfavorable effect foreign exchange reflecting higher sales vaccine hospital hepatitis immunology products partially offset lower sales singulair diversified brands total international sales represented 59 57 total sales 2013 2012 respectively global efforts toward health care cost containment continue exert pressure product pricing market access worldwide many international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2013 company anticipates pricing actions including biennial price reductions japan austerity measures continue negatively affect revenue performance 2014 october 2013 company sold active pharmaceutical ingredient “api” manufacturing business effective december 31 2013 certain related products within diversified brands november 2013 merck sold us rights certain ophthalmic products january 2014 sold us rights saphris aggregate annual sales associated divested assets approximately 625 million annual sales associated divested products approximately 425 million approximately 385 million related pharmaceutical segment 40 million related consumer care segment annual sales associated divested api manufacturing business approximately 200 million related nonsegment revenues worldwide sales 473 billion 2012 decline 2 compared 480 billion 2011 foreign exchange unfavorably affected global sales performance 3 sales decrease driven primarily singulair lost market exclusivity united states august 2012 resulting significant rapid decline us singulair sales decline also driven lower sales remicade largely result arbitration settlement agreement reached 2011 discussed addition lower sales cozaar hyzaar clarinex fosamax vytorin primaxin antibacterial product avelox broadspectrum fluoroquinolone antibiotic treatment certain respiratory skin infections well lower revenue company’s relationship astrazeneca lp “azlp” also contributed sales decline 2012 declines largely offset higher sales januvia gardasil victrelis zostavax janumet isentress zetia dulera inhalation aerosol well higher sales company’s animal health consumer care products sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health consumer care alliances segment includes revenue company’s relationship azlp 4 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results discussed october 1 2013 company divested substantial portion thirdparty manufacturing sales addition revenues 2013 reflect 50 million revenue outlicense pipeline compound pharmaceutical segment primary care women’s health cardiovascular worldwide sales zetia also marketed ezetrol outside united states cholesterol absorption inhibitor 27 billion 2013 increase 4 compared 2012 including 2 unfavorable effect foreign exchange sales increase primarily reflects favorable pricing united states volume growth japan partially offset unfavorable effect foreign exchange particularly japan sales zetia increased 6 2012 26 billion including 2 unfavorable effect foreign exchange sales increase reflects positive performance united states due pricing well volume growth japan partially offset volume declines united states global sales vytorin marketed outside united states inegy combination product containing active ingredients zetia zocor statin modifying cholesterol 16 billion 2013 decline 6 compared 2012 driven primarily lower volumes united states latin america partially offset volume growth asia pacific region worldwide sales vytorin declined 7 2012 17 billion including 3 unfavorable effect foreign exchange sales decline reflects volume declines united states partially offset pricing united states volume growth certain international markets march 2013 data safety monitoring board “dsmb” improveit trial large cardiovascular outcomes study evaluating ezetimibesimvastatin simvastatin alone patients presenting acute coronary syndrome completed planned review study data recommended study continue merck remains blinded actual results analysis improveit safety efficacy data improveit 18000 patient eventdriven trial based targeted number 5250 clinical endpoints rate events reported trial projected conclude later 2014 results improveit trial fail demonstrate incremental benefit ezetimibesimvastatin cardiovascular morbidity mortality demonstrated simvastatin sales zetia vytorin could materially adversely affected company may take noncash impairment charges respect carrying values zetia vytorin intangible assets 47 billion 26 billion respectively december 31 2013 charges could material diabetes obesity global sales januvia merck’s dipeptidyl peptidase4 “dpp4” inhibitor treatment type 2 diabetes 40 billion 2013 decline 2 compared 2012 including 5 unfavorable effect foreign exchange excluding negative effect foreign exchange sales performance 2013 compared 2012 reflects volume growth japan positive performance europe emerging markets partially offset declines united states reflecting lowering demand worldwide sales januvia rose 23 41 billion 2012 compared 2011 reflecting volume growth united states well international markets particularly japan foreign exchange unfavorably affected sales performance 2 2012 2014 company anticipates dpp4 inhibitors including januvia subject repricing japan trial evaluating cardiovascular outcomes treatment sitagliptin “tecos” eventdriven cardiovascular outcomes study sitagliptin began 2008 14000 patients enrolled tecos evaluate impact sitagliptin added usual care compared usual care without sitagliptin large highrisk type 2 diabetes population across multiple countries tecos expected completed later 2014 worldwide sales janumet merck’s oral antihyperglycemic agent combines sitagliptin januvia metformin single tablet 18 billion 2013 increase 10 compared 2012 driven primarily volume growth outside united states global sales janumet 17 billion 2012 increase 22 compared 2011 reflecting volume growth united states emerging markets europe foreign exchange unfavorably affected sales performance 4 2012 global sales combined diabetes franchise januviajanumet 58 billion 2013 increase 2 compared 2012 including 3 unfavorable effect foreign exchange 57 billion 2012 increase 23 compared 2011 including 2 unfavorable effect foreign exchange respiratory global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms increased 5 13 billion 2013 compared 2012 driven primarily increases united states reflecting net favorable adjustments indirect customer discounts well volume growth japan partially offset declines latin america canada europe foreign exchange unfavorably affected global sales performance 3 2013 agreement generic manufacturers able launch generic version nasonex european markets january 1 2014 generic versions nasonex since launched several markets accordingly company anticipates rapid decline nasonex sales europe 2014 sales nasonex europe 207 million 2013 2009 apotex inc apotex corp collectively “apotex” filed application fda seeking approval sell generic version nasonex june 2012 us district court district new jersey ruled company patent infringement suit apotex holding apotex’s generic version nasonex infringe company’s formulation patent june 2013 court appeals federal circuit issued decision affirming us district court decision company exhausted appeal options apotex’s generic version becomes available significant losses us nasonex sales could occur company may take noncash impairment charge respect carrying value nasonex intangible asset 13 billion december 31 2013 nasonex intangible asset determined impaired impairment charge could material us sales nasonex 681 million 2013 worldwide sales nasonex declined 1 2012 13 billion including 1 unfavorable impact foreign exchange sales performance 2012 compared 2011 reflects price declines europe lower volumes united states largely offset higher prices united states worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis fell 69 12 billion 2013 compared 2012 driven primarily lower sales united states europe result generic competition patent provided us market exclusivity singulair expired august 2012 company lost nearly sales singulair united states addition patents provided market exclusivity singulair expired number major european markets february 2013 company experienced significant rapid reduction sales singulair markets following patent expiries expects decline continue patent provides market exclusivity singulair japan expire 2016 singulair sales japan 523 million 2013 global sales singulair declined 30 39 billion 2012 compared 2011 driven primarily lower sales united states revenue declines europe canada latin america also contributed singulair sales decline 2012 global sales dulera inhalation aerosol combination medicine treatment asthma 324 million 2013 207 million 2012 96 million 2011 reflecting higher demand united states dulera inhalation aerosol approved fda june 2010 january 2012 merck received crl fda company’s supplemental new drug application dulera inhalation aerosol treatment chronic obstructive pulmonary disease company determined conduct additional clinical study longer pursue update application women’s health endocrine worldwide sales nuvaring vaginal contraceptive product 686 million 2013 increase 10 compared 2012 primarily reflecting volume growth favorable pricing united states global sales nuvaring 623 million 2012 comparable sales 2011 foreign exchange unfavorably affected sales performance 3 2012 excluding unfavorable impact foreign exchange sales performance 2012 reflects volume growth emerging markets positive performance europe worldwide sales fosamax marketed fosamac japan fosamax plus marketed fosavance throughout eu treatment case fosamax prevention osteoporosis declined 17 2013 560 million decreased 21 2012 676 million driven declines regions medicines lost market exclusivity united states major international markets company expects sales declines within fosamax product franchise continue global sales follistim aq marketed countries outside united states puregon fertility treatment grew 3 481 million 2013 compared 2012 driven largely positive performance united states sales follistim aq declined 12 2012 468 million including 3 unfavorable effect foreign exchange driven largely declines europe resulting supply issues pricing puregon lost market exclusivity eu august 2009 worldwide sales implanon singlerod subdermal contraceptive implant grew 16 403 million 2013 compared 2012 driven primarily volume growth united states partially offset declines emerging markets pricing pressures implanon sales increased 18 2012 348 million including 2 unfavorable effect foreign exchange reflecting volume growth emerging markets united states recent years company experienced difficulties manufacturing certain women’s health products company resolved issues material company’s results operations products included primary care women’s health include among others asmanex twisthaler inhaled corticosteroid asthma cerazette progestin oral contraceptive arcoxia treatment arthritis pain avelox broadspectrum fluroquinolone antibiotic treatment certain respiratory skin infections marketed company united states patent provides us market exclusivity avelox expires march 2014 hospital specialty immunology sales remicade treatment inflammatory diseases marketed company europe russia turkey 23 billion 2013 increase 9 compared 2012 including 2 favorable effect foreign exchange sales growth reflects volume growth europe well russia september 2013 ec approved infliximab biosimilar company experiencing generic competition certain smaller european markets company anticipates substantial decline remicade sales following loss market exclusivity major european markets february 2015 sales remicade 21 billion 2012 decline 22 compared 2011 including 6 unfavorable effect foreign exchange prior july 1 2011 remicade marketed company outside united states except japan certain asian markets result agreement reached april 2011 amend agreement governing distribution rights remicade simponi effective july 1 2011 merck relinquished marketing rights products certain territories including canada central south america middle east africa asia pacific merck retained exclusive marketing rights throughout europe russia turkey “retained territories” retained territories remicade sales declined 2 2012 reflects 8 unfavorable effect foreign exchange volume growth europe sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey 500 million 2013 331 million 2012 264 million 2011 driven continued launch activities simponi approved european commission “ec” october 2009 september 2013 ec approved simponi treatment adult patients moderately severely active ulcerative colitis inadequate response conventional therapy intolerant medical contraindications therapies infectious disease worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection grew 8 16 billion 2013 compared 2012 driven primarily volume growth united states europe global sales isentress grew 11 2012 15 billion compared 2011 driven primarily volume growth united states latin america asia pacific region foreign exchange unfavorably affected global sales performance 1 2013 4 2012 global sales cancidas antifungal product increased 7 660 million 2013 compared 2012 reflecting growth emerging markets well europe japan sales cancidas declined 3 2012 619 million reflects 5 unfavorable effect foreign exchange growth emerging markets worldwide sales pegintron treatment chronic hepatitis c declined 24 496 million 2013 compared 2012 reflecting declines regions company believes sales declines attributable part patient treatment delayed health care providers anticipation new therapeutic options becoming available foreign exchange unfavorably affected global sales performance 3 2013 global sales pegintron declined 1 2012 653 million including unfavorable effect foreign exchange 4 excluding unfavorable impact foreign exchange sales performance reflects volume growth favorable pricing united states volume growth certain emerging markets global sales victrelis oral medicine treatment chronic hepatitis c 428 million 2013 decline 15 compared 2012 including 1 unfavorable effect foreign exchange sales declines united states europe canada partially offset growth across emerging markets company believes sales declines united states europe canada attributable part patient treatment delayed health care providers anticipation new therapeutic options becoming available sales victrelis 502 million 2012 compared 140 million 2011 driven postlaunch growth united states internationally particularly europe victrelis approved fda may 2011 ec july 2011 sales company’s products indicated treatment chronic hepatitis c including victrelis pegintron discussed well rebetol continued adversely affected 2013 patient treatment delayed health care providers anticipation new therapeutic options becoming available sales rebetol product sold almost entirely international markets particularly adversely affected trend given markets rebetol sold well generic competition worldwide sales rebetol declined 43 2013 74 million driven declines japan europe cash flow revisions fourth quarter 2013 indicated rebetol intangible asset value recoverable undiscounted cash flows basis utilizing market participant assumptions company concluded best estimate fair value intangible asset related rebetol 94 million december 31 2013 resulted impairment charge 156 million recorded within materials production costs event availability new treatment options adversely affects sales products currently marketed company treatment chronic hepatitis c greater extent anticipated company event circumstances arise significantly reduce cash flow projections products company may record additional intangible asset impairment charges future charges could material carrying value intangible assets related products 13 billion aggregate december 31 2013 oncology sales temodar marketed temodal outside united states treatment certain types brain tumors declined 23 708 million 2013 compared 2012 foreign exchange unfavorably affected global sales performance 3 2013 sales decline driven primarily generic competition united states europe previously disclosed agreement generic manufacturer launched generic version temodar united states august 2013 us patent exclusivity periods otherwise expired february 2014 temodar lost patent exclusivity eu 2009 accordingly company experiencing sales declines due loss exclusivity markets company expects declines continue sales temodar decreased 2 2012 917 million including 2 unfavorable effect foreign exchange sales declines europe generic competition offset price increases united states global sales emend prevention chemotherapyinduced postoperative nausea vomiting 507 million 2013 increase 4 compared 2012 including 1 unfavorable effect foreign exchange largely reflecting volume growth united states emerging markets partially offset decline japan sales emend 489 million 2012 increase 17 compared 2011 including 2 unfavorable effect foreign exchange reflecting volume growth united states japan worldwide sales ophthalmic products cosopt trusopt 416 million 2013 decline 6 compared 2012 reflecting 7 unfavorable effect foreign exchange lower sales europe canada due generic competition partially offset volume growth japan patent cosopt expired number major european markets march 2013 company experiencing sales declines markets patents provided market exclusivity cosopt trusopt united states trusopt number major european markets previously expired sales cosopt trusopt 444 million 2012 decline 7 compared 2011 including 4 unfavorable effect foreign exchange sales decline primarily reflects lower sales europe due generic erosion price reductions mitigated part higher cosopt sales japan november 2013 merck sold us rights ophthalmic products cosopt pf azasite akorn inc annual us sales associated ophthalmic products approximately 45 million bridion sugammadex sodium injection reversal certain muscle relaxants used surgery approved launched many countries outside united states sales bridion 288 million 2013 increase 10 compared 2012 sales growth driven volume growth europe emerging markets japan partially offset 13 unfavorable effect foreign exchange primarily sales japan sales bridion grew 30 2012 261 million driven primarily higher sales japan emerging markets september 2013 company received crl fda resubmission nda sugammadex sodium injection see “research development” saphris asenapine antipsychotic indicated treatment schizophrenia bipolar disorder adults previously marketed company united states merck’s sales saphris 158 million 2013 166 million 2012 120 million 2011 asenapine sold brand name sycrest also approved eu treatment bipolar disorder adults commercialization agreement sycrest sublingual tablets 5 mg 10 mg h lundbeck “lundbeck” makes product supply payments exchange exclusive commercial rights sycrest markets outside united states china japan second quarter 2013 company reduced cash flow projections saphrissycrest result reduced expectations international markets united states revisions cash flows indicated saphrissycrest intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions considered several different scenarios determine best estimate fair value intangible asset related saphrissycrest compared related carrying value resulted impairment charge 330 million reflected materials production costs january 2014 merck sold us rights saphris forest laboratories inc “forest” terms agreement forest make upfront payments approximately 230 million make additional payments merck based defined sales milestones products contained hospital specialty include among others invanz treatment certain infections noxafil prevention certain invasive fungal infections integrilin treatment patients acute coronary syndrome sold company united states canada diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatments hypertension 10 billion 2013 decline 22 compared 2012 including 8 unfavorable effect foreign exchange decline driven largely lower sales japan europe canada due generic competition unfavorable effect foreign exchange particularly sales japan sales cozaarhyzaar decreased 23 2012 13 billion driven declines regions patents provided market exclusivity cozaar hyzaar united states number major international markets expired accordingly company experiencing significant declines cozaar hyzaar sales company expects declines continue worldwide sales propecia product treatment male pattern hair loss 283 million 2013 decline 33 compared 2012 including 6 unfavorable impact foreign exchange decline driven primarily generic competition united states well lower sales japan due largely unfavorable effect foreign exchange company lost us market exclusivity propecia 2013 multiple generics entered market accordingly company experiencing significant decline us sales propecia expects decline continue sales propecia declined 5 2012 424 million compared 2011 driven declines europe united states partially offset increases asia pacific region global sales clarinex marketed aerius many countries outside united states nonsedating antihistamine declined 40 2013 235 million decreased 37 2012 393 million driven lower volumes united states europe result generic competition company anticipates sales clarinex continue decline global sales maxalt product acute treatment migraine fell 77 2013 149 million compared 2012 driven primarily lower volumes united states due generic competition patent provided us market exclusivity maxalt expired december 2012 company experienced significant rapid decline us maxalt sales thereafter addition patents provided market exclusivity maxalt expired number major european markets august 2013 company experiencing sales declines markets well sales maxalt 638 million 2012 comparable sales 2011 reflecting higher sales united states driven favorable pricing offset volume declines europe canada due generic erosion products contained diversified brands include among others primaxin antibacterial product zocor statin modifying cholesterol prescription claritin treatment seasonal outdoor allergies yearround indoor allergies remeron antidepressant proscar urology product treatment symptomatic benign prostate enlargement vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd “spmsd” company’s joint venture sanofi pasteur results reflected equity income affiliates see “selected joint venture affiliate information” supply sales spmsd however included merck’s sales gardasil vaccine help prevent certain diseases caused four types hpv grew 12 18 billion 2013 compared 2012 driven primarily volume growth united states reflecting continued uptake males females volume growth latin america partially offset lower volumes japan sales 2013 2012 included 37 million 44 million respectively purchases us centers disease control prevention “cdc” pediatric vaccine stockpile june 14 2013 japanese health ministry issued advisory suspend active promotion hpv vaccines accordingly company recorded almost sales gardasil japan second half 2013 merck’s sales gardasil rose 35 2012 16 billion compared 2011 driven primarily growth united states reflecting continued uptake males higher government purchases cdc pediatric vaccine stockpile well growth emerging markets particularly latin america asia pacific region japan company party certain thirdparty license agreements respect gardasil including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasil sales 21 27 vary country included materials production costs merck’s sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 314 million 2013 61 million 2012 34 million 2011 sales proquad 2012 2011 affected supply constraints proquad became available united states ordering october 2012 merck’s sales varivax vaccine help prevent chickenpox varicella 684 million 2013 846 million 2012 831 million 2011 merck’s sales mmr ii vaccine help protect measles mumps rubella 307 million 2013 365 million 2012 337 million 2011 sales varivax mmr ii declined 2013 due availability proquad discussed merck’s sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 758 million 2013 651 million 2012 332 million 2011 sales growth 2013 compared 2012 driven higher demand united states canada well launches within asia pacific region company continuing launch zostavax outside united states sales zostavax 2011 affected supply issues merck’s sales pneumovax 23 vaccine help prevent pneumococcal disease grew 13 2013 653 million compared 2012 driven primarily volume growth emerging markets well volume price increases united states merck’s sales pneumovax 23 increased 17 2012 580 million due primarily growth united states result price increases higher volumes partially offset declines japan merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children grew 6 2013 636 million compared 2012 reflecting higher pricing united states volume growth japan merck’s sales rotateq declined 8 2012 601 million reflecting favorable public sector inventory fluctuations 2011 partially offset volume growth emerging markets japan 2012 segments company’s segments animal health consumer care alliances segments material separate reporting january 2014 company announced evaluating respective roles merck’s animal health consumer care businesses company’s strategy longterm value creation company expects complete evaluation process take action 2014 company could reach different decisions two businesses animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected competition frequent introduction generic products global sales animal health products 34 billion 2013 decline 1 compared 2012 including 2 unfavorable effect foreign exchange sales decline reflects lower sales ruminant products primarily zilmax partially offset growth companion animal poultry products august 2013 merck animal health voluntarily suspended sales zilmax feed supplement beef cattle united states canada suspension zilmax unfavorably affected animal health sales 2 2013 sales animal health products 34 billion 2012 increase 4 compared 2011 including 5 unfavorable effect foreign exchange driven positive performance among ruminant poultry companion animal swine products consumer care consumer care products include overthecounter foot care sun care products claritin nondrowsy antihistamines miralax relief occasional constipation dr scholl’s foot care products coppertone sun care products consumer care product sales affected competition consumer spending patterns global sales consumer care products 19 billion 2013 decline 3 compared 2012 including 1 unfavorable effect foreign exchange sales decline 2013 resulted termination china certain consumer care distribution arrangements reversal sales previously made distributors together associated termination costs excluding items consumer care global sales would increased 1 2013 compared 2012 including 1 unfavorable effect foreign exchange reflecting higher sales women’s health products partially offset lower sales foot care products 2013 company launched oxytrol women first overthecounter treatment overactive bladder women consumer care product sales grew 6 2012 including 1 unfavorable effect foreign exchange 20 billion reflecting higher sales dr scholl’s coppertone miralax claritin partially offset lower sales marvelon oral contraceptive overthecounter product china discussed december 31 2013 company divested certain products aspen annual sales products reflected within consumer care approximately 40 million alliances segment includes results company’s relationship azlp revenue azlp primarily relating sales nexium prilosec 920 million 2013 915 million 2012 12 billion 2011 astrazeneca option buy merck’s interest subsidiary merck’s interest nexium prilosec exercisable 2014 company believes likely astrazeneca exercise option see “selected joint venture affiliate information” astrazeneca exercises option company longer record equity income azlp supply sales azlp terminate addition company recognize noncash pretax gain approximately 700 million costs expenses 100 greater 1 includes 279 million 200 million 587 million iprd impairment charges 2013 2012 2011 respectively materials production materials production costs 170 billion 2013 164 billion 2012 169 billion 2011 costs include expenses amortization intangible assets recorded connection mergers acquisitions totaled 47 billion 2013 49 billion 2012 2011 additionally expenses 2011 include 89 million amortization purchase accounting adjustments scheringplough’s inventories recognized result merger costs 2013 2011 include intangible asset impairment charges 486 million 118 million respectively impairment charges 2013 related changes cash flow assumptions currently marked products saphrissycrest rebetol see “pharmaceutical segment” company may recognize additional noncash impairment charges future related product intangibles measured fair value capitalized connection mergers acquisitions charges could material additionally costs 2013 include 41 million intangible asset impairment charge related licensing agreement also included materials production costs associated restructuring activities amounted 446 million 188 million 348 million 2013 2012 2011 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 615 2013 compared 652 2012 649 2011 amortization intangible assets purchase accounting adjustments inventories well restructuring impairment charges noted reduced gross margin 128 percentage points 2013 107 percentage points 2012 114 percentage points 2011 excluding impacts gross margin decline 2013 compared 2012 driven part loss singulair sales result patent expiries united states august 2012 major european markets february 2013 addition generic competition united states maxalt temodar clarinex propecia coupled changes product mix continued pricing pressures mature markets also negatively affected gross margin 2013 gross margin decline 2012 compared 2011 reflects significant decline singulair sales result loss us market exclusivity partially offset improvements resulting changes product mix company anticipates gross margin continue negatively affected ongoing impacts recent patent expiries additional patent expiries occur 2014 marketing administrative marketing administrative expenses declined 7 2013 119 billion decreased 7 2012 128 billion largely due lower promotional spending selling costs resulting restructuring activities also reflecting favorable effect foreign exchange expenses 2013 2012 2011 include restructuring costs 145 million 90 million 119 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include 94 million 272 million 278 million acquisitionrelated costs 2013 2012 2011 respectively consisting incremental thirdparty integration costs related merger including costs related legal entity system integration acquisitionrelated costs 2011 also consist severance costs associated acquisition inspire pharmaceuticals inc part company’s formal restructuring programs research development research development expenses 75 billion 2013 82 billion 2012 85 billion 2011 research development expenses comprised costs directly incurred merck research laboratories “mrl” company’s research development division focuses human healthrelated activities approximately 42 billion 2013 45 billion 2012 2011 also included research development expenses costs incurred divisions support research development activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health consumer care segments aggregate 29 billion 34 billion 32 billion 2013 2012 2011 respectively decline research development costs 2013 compared 2012 due targeted reductions lower clinical development spend result portfolio prioritization well lower payments licensing activity research development expenses 2013 2012 2011 favorably affected cost savings resulting restructuring activities research development expenses also include inprocess research development “iprd” impairment charges 279 million 200 million 587 million 2013 2012 2011 respectively see “research development” company may recognize additional noncash impairment charges future cancellation delay pipeline programs measured fair value capitalized connection mergers acquisitions charges could material research development expenses 2013 2012 2011 reflect 101 million 57 million 138 million respectively accelerated depreciation asset abandonment costs associated restructuring activities 2012 company recorded adjustment accelerated depreciation costs included research development expenses revising previously recorded amounts certain facilities restructuring costs restructuring costs primarily representing separation related costs associated restructuring activities 17 billion 664 million 13 billion 2013 2012 2011 respectively costs 2013 include 898 million costs related 2013 restructuring program nearly remaining costs recorded 2013 costs recorded 2012 2011 related merger restructuring program 2013 2012 2011 separation costs 14 billion 489 million 11 billion respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated approximately 6070 positions 2013 1540 related 2013 restructuring program 4475 related merger restructuring program 55 related 2008 restructuring program approximately 4255 positions 2012 3975 related merger restructuring program 155 related 2008 restructuring program 125 related legacy scheringplough program approximately 7590 positions 2011 6880 related merger restructuring program 450 related 2008 restructuring program 260 related legacy scheringplough program position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs well contract termination shutdown costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed equity income affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates declined 37 2013 404 million compared 2012 driven primarily lower equity income azlp partially offset higher equity income spmsd equity income affiliates increased 5 2012 642 million due primarily higher equity income azlp 2011 company divested interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture see “selected joint venture affiliate information” income expense net income expense net 815 million expense 2013 compared 11 billion expense 2012 reflecting 493 million net charge 2012 relating settlement certain shareholder litigation enhance litigation” see note 10 consolidated financial statements partially offset higher exchange losses 2013 driven 140 million exchange losses related venezuelan currency devaluation see note 14 consolidated financial statements well higher interest expense 2013 resulting part issuances debt september 2012 may 2013 income expense net 11 billion expense 2012 compared 946 million expense 2011 reflecting 493 million net charge 2012 relating settlement enhance litigation gains recognized 2011 136 million disposition company’s interest jjmcp joint venture see note 8 consolidated financial statements 127 million sale certain manufacturing facilities related assets see note 4 consolidated financial statements partially offset 500 million charge 2011 related resolution arbitration proceeding involving company’s rights market remicade simponi higher interest income 2012 segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits amortization purchase accounting adjustments acquisitionrelated costs intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income expenses corporate manufacturing cost centers miscellaneous income expense additionally segment profits reflect charge related settlement enhance litigation recorded 2012 arbitration settlement charge gain divestiture company’s interest jjmcp joint venture gain sale certain manufacturing facilities related assets recorded 2011 unallocated items reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales pharmaceutical segment profits declined 11 2013 driven primarily effects loss market exclusivity certain products particularly singulair pharmaceutical segment profits increased 1 2012 driven primarily lower operating expenses mostly offset effects loss us market exclusivity singulair taxes income effective income tax rates 185 2013 279 2012 128 2011 reflect impacts acquisitionrelated costs restructuring costs partially offset beneficial impact foreign earnings effective tax rate 2013 reflects net benefit 165 million settlements certain federal income tax issues net benefits reductions tax reserves upon expiration applicable statutes limitations favorable impact tax legislation enacted first quarter 2013 extended rd tax credit 2012 2013 well outofperiod net tax benefit approximately 160 million associated resolution previously disclosed legacy scheringplough federal income tax issue see note 15 consolidated financial statements effective tax rate 2012 also reflects favorable impacts tax settlement canada revenue agency “cra” realization foreign tax credits impact favorable ruling state tax matter addition 2012 effective tax rate reflects unfavorable impact net charge recorded connection settlement enhance litigation tax benefit recorded reflect impacts rd tax credit expired december 31 2011 result legislation passed 2013 extended rd tax credit 2012 2013 rd tax credits recognized 2013 noted effective tax rate 2011 reflects net favorable impact approximately 700 million relating settlement merck’s 20022005 federal income tax audit favorable impact certain foreign state tax rate changes resulted net 270 million reduction deferred tax liabilities intangibles established purchase accounting unfavorable impact 500 million charge related resolution arbitration proceeding involving company’s rights market remicade simponi net income earnings per common share net income attributable merck co inc 44 billion 2013 62 billion 2012 63 billion 2011 eps 147 2013 200 2012 202 2011 declines net income eps 2013 compared 2012 due primarily lower sales reflecting loss market exclusivity certain products particularly singulair well higher restructuring costs intangible asset impairment charges exchange losses partially offset favorable impact certain tax items lower operating expenses eps 2013 benefited lower average shares outstanding due asr program see note 11 consolidated financial statements decreases net income eps 2012 compared 2011 due primarily net charge recorded connection settlement enhance litigation effects loss us market exclusivity singulair 2012 favorable impact tax items 2011 partially offset lower marketing administrative expenses lower restructuring costs lower intangible asset impairment charges 2012 arbitration settlement charge recorded 2011 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items consist acquisitionrelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income eps prepared accordance generally accepted accounting principles united states “gaap” additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows 1 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisitionrelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection mergers acquisitions amounts include amortization intangible assets inventory stepup well intangible asset impairment charges also excluded incremental thirdparty integration costs associated merger costs related legal entity system integration well costs associated mergers acquisitions severance costs part company’s formal restructuring programs costs excluded management believes costs representative ongoing normal business activities restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 3 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis certain items comprised net charge recorded connection settlement enhance litigation arbitration settlement charge gain disposition company’s interest jjmcp joint venture gain associated sale certain manufacturing facilities related assets also excluded nongaap income nongaap eps tax benefits resolution certain federal income tax issues research development chart reflecting company’s current research pipeline february 21 2014 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally mk5348 vorapaxar investigational antithrombotic medicine review fda european medicines agency “ema” merck seeking approval vorapaxar reduction atherothrombotic events added standard care patients history heart attack history stroke transient ischemic attack january 2014 fda’s cardiovascular renal drugs advisory committee recommended approval vorapaxar fda bound committee’s guidance takes advice consideration reviewing investigational medicines v503 company’s ninevalent hpv vaccine development help protect certain hpvrelated diseases review fda v503 incorporates antigens five additional cancercausing hpv types compared gardasil company anticipates submitting marketing authorization application “maa” ema first half 2014 mk8962 corifollitropin alfa injection investigational fertility treatment review fda controlled ovarian stimulation women participating assisted reproductive technology approved corifollitropin alfa would first sustained follicular stimulant use fertility treatment regimen united states merck’s corifollitropin alfa currently approved 50 markets outside united states including eu mk7243 grastek investigational timothy grass pollen allergy immunotherapy tablet “ait” mk3641 ragwitek investigational ragweed pollen ait review fda mk7243 mk3641 investigational sublingual tablets designed help treat underlying cause allergic rhinitis generating immune response help protect allergic patients effects triggered targeted allergen merck partnered alkabello develop investigational sublingual allergy immunotherapy tablets timothy grass pollen ragweed pollen house dust mites north america december 2013 fda’s allergenic products advisory committee positive discussion mk7243 january 2014 advisory committee positive discussion mk3641 fda bound committee’s guidance takes advice consideration reviewing investigational medicines merck expects fda’s review mk7243 mk3641 completed first half 2014 february 2014 company announced grastek received regulatory approval canada mk4305 suvorexant investigational insomnia medicine new class medicines called orexin receptor antagonists use patients difficulty falling staying asleep july 2013 company announced received crl fda regarding nda suvorexant crl fda advised merck 1 efficacy suvorexant established doses 10 mg 40 mg elderly nonelderly adult patients 2 10 mg starting dose patients must available suvorexant approved 3 15 mg 20 mg doses would appropriate patients 10 mg dose welltolerated effective 4 patients taking concomitant moderate cyp3a4 inhibitors 5 mg dose would necessary addition fda determined safety data support approval suvorexant 30 mg 40 mg february 2014 company resubmitted nda fda previously disclosed fda approval separate scheduling determination us drug enforcement administration required merck introduce suvorexant united states insomnia condition characterized difficulty falling asleep andor staying asleep company submitted new drug application suvorexant health authorities japan continuing plans seek approval suvorexant countries around world mk8616 sugammadex sodium injection investigational agent reversal neuromuscular blockade induced rocuronium vecuronium neuromuscular blocking agents neuromuscular blockade used anesthesiology induce muscle relaxation surgery september 2013 merck announced received crl fda resubmission nda sugammadex sodium injection fda’s letter raised concerns operational aspects hypersensitivity study agency requested 2008 address crl company conducting hypersensitivity study anticipates filing nda resubmission fda 2014 sugammadex sodium injection approved launched many countries outside united states marketed bridion mk8109 vintafolide investigational cancer candidate review ema part exclusive license agreement endocyte inc “endocyte” merck responsible development worldwide commercialization vintafolide oncology ema accepted maa filings vintafolide endocyte’s investigational companion diagnostic imaging agent etarfolatide targeted treatment patients folatereceptor positive platinumresistant ovarian cancer combination pegylated liposomal doxorubicin vintafolide etarfolatide granted orphan drug status ec vintafolide phase 3 development united states mk7009 vaniprevir investigational oral twicedaily protease inhibitor treatment chronic hepatitis c virus infection review japan addition candidates regulatory review company 12 drug candidates phase 3 development targeting broad range diseases company anticipates filing nda bla applicable fda respect several candidates 2014 mk3475 investigational antipd1 immunotherapy currently evaluated treatment patients advanced melanoma tumor types january 2014 company announced started rolling submission fda bla mk3475 patients advanced melanoma previously treated ipilimumab rolling submission allows completed portions application submitted reviewed fda ongoing basis company expects complete application first half 2014 april 2013 merck announced mk3475 received breakthrough therapy designation advanced melanoma fda designation investigational drug breakthrough therapy intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints mk3475 clinical development program also includes studies across broad range cancer types including bladder colorectal gastric head neck melanoma nonsmall cell lung renal triple negative breast hematological malignancies addition company announced four collaborations pharmaceutical companies evaluate novel combination regimens mk3475 mk0822 odanacatib oral onceweekly investigational treatment patients osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis july 2012 merck announced update phase 3 trial assessing fracture risk reduction odanacatib independent data monitoring committee “dmc” study completed first planned interim analysis efficacy recommended study closed early due robust efficacy favorable benefitrisk profile dmc noted safety issues remain certain selected areas made recommendations respect following february 1 2013 merck announced recently received reviewing safety efficacy data phase 3 trial result review data company concluded review additional data previously planned ongoing extension study warranted filing application approval fda delayed previously announced company conducting blinded extension trial approximately 8200 women provide additional safety efficacy data merck continues anticipate file applications approval odanacatib 2014 additional data extension trial company continues believe odanacatib potential address unmet medical needs patients osteoporosis v419 investigational hexavalent pediatric combination vaccine contains components current vaccines designed help protect six potentially serious diseases diphtheria tetanus whooping cough bordetella pertussis polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hepatitis b developed collaboration sanofipasteur company continues anticipate filing bla v419 fda 2014 mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein “cetp” investigated lipid management raise hdlc reduce ldlc anacetrapib evaluated large eventdriven cardiovascular clinical outcomes trial reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease predicted completed 2017 mk8931 merck’s novel investigational oral ßamyloid precursor protein sitecleaving enzyme “bace” inhibitor treatment alzheimer’s disease evaluated phase 23 clinical trial epoch designed evaluate safety efficacy mk8931 versus placebo patients mildtomoderate alzheimer’s disease based positive dmc recommendation made following planned analysis interim safety data included safety cohort 200 patients treated mk8931 least three months company recently began enrolling patients phase 3 portion trial well new phase 3 trial apecs designed evaluate safety efficacy mk8931 versus placebo patients amnestic mild cognitive impairment due alzheimer’s disease also known prodromal alzheimer’s disease mk3415a actoxumabbezlotoxumab investigational candidate prevention clostridium difficile infection recurrence combination two monoclonal antibodies used treat patients single infusion mk3102 omarigliptin investigational onceweekly dpp4 inhibitor development treatment type 2 diabetes mk8835 ertugliflozin investigational oral sodium glucose cotransporter “sglt2” inhibitor evaluated treatment type 2 diabetes 2013 company entered worldwide except japan collaboration agreement pfizer inc “pfizer” development commercialization ertugliflozin discussed mk1293 insulin glargine candidate treatment patients type 1 type 2 diabetes february 2014 company announced expanded collaboration samsung bioepis develop manufacture commercialize mk1293 terms agreement companies collaborate clinical development regulatory filings manufacturing approved merck commercialize candidate v212 inactivated varicella zoster virus vaccine development prevention herpes zoster company conducting two phase 3 trials one autologous hematopoietic cell transplant patients solid tumor malignancies undergoing chemotherapy hematological malignancies mk3222 tildrakizumab antiinterleukin23 monoclonal antibody candidate investigated treatment psoriasis mk5172mk8742 alloral combination regimen phase 2 development consisting mk5172 investigational hepatitis c virus ns34a protease inhibitor mk8742 investigational hepatitis c virus ns5a replication complex inhibitor granted breakthrough therapy designation october 2013 fda treatment chronic hepatitis c virus infection mk5172 mk8742 investigated broad clinical program includes studies patients multiple hepatitis c virus genotypes treatmentnaïve treatment failures well important hepatitis c virus subpopulations patients cirrhosis coinfected hiv mk8175a nomace2 marketed zoely eu investigational oral contraceptive use women prevent pregnancy november 2011 merck received crl fda nomace2 merck made decision discontinue phase 3 clinical trial nomace2 conducted united states decision based new safety efficacy findings may 2013 company provided update clinical program preladenant merck’s investigational adenosine a2a receptor antagonist treatment parkinson’s disease initial review data three separate phase 3 trials provide evidence efficacy preladenant compared placebo based results merck taken steps discontinue extension phases studies longer plans pursue regulatory filings preladenant decision discontinue studies based safety finding company recorded impairment charge 181 million 2013 related discontinuation clinical development program preladenant company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities merck moved diversify portfolio collaboration development biosimilars potential harness market opportunity presented biological medicine patent expiries delivering high quality biosimilars enhance access patients worldwide company committed making externally sourced programs greater component pipeline strategy renewed focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company evaluating certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases insomnia neurodegenerative diseases osteoporosis respiratory diseases women’s health inprocess research development connection mergers acquisitions company recorded fair value incomplete research projects time acquisition yet reached technological feasibility december 31 2013 balance iprd 19 billion significant projects latestage development include vorapaxar company’s bace inhibitor sugammadex sodium injection ait programs discussed 2013 2012 2011 approximately 346 million 78 million 666 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2013 company recorded 279 million iprd impairment charges within research development expenses amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period 2012 company recorded 200 million iprd impairment charges primarily pipeline programs previously deprioritized subsequently deemed alternative use period 2011 company recorded 587 million iprd impairment charges primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges 2011 related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2013 estimated costs complete projects acquired connection mergers acquisitions phase 3 development human health analogous stage development animal health approximately 12 billion acquisitions divestitures research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth 2013 company completed transactions across broad range therapeutic categories merck actively monitoring landscape growth opportunities meet company’s strategic criteria april 2013 merck pfizer announced entered worldwide except japan collaboration agreement development commercialization pfizer’s ertugliflozin investigational oral sodium glucose cotransporter “sglt2” inhibitor evaluated treatment type 2 diabetes company initiated phase 3 clinical trials ertugliflozin pfizer terms agreement merck pfizer collaborate clinical development commercialization ertugliflozin ertugliflozincontaining fixeddose combinations metformin januvia sitagliptin tablets merck continue retain rights existing portfolio sitagliptincontaining products end 2013 merck recorded research development expenses 125 million upfront milestone payments made pfizer eligible additional payments associated achievement prespecified future clinical regulatory commercial milestones companies share potential revenues certain costs 60 merck 40 pfizer party certain manufacturing supply obligations company pfizer right terminate agreement due material uncured breach insolvency party event safety issue pfizer right terminate agreement upon 12 months notice time following first anniversary first commercial sale collaboration product must assign rights ertugliflozin merck upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization ertugliflozin certain payment obligations september 2013 merck astrazeneca announced worldwide outlicensing agreement merck’s oral small molecule inhibitor wee1 kinase mk1775 currently evaluated phase 2a clinical studies combination standardofcare therapies treatment patients certain types ovarian cancer terms agreement astrazeneca paid merck 50 million upfront fee company recorded revenue addition merck eligible receive future payments tied development regulatory milestones plus salesrelated payments tiered royalties astrazeneca responsible future clinical development manufacturing marketing january 2014 company entered agreement divest sirna therapeutics inc subsidiary related rnai technology assets alnylam pharmaceuticals inc “alnylam” terms agreement consideration paid alnylam merck consist 25 million cash 2520044 shares alnylam common stock valued approximately 165 million time agreement addition merck eligible receive 115 million developmental sales milestone payments well singledigit royalties associated certain preclinical candidates transaction subject customary closing conditions expected close first quarter 2014 selected joint venture affiliate information expand research base realize synergies combining capabilities opportunities assets previous years merck formed number joint ventures astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 920 million 915 million 12 billion 2013 2012 2011 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest returns aggregated 352 million 621 million 574 million 2013 2012 2011 respectively 2014 astrazeneca option purchase merck’s interest kbi based part value merck’s interest nexium prilosec astrazeneca’s option exercisable march 1 2014 april 30 2014 astrazeneca chooses exercise option closing date expected june 30 2014 amended agreement astrazeneca make payment merck upon closing 327 million reflecting estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 exercise price also include additional amount equal multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise company believes likely astrazeneca exercise option 2014 astrazeneca exercises option company longer record equity income azlp supply sales azlp terminate addition company recognize noncash pretax gain approximately 700 million sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows johnson°merck consumer pharmaceuticals company 2011 merck sold 50 interest jjmcp joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net partnership assets also included manufacturing facility sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date capital expenditures capital expenditures 15 billion 2013 20 billion 2012 17 billion 2011 expenditures united states 902 million 2013 13 billion 2012 12 billion 2011 depreciation expense 22 billion 2013 20 billion 2012 24 billion 2011 15 billion 13 billion 14 billion respectively applied locations united states total depreciation expense 2013 2012 2011 included accelerated depreciation 577 million 235 million 589 million respectively associated restructuring activities see note 3 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders cash provided operating activities 117 billion 2013 100 billion 2012 124 billion 2011 cash provided operating activities 2013 includes payment made company 480 million connection previously disclosed settlement enhance litigation see note 10 consolidated financial statements cash provided operating activities 2012 reflects higher contributions defined benefit plans compared 2013 2011 cash provided operating activities 2012 also includes payment 960 million related resolution certain litigation related vioxx cash provided operating activities 2011 includes 500 million payment made jj result arbitration settlement well net payments approximately 465 million internal revenue service result conclusion examination certain merck’s federal income tax returns cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders global economic conditions ongoing sovereign debt issues among factors adversely affected foreign receivables certain european countries see note 5 consolidated financial statements company received significant collections 2013 2012 successful completing factoring arrangements portion receivables additionally company continues expand emerging markets payment terms tend longer conditions eu emerging markets resulted increase average length time takes collect accounts receivable outstanding thereby adversely affecting cash provided operating activities cash used investing activities 31 billion 2013 compared 68 billion 2012 primarily reflecting higher proceeds sales securities investments lower capital expenditures partially offset higher purchases securities investments cash used investing activities 68 billion 2012 compared 29 billion 2011 primarily reflecting higher purchases securities investments partially offset higher proceeds sales securities investments cash used financing activities 60 billion 2013 compared 33 billion 2012 higher use cash financing activities driven primarily higher purchases treasury stock largely asr agreement discussed well higher payments debt decrease shortterm borrowings partially offset higher proceeds issuance debt cash used financing activities 2012 33 billion compared 69 billion 2011 lower use cash financing activities primarily driven proceeds issuance debt lower payments debt higher proceeds exercise stock options partially offset increased purchases treasury stock decrease shortterm borrowings higher dividends paid stockholders december 31 2013 total worldwide cash investments 273 billion including 175 billion cash equivalents shortterm investments 98 billion longterm investments generally 8090 cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated form dividends company records us deferred tax liabilities certain unremitted earnings amounts earned overseas expected indefinitely reinvested outside united states accrual us taxes provided amount cash investments held us foreign subsidiaries fluctuates due variety factors including timing receipt payments normal course business cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures portion treasury stock purchases dividends paid shareholders company’s contractual obligations december 31 2013 follows 1 includes future bulk supply purchases company committed connection certain divestitures including disposition api manufacturing business 2013 discussed 2 december 31 2013 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 42 billion including 59 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2014 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments also excluded research development obligations potential future funding commitments approximately 100 million investments research venture capital funds loans payable current portion longterm debt reflects 370 million longdated notes subject repayment option holders required funding obligations 2014 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 250 million 75 million respectively pension plans postretirement benefit plans 2014 company 40 billion fiveyear credit facility maturing may 2017 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility may 2013 company completed underwritten public offering 65 billion senior unsecured notes consisting 10 billion aggregate principal amount 070 notes due 2016 500 million aggregate principal amount floating rate notes due 2016 10 billion aggregate principal amount 130 notes due 2018 10 billion aggregate principal amount floating rate notes due 2018 175 billion aggregate principal amount 280 notes due 2023 125 billion aggregate principal amount 415 notes due 2043 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices substantial portion net proceeds notes used repurchase company’s common stock pursuant accelerated share repurchase agreement may 2013 discussed december 2012 company filed securities registration statement securities exchange commission “sec” automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company’s longterm credit ratings assigned moody’s investors service standard poor’s a1 stable outlook aa stable outlook respectively ratings continue allow access capital markets flexibility obtaining funds competitive terms company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer despite strong financial profile certain contingent events realized discussed note 10 consolidated financial statements could material adverse impact company’s liquidity capital resources company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2013 board directors declared quarterly dividend 044 per share company’s common stock payable january 2014 may 1 2013 company announced board directors authorized additional purchases 15 billion merck’s common stock treasury company expects repurchase approximately 75 billion common stock within 12 months following date announcement financed combination debt issuance operating cash flows remainder repurchased time limit purchases may made openmarket transactions block transactions exchange privately negotiated transactions company purchased 65 billion common stock 139 million shares treasury 2013 includes shares asr agreement discussed company approximately 104 billion remaining may share repurchase program company purchased 26 billion 19 billion common stock 2012 2011 respectively previously authorized share repurchase programs may 20 2013 merck entered asr agreement goldman sachs asr merck agreed purchase 50 billion merck’s common stock total initial delivery approximately 995 million shares merck’s common stock based current market price made goldman sachs merck payment 50 billion made merck goldman sachs may 21 2013 upon settlement asr october 31 2013 merck received additional 55 million shares determined average daily volume weightedaverage price merck’s common stock term asr program bringing total shares received merck program 105 million asr entered pursuant share repurchase program announced may 1 2013 financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined estimated 547 million 453 million december 31 2013 2012 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar would yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly strengthened 10 currency exposures company december 31 2013 income taxes would declined approximately 109 million 2013 company net long position relative major foreign currencies consideration forward contracts uniform strengthening us dollar yield largest overall potential net loss earnings due exchange december 31 2012 company net short position relative major foreign currencies consideration forward contracts therefore uniform 10 weakening us dollar would reduced income taxes approximately 20 million measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations march 2013 venezuelan government announced creation new foreign exchange mechanism called “complimentary system foreign currency acquirement” known sicad operates similar auction system allows entities specific sectors bid us dollars used specified import transactions december 2013 regulation created sicad auction mechanism amended require central bank venezuela include website weekly average exchange rate implied transactions settled via sicad auction mechanism week december 30 2013 113 bsf per us dollar company used sicad auction mechanism settle transactions sicad mechanism described auction several attributes inconsistent free market auction accordingly company believe appropriate use sicad rate remeasurement us gaap company continue monitor sicad auction mechanism possible circumstances may change sicad mechanism takes attributes true free market auction sicad rate utilized remeasurement purposes occurs devaluation official rate occurs could result material charge company’s future results operations company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income “oci” remains accumulated comprehensive income “aoci” either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk 2013 company entered 15 payfloating receivedfixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes four swaps maturing 2016 notional amounts 250 million effectively convert company’s 070 fixedrate notes due 2016 floatingrate instruments four swaps maturing 2018 notional amounts 250 million effectively convert company’s 130 fixedrate notes due 2018 floatingrate instruments four swaps maturing 2017 one notional amount 200 million two notional amounts 250 million one notional amount 300 million effectively convert company’s 600 fixedrate notes due 2017 floatingrate instruments three swaps maturing 2019 two notional amounts 200 million one notional amount 150 million effectively convert portion company’s 500 notes due 2019 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes libor recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows interest rate swaps outstanding december 31 2012 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted certain fixedrate notes floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 288 million cash included 43 million accrued interest corresponding 245 million basis adjustment debt associated terminated interest rate swap contracts deferred amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2013 2012 would positively affected net aggregate market value instruments 11 billion 12 billion respectively one percentage point decrease december 31 2013 2012 would negatively affected net aggregate market value 13 billion 14 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded fair values intangible assets including acquired iprd determined utilizing information available near merger acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2013 2012 2011 summarized information changes aggregate indirect customer discount accrual follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 87 million 16 billion respectively december 31 2013 120 million 18 billion respectively december 31 2012 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 15 2013 14 2012 13 2011 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2013 2012 177 million 196 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2013 2012 approximately 160 million 260 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying providing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 20 million 2013 estimated 117 million aggregate years 2014 2018 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 213 million 145 million december 31 2013 2012 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 84 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 276 million 2013 335 million 2012 369 million 2011 december 31 2013 374 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 716 million 2013 509 million 2012 665 million 2011 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2013 discount rates company’s us pension postretirement benefit plans ranged 360 520 compared range 300 420 december 31 2012 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2014 company’s expected rate return range 730 875 compared range 600 875 2013 us pension postretirement benefit plans company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 87 million favorable unfavorable impact net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 39 million favorable unfavorable impact net periodic benefit cost required funding obligations 2014 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses purchased assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macro economic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2013 foreign earnings 571 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc “merck” “company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products markets directly joint ventures company’s operations principally managed products basis comprised three operating segments pharmaceutical animal health alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products overview 2014 merck continued execute multiyear initiative sharpen commercial research development focus redesign operating model reduce cost base remaining focused innovation company received approval six products united states 2014 including us food drug administration “fda” approval keytruda treatment advanced melanoma patients whose disease progressed therapies belsomra treatment insomnia gardasil 9 ninevalent human papillomavirus “hpv” vaccine merck also enhanced pipeline external innovation including 2014 acquisitions idenix pharmaceuticals inc “idenix” company engaged discovery development nextgeneration treatments hepatitis c virus “hcv” oncoethix privately held biotechnology company specializing oncology drug development addition merck announced acquisition cubist pharmaceuticals inc “cubist” leader development new therapies treat serious potentially lifethreatening infections caused broad range increasingly drugresistant bacteria closed january 2015 also 2014 merck entered worldwide collaboration bayer ag “bayer” market develop novel therapies cardiovascular disease therapeutic indications part merck’s prioritization efforts company continued review assets determine whether could provide best short longerterm value merck elsewhere result company divested consumer care “mcc” business bayer provided capital company better resource core areas focus return cash shareholders merck determined animal health business remains key growth driver committed looking ways augment business part intensified portfolio assessment process company sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults divested certain ophthalmic products japan markets europe asia pacific company’s portfolio assessment process ongoing future divestitures may occur worldwide sales 422 billion 2014 decline 4 compared 2013 including 1 unfavorable effect foreign exchange decline reflects lower revenue resulting ongoing impacts product divestitures loss market exclusivity several products well termination company’s relationship astrazeneca lp “azlp” divestiture mcc addition lower sales products treatment hcv also contributed sales decline declines partially offset growth immunology acute care diabetes vaccine products well higher sales merck’s animal health business within core human pharmaceutical vaccine business merck continue support inline portfolio well ongoing upcoming product launches 2014 fda granted accelerated approval keytruda company’s antipd1 programmed death receptor1 therapy treatment patients unresectable metastatic melanoma disease progression following ipilimumab braf v600 mutation positive braf inhibitor keytruda currently review european union “eu” treatment advanced melanoma merck expects submit supplemental biologics license application “sbla” fda keytruda treatment patients epidermal growth factor receptor mutationnegative anaplastic lymphoma kinase rearrangementnegative nonsmallcell lung cancer whose disease progressed following platinumbased chemotherapy midyear 2015 keytruda continues studied 30 cancers 20 combination settings merck presented data number different tumor types see “research development” addition fda approved belsomra treatment adults insomnia difficulty falling asleep andor staying asleep gardasil 9 ninevalent hpv vaccine zontivity proteaseactivated receptor1 par1 antagonist reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease also december 2014 prior company’s acquisition cubist fda approved cubist’s zerbaxa new combination product treatment adults complicated urinary tract infections caused designated susceptible gramnegative organisms complicated intraabdominal infections caused designated susceptible gramnegative grampositive organisms additionally company currently candidates review fda mk8616 bridion sugammadex injection medication reversal two types neuromuscular blocking agents used surgery v419 investigational pediatric hexavalent vaccine company developing partnership sanofi pasteur designed help protect six important diseases diphtheria tetanus pertussis whooping cough polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hib hepatitis b addition zerbaxa review eu result prioritizing research efforts merck focused therapeutic areas believes make impact addressing critical areas unmet medical need cancer hepatitis c cardiometabolic disease resistant microbial infection alzheimer’s disease 2014 merck accelerated several key clinical programs positioning company longterm growth company 10 candidates phase 3 clinical development core therapeutic areas well areas significant potential mk5172a alloral combination regimen consisting mk5172 grazoprevir investigational hcv ns34a protease inhibitor mk8742 elbasvir investigational hcv ns5a replication complex inhibitor currently phase 3 clinical trials company expects file new drug application “nda” fda first half 2015 mk5172a result portfolio prioritization company outlicensing discontinuing selected latestage clinical development assets reducing focus platform technologies 2014 company outlicensed mk3222 tildrakizumab investigational treatment chronic plaque psoriasis divested sirna therapeutics inc subsidiary related rnai technology assets company made strong progress 2014 redesigning operating model reducing cost base result disciplined cost management merck remains track achieve overall savings goal end 2015 noted savings enabled company better target resources key priorities across enterprise marketing administrative expenses research development costs 2014 compared 2013 reflecting lower selling promotional spending lower costs result portfolio prioritization 2013 company announced global restructuring program “2013 restructuring program” part global initiative sharpen commercial research development focus part program company expects reduce total workforce approximately 8500 positions workforce reductions primarily come elimination positions sales administrative headquarters organizations well research development company also reduce global real estate footprint continue improve efficiency manufacturing supply network company recorded total pretax costs 12 billion 2014 2013 related restructuring program actions 2013 restructuring program expected substantially completed end 2015 cumulative pretax costs estimated approximately 30 billion company expects actions 2013 restructuring program result annual net cost savings approximately 20 billion end 2015 company anticipates actions 2013 restructuring program combined remaining actions merger restructuring program discussed result annual net cost savings 25 billion end 2015 compared fullyear 2012 expense levels global restructuring program “merger restructuring program” initiated 2010 subsequent merck scheringplough corporation “scheringplough” merger “merger” intended streamline cost structure combined company workforce reductions associated plan relate elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company recorded total pretax costs 730 million 2014 11 billion 2013 951 million 2012 related restructuring program nonmanufacturing related restructuring actions merger restructuring program substantially completed end 2013 remaining actions program relate ongoing manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 85 billion yield annual savings upon completion program approximately 40 billion 46 billion costs associated company’s restructuring actions included materials production costs marketing administrative expenses research development expenses restructuring costs company estimates projected costs associated mentioned restructuring programs approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested november 2014 merck’s board directors raised company’s quarterly dividend 045 per share 044 per share 2014 company returned nearly 13 billion shareholders dividends share repurchases earnings per common share assuming dilution attributable common shareholders “eps” 2014 407 compared 147 2013 eps years reflect impact acquisition divestiturerelated costs restructuring costs well certain items 2014 includes 112 billion gain recognized connection divestiture mcc nongaap eps excludes items 349 2014 2013 see “nongaap income nongaap eps” competition health care environment competition markets company conducts business pharmaceutical industry highly competitive highly regulated company’s competitors include worldwide researchbased pharmaceutical companies smaller research companies limited therapeutic focus generic drug animal health care manufacturers company’s operations may adversely affected generic biosimilar competition company’s products mature well technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors generic availability competitors’ branded products new information clinical trials marketed products postmarketing surveillance addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect intangible assets associated certain products competitive pressures intensified pressures industry grown effect operations competitive factors patent disputes cannot predicted pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources required meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances joint ventures licenses refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacements even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth reduced sales company’s products therapeutic category highly competitive animal health business affected several factors including regulatory legislative issues scientific technological advances product innovation quality price company’s products effective promotional efforts frequent introduction generic products competitors health care environment government regulation global efforts toward health care cost containment continue exert pressure product pricing market access united states federal state governments many years also pursued methods reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities hospitals serving disproportionate share low income uninsured patients backdrop united states enacted major health care reform legislation 2010 “patient protection affordable care act” began implemented 2010 various insurance market reforms advanced state federal insurance exchanges launched 2014 end decade law expected expand access health care 32 million americans previously insurance coverage respect effect law pharmaceutical industry law increased mandated medicaid rebate 151 231 expanded rebate medicaid managed care utilization increased types entities eligible federal 340b drug discount program law also requires pharmaceutical manufacturers pay 50 point service discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” approximately 430 million 280 million 210 million recorded merck reduction revenue 2014 2013 2012 respectively related donut hole provision also pharmaceutical manufacturers required pay annual nontax deductible health care reform fee total annual industry fee 30 billion 2014 remain 30 billion 2015 fee assessed company proportion share prior year branded pharmaceutical sales certain government programs medicare medicaid company recorded 390 million 151 million 190 million costs within marketing administrative expenses 2014 2013 2012 respectively annual health care reform fee increase expenses 2014 reflects final regulations annual health care reform fee issued internal revenue service “irs” july 28 2014 final irs regulations accelerated recognition criteria fee obligation one year underlying sales used allocate fee occurred rather year fee paid result change merck recorded additional year expense 193 million 2014 full impact us health care reform cannot predicted time company also faces increasing pricing pressure globally managed care organizations government agencies programs could negatively affect company’s sales profit margins united states include practices managed care groups federal state exchanges institutional governmental purchasers ii us federal laws regulations related medicare medicaid including medicare prescription drug improvement modernization act 2003 patient protection affordable care act changes health care system enacted part health care reform united states well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries could result pricing pressures example health care reform contributing increase number patients medicaid program sales pharmaceutical products subject substantial rebates addition effort contain us federal deficit pharmaceutical industry could considered potential source savings via legislative proposals debated enacted types revenue generating cost saving proposals include additional direct price controls medicare prescription drug program part addition congress may consider proposals allow certain conditions importation medicines countries remains uncertain proposals may included part future federal budget deficit reduction proposals would directly indirectly affect company efforts toward health care cost containment remain intense several european countries many countries continued announce execute austerity measures include implementation pricing actions reduce prices generic patented drugs mandatory switches generic drugs company taking steps mitigate impact countries austerity measures continued negatively affect company’s revenue performance 2014 company anticipates austerity measures continue negatively affect revenue performance 2015 addition majority countries attempt contain drug costs engaging reference pricing authorities examine predetermined markets published prices drugs brand authorities use price data markets set new local prices brandname drugs including company’s guidelines examining reference pricing usually set local markets changed pursuant local regulations addition japan pharmaceutical industry subject governmentmandated biennial price reductions pharmaceutical products certain vaccines furthermore government order repricings classes drugs determines appropriate applicable rules certain markets outside united states also implemented cost management strategies health technology assessments require additional data reviews administrative processes increase complexity timing costs obtaining product reimbursement exert downward pressure available reimbursement company’s focus emerging markets increased governments many emerging markets also focused constraining health care costs enacted price controls related measures compulsory licenses aim put pressure price pharmaceuticals constrain market access company anticipates pricing pressures market access challenges continue 2015 varying degrees emerging markets beyond pricing market access challenges conditions emerging market countries affect company’s efforts continue grow markets including potential political instability significant currency fluctuation controls financial crises limited changing availability funding health care developments may adversely impact business environment company may engage thirdparty agents assist operating emerging market countries may affect ability realize continued growth may also increase company’s risk exposure addressing cost containment pressures company engages public policy advocacy policymakers continues work demonstrate medicines provide value patients pay health care company advocates government policymakers encourage longterm approach sustainable health care financing ensures access innovative medicines disproportionately target pharmaceuticals source budget savings markets historically low rates health care spending company encourages governments increase investments adopt market reforms order improve citizens’ access appropriate health care including medicines operating conditions become challenging global pressures competition industry regulation cost containment efforts although one predict effect factors company’s business company continually takes measures evaluate adapt improve organization business practices better meet customer needs believes well positioned respond evolving health care environment market forces pharmaceutical industry also subject regulation regional country state local agencies around world focused standards processes determining drug safety effectiveness well conditions sale reimbursement particular importance fda united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals cases fda requirements practices increased amount time resources necessary develop new products bring market united states time fda committed expediting development review products bearing “breakthrough therapy” designation appears accelerated regulatory review process medicines designation eu adopted directives legislation concerning classification labeling advertising wholesale distribution integrity supply chain enhanced pharmacovigilance monitoring approval marketing medicinal products human use provide mandatory standards throughout eu may supplemented implemented additional regulations eu member states company’s policies procedures already consistent substance directives consequently believed material effect company’s business company believes continue able conduct operations including launching new drugs regulatory environment access medicines global health care company merck’s primary role discover develop innovative medicines vaccines company also recognizes important role play helping improve access products around world company’s efforts regard wideranging include set principles company strives embed operations business strategies guide company’s worldwide approach expanding access health care addition company many farreaching philanthropic programs merck patient assistance program provides medicines adult vaccines free people united states prescription drug health insurance coverage without company’s assistance cannot afford merck medicine vaccines 2011 merck launched “merck mothers” longterm effort global health partners end preventable deaths complications pregnancy childbirth merck also provided funds merck foundation independent organization partnered variety organizations dedicated improving global health privacy data protection company subject significant number privacy data protection laws regulations globally legislative regulatory landscape privacy data protection continues evolve increased attention privacy data protection issues developed emerging markets potential affect directly company’s business including additional laws regulations enacted united states europe asia latin america increased enforcement litigation activity united states developed markets increased regulatory cooperation among privacy authorities globally company adopted comprehensive global privacy program manage evolving risks operating results sales worldwide sales totaled 422 billion 2014 decline 4 compared 440 billion 2013 foreign exchange unfavorably affected global sales performance 1 2014 decline reflects lower revenue resulting ongoing impacts loss market exclusivity several products including temodar treatment certain types brain tumors singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis cozaar hyzaar treatments hypertension addition sales decline attributable product divestitures occurred 2014 2013 discussed termination company’s relationship azlp well divestiture mcc october 1 2014 revenue decline also driven lower sales victrelis pegintron medicines treatment chronic hcv nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms vytorin cholesterol modifying product declines partially offset growth remicade simponi treatments inflammatory diseases diabetes franchise januviajanumet dulera inhalation aerosol combination medicine treatment asthma implanonnexplanon singlerod subdermal contraceptive implant well higher sales acute care animal health products addition company recognized revenue 232 million 2014 connection sale us marketing rights saphris sales united states 171 billion 2014 decline 6 compared 182 billion 2013 sales decrease driven primarily termination company’s relationship azlp divestiture mcc ongoing impact product divestitures addition decline reflects lower sales temodar victrelis vytorin nasonex partially offset higher sales dulera inhalation aerosol januviajanumet franchise implanonnexplanon well revenue recognized connection sale us marketing rights saphris international sales 252 billion 2014 decline 2 compared 258 billion 2013 foreign exchange unfavorably affected international sales performance 2 2014 sales decrease reflects divestiture mcc decline also driven lower sales pharmaceutical segment reflecting declines japan europe canada sales japan declined 14 2014 34 billion 8 due unfavorable effect foreign exchange sales decline largely driven biennial price reductions repricings occurred 2014 product divestitures ongoing impacts loss market exclusivity several products including cozaar hyzaar well lower sales gardasil vaccine help prevent certain diseases caused four types hpv reflecting japanese government’s decision 2013 suspend proactive recommendation hpv vaccines partially offset higher sales pneumovax 23 vaccine help prevent pneumococcal disease sales europe canada declined 2 2014 104 billion including 1 favorable effect foreign exchange reflecting lower sales singulair nasonex victrelis well product divestitures ongoing generic erosion fiscal austerity measures region partially offset growth simponi remicade janumet januvia sales emerging markets 78 billion 2014 essentially flat compared 2013 including 5 unfavorable effect foreign exchange reflecting higher sales vaccine acute care diabetes products offset lower sales hcv products well product divestitures total international sales represented 60 59 total sales 2014 2013 respectively global efforts toward health care cost containment continue exert pressure product pricing market access worldwide united states health care reform contributing increase number patients medicaid program sales pharmaceutical products subject substantial rebates many international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2014 company anticipates pricing actions austerity measures continue negatively affect revenue performance 2015 october 2013 company sold active pharmaceutical ingredient “api” manufacturing business netherlands effective december 31 2013 certain related products within diversified brands november 2013 merck sold us rights certain ophthalmic products january 2014 sold us marketing rights saphris addition company sold us rights zioptan april 2014 divested certain ophthalmic products several international markets closed july 1 2014 october 1 2014 company sold mcc business bayer including prescription rights claritin afrin sales decline 2014 attributable divestitures approximately 11 billion approximately 575 million related pharmaceutical segment 345 million related consumer care segment 150 million related divested api manufacturing business nonsegment revenues also discussed note 8 consolidated financial statements company’s relationship azlp terminated june 30 2014 therefore effective july 1 2014 company longer records supply sales azlp resulted sales decline approximately 450 million alliances segment worldwide sales totaled 440 billion 2013 decline 7 compared 473 billion 2012 sales decline driven primarily lower sales singulair patents provided us market exclusivity market exclusivity number major european markets singulair expired august 2012 february 2013 respectively company experienced significant rapid decline singulair sales markets thereafter foreign exchange unfavorably affected global sales performance 2 2013 revenue decline 2013 also driven lower sales maxalt product acute treatment migraine cozaar hyzaar temodar clarinex nonsedating antihistamine pegintron propecia product male pattern hair loss fosamax treatment osteoporosis vytorin declines partially offset growth gardasil remicade simponi janumet isentress treatment hiv1 infection dulera inhalation aerosol zostavax vaccine help prevent shingles herpes zoster sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health alliances well consumer care divestiture october 1 2014 alliances segment includes revenue company’s relationship azlp termination june 302014 4 revenues primarily comprised miscellaneous corporate revenues including revenue hedging activities sales related divested products businesses supply sales included segment results revenues 2014 include 232 million received merck connection sale us marketing rights saphris revenues 2013 reflect 50 million revenue outlicense pipeline compound revenues also include thirdparty manufacturing sales substantial portion divested october 2013 pharmaceutical segment primary care women’s health cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy medicines lowering ldl cholesterol 42 billion 2014 decline 3 compared 2013 foreign exchange unfavorably affected global sales performance 1 2014 sales decline driven primarily lower volumes vytorin united states zetia canada lost market exclusivity combined worldwide sales zetia vytorin 43 billion 2013 essentially flat compared 2012 including 1 unfavorable impact foreign exchange reflecting higher sales zetia united states due pricing partially offset lower volumes vytorin united states november 2014 merck announced investigational improveit study met primary secondary composite efficacy endpoints improveit patients taking vytorin combines simvastatin zetia ezetimibe experienced significantly fewer major cardiovascular events measured composite cardiovascular death nonfatal myocardial infarction nonfatal stroke rehospitalization unstable angina coronary revascularization occurring least 30 days randomization patients treated simvastatin alone results 18144 patient study highrisk patients presenting acute coronary syndromes presented american heart association 2014 scientific sessions merck plans submit data improveit fda mid2015 support new indication reduction major cardiovascular events vytorin zetia vytorin zetia currently indicated use along healthy diet reduce elevated ldl cholesterol patients hyperlipidemia current us prescribing information products states effect ezetimibe cardiovascular morbidity mortality alone incremental statin therapy determined agreement generic manufacturer may launch generic version zetia united states december 2016 us patent exclusivity periods zetia vytorin otherwise expire april 2017 company market exclusivity zetia major european markets october 2017 however company expects apply pediatric extensions term would extend date april 2018 company market exclusivity vytorin markets april 2019 business reasons company plans time reintroduce liptruzet us market company supplied liptruzet united states since january 2014 voluntary recall product due packaging defects two active ingredients liptruzet remain available zetia merck atorvastatin generic multiple manufacturers may 2014 merck announced fda approved zontivity reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease us prescribing information zontivity includes boxed warning regarding bleeding risk january 2015 zontivity approved european commission “ec” coadministration acetylsalicylic acid appropriate clopidogrel reduce atherothrombotic events adult patients history myocardial infarction merck currently plans launch zontivity eu late 2015 early 2016 diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes 60 billion 2014 increase 3 compared 2013 including 1 unfavorable effect foreign exchange growth driven primarily higher sales januvia janumet united states volume growth europe partially offset lower sales januvia japan due lower pricing april 2014 dipeptidyl peptidase4 “dpp4” inhibitors including januvia subject repricing japan combined global sales januvia janumet 58 billion 2013 increase 2 compared 2012 including 3 unfavorable effect foreign exchange sales growth reflects higher volumes outside united states trial evaluating cardiovascular outcomes sitagliptin “tecos” eventdriven cardiovascular outcomes study sitagliptin began 2008 enrolled 14000 patients tecos evaluate impact sitagliptin cardiovascular outcomes added usual care compared usual care without sitagliptin large highrisk type 2 diabetes population across multiple countries tecos expected completed first quarter 2015 company expects results tecos presented annual scientific meeting american diabetes association june 2015 results tecos trial show negative effect cardiovascular outcomes reveal another safety issue related use sitagliptin could material adverse effect sales januvia janumetjanumet xr general medicine women’s health worldwide sales nuvaring vaginal contraceptive product 723 million 2014 increase 5 compared 2013 including 1 unfavorable impact foreign exchange largely reflecting higher pricing united states global sales nuvaring 686 million 2013 increase 10 compared 2012 primarily reflecting volume growth favorable pricing united states worldwide sales implanonnexplanon singlerod subdermal contraceptive implant grew 25 502 million 2014 compared 2013 driven primarily higher demand united states implanonnexplanon sales increased 16 403 million 2013 compared 2012 driven primarily volume growth united states partially offset declines emerging markets pricing pressures global sales dulera inhalation aerosol combination medicine treatment asthma 460 million 2014 324 million 2013 207 million 2012 reflecting higher demand united states dulera inhalation aerosol approved fda june 2010 global sales follistim aq marketed countries outside united states puregon fertility treatment declined 14 412 million 2014 compared 2013 driven largely lower pricing united states well lower sales europe driven primarily volume declines sales follistim aq grew 3 481 million 2013 compared 2012 driven largely positive performance united states patent provides market exclusivity follistim aq united states expires june 2015 august 2014 merck announced fda approved belsomra suvorexant treatment adults insomnia difficulty falling asleep andor staying asleep belsomra became available united states early 2015 following receipt marketing approval belsomra launched japan november 2014 company continuing plans seek approval suvorexant countries around world april 2014 merck announced fda approved grastek ragwitek tablets sublingual use grastek allergen extract indicated immunotherapy treatment grass polleninduced allergic rhinitis without conjunctivitis confirmed positive skin test vitro testing pollenspecific ige antibodies timothy grass crossreactive grass pollens grastek approved use persons 5 65 years age ragwitek allergen extract indicated immunotherapy treatment short ragweed polleninduced allergic rhinitis without conjunctivitis confirmed positive skin test vitro testing pollenspecific ige antibodies short ragweed pollen ragwitek approved use adults 18 65 years age neither grastek ragwitek indicated immediate relief allergic symptoms prescribing information grastek ragwitek includes boxed warning regarding severe allergic reactions grastek ragwitek well ongoing phase 3 program sublingual immunotherapy tablets allergic rhinitis associated house dust mites part north america partnership merck alkabello hospital specialty hepatitis worldwide sales pegintron treatment chronic hcv 381 million 2014 decline 23 compared 2013 driven lower volumes regions availability new therapeutic options resulted loss market share led patient treatment delays markets anticipating availability new therapeutic options foreign exchange unfavorably affected global sales performance 3 2014 global sales pegintron declined 24 496 million 2013 compared 2012 reflecting declines regions attributable part patient treatment delayed health care providers anticipation new therapeutic options becoming available foreign exchange unfavorably affected global sales performance 3 2013 global sales victrelis oral medicine treatment chronic hcv 153 million 2014 decline 64 compared 2013 driven lower volumes nearly regions particularly within united states availability new therapeutic options resulted loss market share led patient treatment delays markets anticipating availability new therapeutic options worldwide sales victrelis 428 million 2013 decline 15 compared 2012 including 1 unfavorable effect foreign exchange sales declines united states europe canada partially offset growth across emerging markets sales declines united states europe canada attributable part patient treatment delayed health care providers anticipation new therapeutic options becoming available sales company’s products indicated treatment chronic hcv including victrelis pegintron discussed well rebetol continue adversely affected new therapeutic options becoming available 2014 trends accelerated rapidly previously anticipated company addition developments competitive hcv treatment market led market share losses greater company predicted factors caused changes cash flow projections pegintron victrelis rebetol indicated intangible asset values recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair values intangible assets related pegintron victrelis rebetol compared related carrying values resulted impairment charges 793 million related pegintron 244 million related victrelis 35 million related rebetol recorded within materials production costs 2014 sales products adversely affected 2013 patient treatment delayed health care providers anticipation new therapeutic options becoming available sales rebetol product sold almost entirely international markets particularly adversely affected trend given markets rebetol sold well generic competition 2013 company recorded impairment charge 156 million rebetol intangible asset event future circumstances arise significantly reduce current cash flow projections products company may record additional intangible asset impairment charges future carrying value intangible assets related products 96 million aggregate december 31 2014 following receipt market approval vanihep oral twicedaily protease inhibitor treatment chronic hcv launched japan november 2014 vanihep available japan hiv worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection increased 2 2014 17 billion compared 2013 primarily reflecting volume growth europe emerging markets particularly latin america resulting government tenders partially offset volume declines united states reflecting competitive pressures global sales isentress grew 8 16 billion 2013 compared 2012 driven primarily volume growth united states europe foreign exchange unfavorably affected global sales performance 1 2014 2013 acute care global sales cancidas antifungal product increased 3 2014 681 million compared 2013 largely reflecting volume growth asia pacific region particularly china sales cancidas increased 7 660 million 2013 compared 2012 reflecting growth emerging markets well europe japan worldwide sales noxafil prevention invasive fungal infections grew 30 2014 402 million increased 20 2013 309 million driven volume growth united states europe reflecting positive impact approval new formulations bridion reversal two types neuromuscular blocking agents used surgery approved launched many countries outside united states sales bridion rose 18 2014 340 million compared 2013 driven volume growth markets foreign exchange unfavorably affected global sales performance 6 2014 sales bridion 288 million 2013 increase 10 compared 2012 sales growth driven volume growth europe emerging markets japan partially offset 13 unfavorable effect foreign exchange primarily sales japan september 2013 company received crl fda resubmission nda bridion address crl company conducted new hypersensitivity study october 2014 resubmitted nda fda company anticipates fda advisory committee meeting held march 18 2015 review bridion approved company expects launch bridion united states later 2015 january 2015 merck acquired cubist leader development new therapies treat serious potentially lifethreatening infections caused broad range increasingly drugresistant bacteria cubist’s products include cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms zerbaxa combination product recently approved fda treatment adults complicated urinary tract infections caused designated susceptible gramnegative organisms complicated intraabdominal infections caused designated susceptible gramnegative grampositive organisms sivextro treatment acute bacterial skin structure infections “absssi” adults caused designated susceptible grampositive organisms zerbaxa sivextro review eu immunology sales remicade treatment inflammatory diseases marketed company europe russia turkey 24 billion 2014 increase 4 compared 2013 reflecting sales growth europe partially offset decline russia sales remicade 23 billion 2013 increase 9 compared 2012 including 2 favorable effect foreign exchange sales growth reflects volume growth europe well russia september 2013 ec approved infliximab biosimilar company experiencing biosimilar competition certain smaller european markets company anticipates substantial decline remicade sales following loss market exclusivity major european markets february 2015 additionally company anticipates mandatory price reductions certain european markets sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey grew 38 2014 689 million compared 2013 driven demand europe reflecting part positive impact ulcerative colitis indication september 2013 ec approved simponi treatment adult patients moderately severely active ulcerative colitis inadequate response conventional therapy intolerant medical contraindications therapies sales simponi 500 million 2013 compared 331 million 2012 driven continued launch activities worldwide sales ophthalmic products cosopt trusopt declined 38 2014 257 million compared 2013 driven largely divestiture cosopt trusopt many international markets 2014 sale us rights cosopt pf 2013 discussed sales cosopt trusopt 416 million 2013 decline 6 compared 2012 reflecting 7 unfavorable effect foreign exchange lower sales europe canada due generic competition partially offset volume growth japan november 2013 merck sold us rights ophthalmic products cosopt pf well azasite sale inspire pharmaceuticals inc subsidiary akorn inc “akorn” also noted may 2014 merck entered agreement sell certain ophthalmic products including cosopt trusopt santen japan markets europe asia pacific transaction closed markets july 1 2014 remaining markets closed october 1 2014 merck continues sell ophthalmic products markets included transactions santen akorn merck’s sales saphris asenapine antipsychotic indicated treatment schizophrenia bipolar disorder adults 84 million 2014 158 million 2013 166 million 2012 january 2014 merck sold us marketing rights saphris forest laboratories inc “forest” terms agreement forest made upfront payments 232 million reflected sales 2014 make additional payments merck based defined sales milestones addition part transaction merck agreed supply product forest subsequently acquired actavis plc patent expiry asenapine sold brand name sycrest also approved eu treatment bipolar disorder adults commercialization agreement sycrest sublingual tablets 5 mg 10 mg h lundbeck makes product supply payments exchange exclusive commercial rights sycrest markets outside united states china japan 2013 company recorded impairment charge saphrissycrest intangible asset see note 7 consolidated financial statements products contained hospital specialty include among others invanz treatment certain infections primaxin antibacterial product oncology global sales emend prevention chemotherapyinduced postoperative nausea vomiting 553 million 2014 increase 9 compared 2013 including 1 unfavorable effect foreign exchange largely reflecting volume growth regions sales emend 507 million 2013 increase 4 compared 2012 including 1 unfavorable effect foreign exchange largely reflecting volume growth united states emerging markets partially offset decline japan sales temodar marketed temodal outside united states treatment certain types brain tumors declined 51 350 million 2014 decreased 23 708 million 2013 foreign exchange unfavorably affected global sales performance 3 2014 2013 sales declines driven primarily generic competition united states well europe previously disclosed agreement generic manufacturer launched generic version temodar united states august 2013 us patent exclusivity periods otherwise expired february 2014 temodar lost patent exclusivity eu 2009 accordingly company experiencing sales declines due loss exclusivity markets company expects declines continue september 2014 merck announced fda granted accelerated approval keytruda dose 2 mgkg every three weeks treatment patients unresectable metastatic melanoma disease progression following ipilimumab braf v600 mutation positive braf inhibitor keytruda first antipd1 programmed death receptor1 therapy approved united states june 2014 merck announced european medicines agency “ema” accepted review marketing authorization application “maa” keytruda treatment advanced melanoma company made additional regulatory filings countries filings planned december 2014 company estimates 2000 patients receiving treatment keytruda sales keytruda 55 million 2014 keytruda clinical development program also includes studies across broad range cancer types see “research development” october 2014 keytruda granted breakthrough therapy designation fda treatment patients epidermal growth factor receptor mutationnegative anaplastic lymphoma kinase rearrangementnegative nonsmallcell lung cancer whose disease progressed following platinumbased chemotherapy company anticipates submitting sbla fda mid2015 keytruda diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world respiratory global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms declined 18 11 billion 2014 compared 2013 foreign exchange unfavorably affected global sales performance 2 2014 sales decline driven primarily lower demand united states well lower volumes europe canada generic competition agreement generic manufacturers able launch generic version nasonex european markets january 1 2014 generic versions nasonex since launched several markets accordingly company experienced rapid decline nasonex sales europe 2014 expects decline continue sales nasonex increased 5 13 billion 2013 compared 2012 driven primarily increases united states reflecting net favorable adjustments indirect customer discounts well volume growth japan partially offset declines latin america canada europe foreign exchange unfavorably affected global sales performance 3 2013 2009 apotex inc apotex corp collectively “apotex” filed application fda seeking approval sell generic version nasonex june 2012 us district court district new jersey ruled company patent infringement suit apotex holding apotex’s generic version nasonex infringe company’s formulation patent june 2013 court appeals federal circuit issued decision affirming us district court decision company exhausted appeal options apotex’s generic version becomes available significant losses us nasonex sales could occur company may take noncash impairment charge respect carrying value nasonex intangible asset 719 million december 31 2014 nasonex intangible asset determined impaired impairment charge could material us sales nasonex 577 million 2014 worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis 11 billion 2014 decline 9 compared 2013 including 5 unfavorable effect foreign exchange primarily reflecting lower sales europe result generic competition patents provided market exclusivity singulair expired number major european markets february 2013 company experienced significant rapid declines sales singulair markets following patent expiries expects declines continue global sales singulair fell 69 12 billion 2013 compared 2012 driven primarily lower sales united states europe result generic competition patent provided us market exclusivity singulair expired august 2012 patent provides market exclusivity singulair japan expire 2016 singulair sales japan 537 million 2014 global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatments hypertension declined 20 2014 806 million decreased 22 2013 10 billion foreign exchange unfavorably affected global sales performance 4 8 2014 2013 respectively patents provided market exclusivity cozaar hyzaar united states major international markets expired accordingly company experiencing significant declines cozaar hyzaar sales expects declines continue worldwide sales fosamax marketed fosamac japan fosamax plus marketed fosavance throughout eu treatment case fosamax prevention osteoporosis decreased 16 2014 470 million declined 17 2013 560 million driven declines regions medicines lost market exclusivity united states major international markets company expects sales declines within fosamax product franchise continue products contained diversified brands include among others clarinex nonsedating antihistamine arcoxia treatment arthritis pain propecia product treatment male pattern hair loss zocor statin modifying cholesterol remeron antidepressant vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd “spmsd” company’s joint venture sanofi pasteur results reflected equity income affiliates see “selected joint venture affiliate information” supply sales spmsd however included merck’s sales gardasil vaccine help prevent certain diseases caused four types hpv 17 billion 2014 decline 5 compared 2013 including 2 unfavorable effect foreign exchange decline reflects lower sales asia pacific japan canada partially offset higher government tenders brazil national immunization program well higher public sector purchases united states merck’s sales gardasil grew 12 18 billion 2013 compared 2012 driven primarily volume growth united states reflecting continued uptake males females volume growth latin america partially offset lower volumes japan sales 2014 2013 2012 included 56 million 37 million 44 million respectively purchases us centers disease control prevention “cdc” pediatric vaccine stockpile june 2013 japanese health ministry issued advisory suspend active promotion hpv vaccines company party certain thirdparty license agreements respect gardasil including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasil sales 19 27 vary country included materials production costs december 2014 company announced fda approved gardasil 9 merck’s 9valent hpv vaccine use girls young women 9 26 years age prevention cervical vulvar vaginal anal cancers caused hpv types 16 18 31 33 45 52 58 precancerous dysplastic lesions caused hpv types 6 11 16 18 31 33 45 52 58 genital warts caused hpv types 6 11 gardasil 9 also approved use boys 9 15 years age prevention anal cancer caused hpv types 16 18 31 33 45 52 58 precancerous dysplastic lesions caused hpv types 6 11 16 18 31 33 45 52 58 genital warts caused hpv types 6 11 gardasil 9 includes greatest number hpv types available hpv vaccine merck’s sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 395 million 2014 314 million 2013 61 million 2012 increase 2014 compared 2013 driven primarily higher sales united states reflecting approximately 30 million government purchases cdc pediatric vaccine stockpile sales proquad 2012 affected supply constraints proquad became available united states ordering october 2012 merck’s sales varivax vaccine help prevent chickenpox varicella 672 million 2014 684 million 2013 846 million 2012 sales performance 2014 reflects lower sales united states largely offset growth emerging markets merck’s sales mmr ii vaccine help protect measles mumps rubella 326 million 2014 307 million 2013 365 million 2012 sales varivax mmr ii declined 2013 compared 2012 due availability proquad discussed merck’s sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 765 million 2014 increase 1 compared 2013 driven primarily higher sales asia pacific region due ongoing launches partially offset lower demand united states well canada company continuing educate us customers broad managed care coverage zostavax process obtaining reimbursement merck’s sales zostavax grew 16 758 million 2013 compared 2012 driven higher demand united states canada well launches within asia pacific region merck continuing launch zostavax outside united states merck’s sales pneumovax 23 vaccine help prevent pneumococcal disease grew 14 2014 746 million compared 2013 driven primarily higher sales japan national immunization program well higher sales united states attributable price volume foreign exchange unfavorably affected sales performance 3 2014 merck’s sales pneumovax 23 increased 13 2013 653 million compared 2012 driven primarily volume growth emerging markets well volume price increases united states merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children increased 4 2014 659 million compared 2013 primarily reflecting higher sales certain emerging markets merck’s sales rotateq grew 6 2013 636 million compared 2012 reflecting higher pricing united states volume growth japan segments company’s segments animal health alliances segments material separate reporting prior disposition october 1 2014 company also consumer care segment animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected competition frequent introduction generic products global sales animal health products totaled 35 billion 2014 growth 3 compared 2013 including 2 unfavorable effect foreign exchange sales growth driven primarily higher sales companion animal products reflecting launch bravecto europe united states well higher sales poultry aqua products partially offset lower sales zilmax august 2013 merck animal health voluntarily suspended sales zilmax feed supplement beef cattle united states canada may 2014 merck announced fda approved bravecto chewable tablets dogs treat fleas ticks bravecto first treatment shown quickly effectively kill fleas multiple tick species 12 weeks single dose bravecto also effective eight weeks amblyomma americanum ticks addition bravecto approved launched approximately 30 countries outside united states global sales animal health products 34 billion 2013 decline 1 compared 2012 including 2 unfavorable effect foreign exchange sales decline reflects lower sales ruminant products primarily zilmax partially offset growth companion animal poultry products suspension zilmax unfavorably affected animal health sales 4 2014 2 2013 alliances segment includes results company’s relationship azlp june 30 2014 astrazeneca exercised option buy merck’s interest subsidiary merck’s interest nexium prilosec result july 1 2014 company longer records equity income azlp supply sales azlp primarily relating sales nexium prilosec terminated see “selected joint venture affiliate information” revenue azlp primarily relating sales nexium prilosec 463 million 2014 termination date june 30 2014 920 million 2013 915 million 2012 consumer care noted october 1 2014 company divested consumer care segment consumer care products included overthecounter foot care sun care products global sales consumer care 15 billion 2014 19 billion 2013 20 billion 2012 costs expenses 100 greater 1 includes 49 million 279 million 200 million iprd impairment charges 2014 2013 2012 respectively materials production materials production costs 168 billion 2014 170 billion 2013 164 billion 2012 costs include expenses amortization intangible assets recorded connection mergers acquisitions totaled 42 billion 2014 47 billion 2013 49 billion 2012 costs 2014 2013 include intangible asset impairment charges 11 billion 486 million respectively related marketed products see note 7 consolidated financial statements company may recognize additional noncash impairment charges future related product intangibles measured fair value capitalized connection mergers acquisitions charges could material additionally costs 2013 include 41 million intangible asset impairment charge related licensing agreement also included materials production costs associated restructuring activities amounted 482 million 446 million 188 million 2014 2013 2012 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 603 2014 compared 615 2013 652 2012 amortization intangible assets well restructuring impairment charges noted reduced gross margin 136 percentage points 2014 128 percentage points 2013 107 percentage points 2012 excluding impacts gross margin decline 2014 compared 2013 driven primarily unfavorable effects inventory writeoffs largely related victrelis well changes product mix partially offset sale us marketing rights saphris gross margin decline 2013 compared 2012 driven part loss singulair sales result patent expiries united states august 2012 major european markets february 2013 addition generic competition united states coupled changes product mix continued pricing pressures mature markets also negatively affected gross margin 2013 compared 2012 marketing administrative marketing administrative expenses declined 3 2014 116 billion driven primarily lower selling costs promotional spending divestiture mcc favorable effect foreign exchange partially offset additional year expense related health care reform fee discussed well higher acquisition divestiturerelated costs marketing administrative expenses decreased 7 2013 119 billion largely due lower promotional spending selling costs resulting restructuring activities also reflecting favorable effect foreign exchange expenses 2014 2013 2012 include restructuring costs 200 million 145 million 90 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include 234 million 94 million 272 million acquisition divestiturerelated costs 2014 2013 2012 respectively consisting incremental thirdparty integration costs related merger including costs related legal entity systems integration well transaction certain costs related business acquisitions divestitures july 28 2014 irs issued final regulations annual nontax deductible health care reform fee imposed patient protection affordable care act based allocation company’s market share prior year branded pharmaceutical sales certain government programs final irs regulations accelerated recognition criteria fee obligation one year underlying sales used allocate fee occurred rather year fee paid result change merck recorded additional year expense 193 million 2014 research development research development expenses 72 billion 2014 75 billion 2013 82 billion 2012 research development expenses comprised costs directly incurred merck research laboratories “mrl” company’s research development division focuses human healthrelated activities approximately 37 billion 2014 42 billion 2013 45 billion 2012 also included research development expenses costs incurred divisions support research development activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health segments well consumer care segment divestiture october 1 2014 aggregate 28 billion 29 billion 34 billion 2014 2013 2012 respectively costs 2014 include 85 million charge related collaboration bayer see note 4 consolidated financial statements declines research development costs driven cost savings resulting restructuring activities targeted reductions lower clinical development spend result portfolio prioritization decline research development expenses 2013 compared 2012 also reflects lower payments licensing activity research development expenses also include acquired inprocess research development “iprd” impairment charges 49 million 279 million 200 million 2014 2013 2012 respectively see “research development” company may recognize additional noncash impairment charges future cancellation delay pipeline programs measured fair value capitalized connection mergers acquisitions charges could material also 2014 company recorded charge 316 million increase estimated fair value liability contingent consideration related research projects obtained connection acquisition business prior year see note 5 consolidated financial statements research development expenses 2014 2013 2012 reflect 283 million 101 million 57 million respectively accelerated depreciation asset abandonment costs associated restructuring activities restructuring costs restructuring costs primarily representing separation related costs associated restructuring activities 10 billion 17 billion 664 million 2014 2013 2012 respectively costs 2014 2013 include 594 million 898 million respectively costs related 2013 restructuring program remaining costs 2014 nearly remaining costs recorded 2013 costs recorded 2012 related merger restructuring program 2014 2013 2012 separation costs 674 million 14 billion 489 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated positions eliminated 2013 restructuring program approximately 4555 2014 1540 2013 positions eliminated merger restructuring program approximately 1530 2014 4475 2013 3975 2012 position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed equity income affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates declined 36 2014 257 million compared 2013 decline driven primarily termination company’s relationship azlp discussed june 30 2014 astrazeneca exercised option purchase merck’s interest subsidiary merck’s interest nexium prilosec effective july 1 2014 company longer records equity income azlp see “selected joint venture affiliate information” equity income affiliates declined 37 2013 404 million compared 2012 driven primarily lower equity income azlp partially offset higher equity income spmsd income expense net income expense net 114 billion income 2014 compared 815 million expense 2013 driven primarily gains recognized 2014 including 112 billion gain related divestiture mcc see note 4 consolidated financial statements 741 million gain related astrazeneca’s option exercise see note 8 consolidated financial statements 480 million gain sale certain ophthalmic products several international markets see note 4 consolidated financial statements 204 million gain related divestiture sirna see note 4 consolidated financial statements well lower exchange losses 2014 due venezuelan currency devaluation 2013 see note 14 consolidated financial statements partially offsetting favorability items 628 million loss extinguishment debt 2014 see note 9 consolidated financial statements 93 million goodwill impairment charge related company’s joint venture supera see note 4 consolidated financial statements income expense net 815 million expense 2013 compared 11 billion expense 2012 reflecting 493 million net charge 2012 relating settlement certain shareholder litigation “enhance litigation” partially offset higher exchange losses 2013 driven 140 million exchange losses related venezuelan currency devaluation well higher interest expense 2013 resulting part issuances debt september 2012 may 2013 segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items including 2014 gains divestitures including mcc gain astrazeneca’s option exercise loss extinguishment debt additional year expense related health care reform fee well charge recorded 2012 related settlement enhance litigation reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales pharmaceutical segment profits declined 4 2014 compared 2013 driven primarily unfavorable effects product divestitures loss market exclusivity certain products partially offset cost savings productivity measures pharmaceutical segment profits declined 11 2013 compared 2012 driven primarily effects loss market exclusivity certain products particularly singulair decline segment profits 2014 compared 2013 driven primarily termination company’s relationship azlp well divestiture mcc taxes income effective income tax rates 309 2014 185 2013 279 2012 reflect impacts acquisition divestiturerelated costs restructuring costs partially offset beneficial impact foreign earnings effective income tax rate 2014 reflects impact gain divestiture mcc taxed combined us federal state tax rates effective income tax rate 2014 includes net tax benefit 517 million recorded connection astrazeneca’s option exercise see note 8 consolidated financial statements benefit approximately 300 million associated capital loss generated connection sale sirna see note 4 consolidated financial statements effective income tax rate 2014 also includes unfavorable impact additional year expense nontax deductible health care reform fee company recorded accordance final regulations issued third quarter irs effective tax rate 2013 reflects net benefit 165 million settlements certain federal income tax issues net benefits reductions tax reserves upon expiration applicable statutes limitations favorable impact tax legislation enacted first quarter 2013 extended rd tax credit 2012 2013 well outofperiod net tax benefit approximately 160 million associated resolution previously disclosed legacy scheringplough federal income tax issue see note 15 consolidated financial statements effective tax rate 2012 also reflects favorable impacts tax settlement canada revenue agency “cra” realization foreign tax credits impact favorable ruling state tax matter addition 2012 effective tax rate reflects unfavorable impact net charge recorded connection settlement enhance litigation tax benefit recorded reflect impacts rd tax credit expired december 31 2011 result legislation passed 2013 extended rd tax credit 2012 2013 rd tax credits recognized 2013 noted net income attributable noncontrolling interests net income attributable noncontrolling interests 14 million 2014 113 million 2013 131 million 2012 decline 2014 reflects termination company’s relationship azlp see note 8 consolidated financial statements addition amount 2014 includes portion intangible asset goodwill impairment charges related company’s joint venture supera attributable noncontrolling interests net income earnings per common share net income attributable merck co inc 119 billion 2014 44 billion 2013 62 billion 2012 eps 407 2014 147 2013 200 2012 increases net income eps 2014 compared 2013 due primarily gain divestiture mcc gain recognized astrazeneca’s option exercise gains divestitures lower operating expenses higher favorability discrete tax items revenue recognized sale us marketing rights saphris partially offset lower sales loss extinguishment debt higher intangible asset impairment charges additional year expense health care reform fee declines net income eps 2013 compared 2012 due primarily lower sales reflecting loss market exclusivity certain products particularly singulair well higher restructuring costs intangible asset impairment charges exchange losses partially offset favorable impact certain tax items lower operating expenses nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income eps prepared accordance generally accepted accounting principles united states “gaap” additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows 1 amount 2014 includes net benefit 517 million recorded connection astrazeneca’s option exercise 2 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection mergers acquisitions divestitures amounts include amortization intangible assets intangible asset impairment charges expense income related changes fair value measurement contingent consideration also excluded incremental thirdparty integration costs associated merger costs related legal entity systems integration well transaction certain costs associated business acquisitions divestitures costs considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 3 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis certain items comprised gain divestiture mcc gain recognized conjunction astrazeneca’s option exercise including related net tax benefit transaction gain divestiture certain ophthalmic products several international markets loss extinguishment debt additional year expense related health care reform fee tax benefit sale sirna tax benefits settlements certain federal income tax issues well net charge recorded connection settlement enhance litigation research development chart reflecting company’s current research pipeline february 20 2015 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally keytruda antipd1 programmed death receptor1 therapy review ema treatment advanced melanoma september 2014 fda approved keytruda dose 2 mgkg every three weeks treatment patients unresectable metastatic melanoma disease progression following ipilimumab braf v600 mutation positive braf inhibitor keytruda first antipd1 therapy approved united states keytruda clinical development program also includes studies 30 cancer types including bladder colorectal gastric head neck melanoma nonsmallcell lung renal triple negative breast hematological malignancies addition company announced number collaborations pharmaceutical companies evaluate novel combination regimens keytruda october 2014 keytruda granted breakthrough therapy designation fda treatment patients epidermal growth factor receptor mutationnegative anaplastic lymphoma kinase rearrangementnegative nonsmallcell lung cancer whose disease progressed following platinumbased chemotherapy company anticipates submitting sbla fda mid2015 keytruda mk8616 bridion investigational agent reversal neuromuscular blockade induced rocuronium vecuronium neuromuscular blocking agents neuromuscular blockade used anesthesiology induce muscle relaxation surgery september 2013 merck announced received crl fda resubmission nda bridion address crl company conducted new hypersensitivity study october 2014 resubmitted nda fda company anticipates fda advisory committee meeting held march 18 2015 review bridion approved company expects launch bridion united states later 2015 bridion approved launched many countries outside united states v419 dtap5ipvhibhepb investigational pediatric hexavalent vaccine company developing partnership sanofi pasteur review fda ema approvedv419 would first pediatric combination vaccine united states designed help protect six important diseases diphtheria tetanus pertussis whooping cough polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hib hepatitis b approved v419 copromoted united states via partnership sanofi pasteur marketed via spmsd joint venture europe mk3102 omarigliptin investigational onceweekly dpp4 inhibitor development treatment type 2 diabetes november 2014 merck announced company submitted new drug application omarigliptin japanese pharmaceuticals medical devices agency omarigliptin phase 3 clinical development united states mk1986 sivextro oncedaily oxazolidinone antibiotic developed intravenous oral administration treatment abssi caused certain grampositive organisms review ema january 2015 merck announced committee medicinal products human use “chmp” ema adopted positive opinion recommending approval sivextro treatment absssi adults merck acquired sivextro part purchase cubist ec affirms chmp opinion grant centralized marketing authorization unified labeling valid 28 countries members eu well european economic area members iceland liechtenstein norway sivextro approved united states indicated treatment adults absssi caused designated susceptible grampositive organisms company conducting phase 3 clinical trial assess safety efficacy sivextro adult patients ventilated nosocomial pneumonia including ventilatorassociated bacterial pneumonia “vabp” ventilated hospitalacquired bacterial pneumonia “ventilated habp” 2013 fda designated sivextro qualified infectious disease product “qidp” approved indication absssi well potential indication ventilated nosocomial pneumonia including vabp ventilated habp iv oral dosage forms mk7625a zerbaxa combination product treatment certain serious bacterial infections adults review ema merck acquired zerbaxa part purchase cubist december 2014 zerbaxa approved fda treatment adults complicated urinary tract infections caused designated susceptible gramnegative organisms complicated intraabdominal infections caused designated susceptible gramnegative grampositive organisms company conducting phase 3 clinical trial assess safety efficacy zerbaxa adult patients ventilated nosocomial pneumonia including vabp ventilated habp fda designated zerbaxa qidp approved indications well potential indication ventilated nosocomial pneumonia including vabp ventilated habp v503 gardasil 9 company’s ninevalent hpv vaccine helps protect certain hpvrelated diseases review ema v503 incorporates antigens five additional cancercausing hpv types compared gardasil 9 approved fda december 2014 mk8962 corifollitropin alfa injection investigational fertility treatment review fda controlled ovarian stimulation women participating assisted reproductive technology july 2014 merck received crl fda nda corifollitropin alfa injection merck reviewing options respect drug candidate response crl corifollitropin alfa injection marketed elonva certain markets outside united states addition candidates regulatory review company several drug candidates phase 3 development company anticipates filing nda bla applicable fda respect certain candidates 2015 mk5172a daily fixeddose combination chronic hcv treatment regimen consisting mk5172 grazoprevir investigational hcv ns34a protease inhibitor mk8742 elbasvir investigational hcv ns5a replication complex inhibitor began phase 3 clinical trials june 2014 mk5172a investigated broad clinical program includes studies patients multiple hcv genotypes treatmentnaïve treatment failures fit important hcv subpopulations patients cirrhosis coinfected hiv company expects file nda fda first half 2015 mk5172a january 30 2015 company received notification fda intent rescind breakthrough therapy designation status combination treatment regimen citing availability recently approved treatments genotype 1 patients company discussing matter fda expect impact ability file nda combination regimen timing filing company started phase 2 ccrest studies study combination regimens grazoprevir mk3682 formerly idx21437 either elbasvir mk8408 treatment hcv infection company expects begin phase 3 studies 2015 mk0822 odanacatib oral onceweekly investigational treatment patients osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis september 2014 merck announced data pivotal phase 3 fracture outcomes study odanacatib postmenopausal women osteoporosis longterm odanacatib fracture trial loft odanacatib met primary endpoints significantly reduced risk three types osteoporotic fractures radiographicallyassessed vertebral clinical hip clinical nonvertebral compared placebo also reduced risk secondary endpoint clinical vertebral fractures addition treatment odanacatib led progressive increases five years bone mineral density lumbar spine total hip rates adverse events overall loft generally balanced patients taking odanacatib placebo adjudicated events morphealike skin lesions atypical femoral fractures occurred often odanacatib group placebo group adjudicated major adverse cardiovascular events generally balanced overall treatment groups numerically adjudicated stroke events odanacatib placebo adjudicated atrial fibrillation reported often odanacatib group placebo group numeric imbalance mortality observed numeric difference appear related particular reported cause causes death merck continues collect data blinded extension study planning additional analyses data trial including independent readjudication major adverse cardiovascular events support regulatory submissions merck plans submit nda fda odanacatib 2015 merck also plans submit applications ema ministry health labour welfare japan mk8237 investigational allergy immunotherapy tablet house dust mite allergy 2014 fda approved grastek timothy grass pollen allergen extract sublingual immunotherapy tablet ragwitek short ragweed pollen allergen extract sublingual immunotherapy tablet grastek ragwitek well ongoing program mk8237 part north america partnership merck alkabello mk8931 merck’s novel investigational oral ßamyloid precursor protein sitecleaving enzyme “bace” inhibitor treatment alzheimer’s disease studied phase 3 trial apecs designed evaluate safety efficacy mk8931 versus placebo patients amnestic mild cognitive impairment due alzheimer’s disease also known prodromal alzheimer’s disease mk8931 also studied another phase 3 trial versus placebo patients mildtomoderate alzheimer’s disease epoch mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein “cetp” development raising hdlc reducing ldlc anacetrapib evaluated large eventdriven cardiovascular clinical outcomes trial reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease predicted completed 2017 mk3415a actoxumabbezlotoxumab investigational candidate prevention clostridium difficile infection recurrence combination two monoclonal antibodies used treat patients single infusion mk4261 surotomycin investigational oral antibiotic development treatment clostridium difficile associated diarrhea merck acquired surotomycin part purchase cubist fda designated surotomycin qidp mk8228 letermovir investigational oral oncedaily antiviral candidate prevention treatment human cytomegalovirus infection letermovir received orphan drug status eu united states also granted fast track designation mk8835 ertugliflozin investigational oral sodium glucose cotransporter2 “sglt2” inhibitor evaluated treatment type 2 diabetes collaboration pfizer inc mk1293 insulin glargine candidate treatment patients type 1 type 2 diabetes february 2014 company announced expanded collaboration samsung bioepis develop manufacture commercialize mk1293 terms agreement companies collaborate clinical development regulatory filings manufacturing approved merck commercialize candidate v212 inactivated varicella zoster virus vaccine development prevention herpes zoster company conducting two phase 3 trials one autologous hematopoietic cell transplant patients solid tumor malignancies undergoing chemotherapy hematological malignancies mk1439 doravirine investigational oncedaily oral nextgeneration nonnucleoside reverse transcriptase inhibitor developed merck treatment hiv1 infection mk2402 bevenopran oral investigational therapy development potential treatment opioidinduced constipation patients chronic noncancer pain merck acquired bevenopran part purchase cubist september 2014 merck sun pharmaceutical industries ltd “sun pharma” entered exclusive worldwide licensing agreement merck’s investigational therapeutic antibody candidate mk3222 tildrakizumab treatment chronic plaque psoriasis skin ailment terms agreement sun pharma acquired worldwide rights tildrakizumab use human indications merck exchange upfront payment 80 million merck continue clinical development regulatory activities funded sun pharma upon product approval sun pharma responsible regulatory activities including subsequent submissions pharmacovigilance post approval studies manufacturing commercialization approved product merck also eligible receive future payments associated regulatory including product approval sales milestones well tiered royalties ranging midsingle digit teen percentage rates sales may 2014 merck endocyte inc “endocyte” company’s collaboration partner announced withdrawal conditional maa ema vintafolide treatment adult patients folate receptorpositive platinumresistant ovarian cancer combination pegylated liposomal doxorubicin “pld” companies’ decision based review interim data proceed trial proceed trial terminated based data safety monitoring board’s “dsmb” recommendation study stopped vintafolide combination pld versus pld alone meet prespecified criteria progressionfree survival allow continuation study dsmb identify safety concerns patients enrolled proceed trial june 2014 merck returned worldwide rights vintafolide indications endocyte company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities merck moved diversify portfolio collaboration development biosimilars potential harness market opportunity presented biological medicine patent expiries delivering high quality biosimilars enhance access patients worldwide company committed making externally sourced programs greater component pipeline strategy renewed focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company evaluating certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases neurodegenerative diseases osteoporosis respiratory diseases women’s health acquired inprocess research development connection mergers acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2014 balance iprd 43 billion majority amount relates clinical development program mk3682 company acquired 2014 acquisition idenix discussed significant projects latestage development include company’s bace inhibitor bridion discussed 2014 2013 2012 approximately 654 million 346 million 78 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2014 company recorded 49 million iprd impairment charges within research development expenses primarily result changes cash flow assumptions certain compounds obtained connection supera joint venture well discontinuation certain animal health programs 2013 company recorded 279 million iprd impairment charges amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period 2012 company recorded 200 million iprd impairment charges primarily pipeline programs previously deprioritized subsequently deemed alternative use period additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2014 estimated costs complete projects acquired connection mergers acquisitions phase 3 development human health analogous stage development animal health approximately 11 billion acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain significant transactions 2014 described merck actively monitoring landscape growth opportunities meet company’s strategic criteria august 2014 merck completed acquisition idenix approximately 39 billion cash 37 billion net cash acquired idenix biopharmaceutical company engaged discovery development medicines treatment human viral diseases whose primary focus development nextgeneration oral antiviral therapeutics treat hcv infection transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions merck recognized intangible asset iprd 32 billion related mk3682 formerly idx21437 net deferred tax liabilities 856 million net assets liabilities approximately 20 million mk3682 nucleotide prodrug phase 2 clinical development evaluated potential inclusion development oral pangenotypic fixeddose combination regimens excess consideration transferred fair value net assets acquired 14 billion recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probability adjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 transaction closed august 5 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included idenix’s historical financial results significant compared company’s financial results october 2014 company entered worldwide clinical development collaboration bayer market develop portfolio soluble guanylate cyclase “sgc” modulators includes bayer’s adempas riociguat first member novel class compounds adempas approved treat pulmonary arterial hypertension “pah” first drug treatment approved patients chronic thromboembolic pulmonary hypertension “cteph” adempas currently marketed united states europe pah cteph japan cteph two companies equally share costs profits collaboration implement joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat currently phase 2 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn make available earlystage sgc compounds similar terms return broad collaboration rights merck made upfront payment bayer 10 billion potential additional milestone payments upon achievement agreedupon sales goals adempas bayer continue lead commercialization americas merck lead commercialization rest world vericiguat potential optin products bayer lead rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead company determined merck’s payment access bayer’s compounds constituted acquisition asset 10 billion consideration paid merck 915 million fair value related currently marketed product adempas capitalized intangible asset subject amortization estimated useful life 12 years remaining 85 million fair value related vericiguat compound currently clinical development expensed within research development expenses fair values adempas vericiguat determined using income approach fair value estimated based upon probability adjusted future net cash flows vericiguat also stage development project associated probability successful completion net cash flows discounted present value using discount rate 100 adempas 105 vericiguat future sales based milestones accrued probable reasonably estimable company bayer right terminate agreement cause productbyproduct basis products developed commercialized agreement adempas bayer termination rights event party’s material uncured breach related product december 2014 merck acquired oncoethix privately held biotechnology company specializing oncology drug development total purchase consideration transaction 153 million included upfront cash payment 110 million future additional milestone payments 265 million contingent upon certain clinical regulatory milestones achieved company determined fair value 43 million acquisition date transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions merck recognized intangible asset iprd 143 million related mk8628 formerly otx015 investigational novel oral bet bromodomain inhibitor currently phase 2 studies treatment hematological malignancies advanced solid tumors well liability contingent consideration 43 million net assets liabilities 10 million fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probability adjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 fair value contingent consideration determined utilizing probability weighted estimated cash flow stream adjusted expected timing payment also utilizing discount rate 115 transaction closed december 18 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included oncoethix’s historical financial results significant compared company’s financial results also december 2014 merck cubist announced definitive agreement merck would acquire cubist total purchase price approximately 95 billion cubist leader development new therapies treat serious potentially lifethreatening infections caused broad range increasingly drugresistant bacteria transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date addition february 2015 merck ngm biopharmaceuticals inc “ngm” privatelyheld biotechnology company announced entered multiyear collaboration research discover develop commercialize novel biologic therapies across wide range therapeutic areas collaboration includes multiple drug candidates currently preclinical development ngm including np201 evaluated treatment diabetes obesity nonalcoholic steatohepatitis ngm lead research development existing preclinical candidates autonomy identify pursue discovery stage programs discretion merck option license resulting ngm programs following human proof concept trials merck exercises option merck lead global product development commercialization resulting products approved terms agreement merck make upfront payment ngm 94 million purchase 15 equity stake ngm 106 million merck commit 250 million fund ngm’s efforts initial fiveyear term collaboration potential additional funding certain conditions met prior merck initiating phase 3 study licensed program ngm may elect either receive milestone royalty payments certain cases cofund development participate global cost revenue share arrangement 50 agreement also provides ngm option participate copromotion cofunded program united states merck option extend research agreement two additional twoyear terms agreement become effective upon expiration waiting period hartscottrodino antitrust improvements act selected joint venture affiliate information astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products revenue 463 million 920 million 915 million 2014 2013 2012 respectively primarily relating sales nexium well prilosec addition merck earned certain partnership returns recorded equity income affiliates returns included priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest returns aggregated 192 million 352 million 621 million 2014 2013 2012 respectively june 30 2014 astrazeneca exercised option purchase merck’s interest kbi 419 million cash amount 327 million reflects estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized time income expense net contingency eliminated sales occur remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net result astrazeneca’s option exercise company’s remaining interest azlp redeemed accordingly company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion kbi preferred stock see note 11 consolidated financial statements elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance result astrazeneca exercising option july 1 2014 company longer records equity income azlp supply sales azlp terminated sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows capital expenditures capital expenditures 13 billion 2014 15 billion 2013 20 billion 2012 expenditures united states 873 million 2014 902 million 2013 13 billion 2012 depreciation expense 25 billion 2014 22 billion 2013 20 billion 2012 20 billion 15 billion 13 billion respectively applied locations united states total depreciation expense 2014 2013 2012 included accelerated depreciation 900 million 577 million 235 million respectively associated restructuring activities see note 3 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders cash provided operating activities 79 billion 2014 117 billion 2013 100 billion 2012 decline cash provided operating activities 2014 compared 2013 reflects approximately 50 billion taxes paid divestiture mcc cash provided operating activities 2013 includes payment made company 480 million connection previously disclosed settlement enhance litigation cash provided operating activities 2012 reflects higher contributions defined benefit plans compared 2014 2013 cash provided operating activities 2012 also includes payment 960 million related resolution certain litigation related vioxx cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures portion treasury stock purchases dividends paid shareholders global economic conditions ongoing sovereign debt issues among factors adversely affected foreign receivables certain european countries see note 5 consolidated financial statements cash used investing activities 374 million 2014 compared 31 billion 2013 reflecting cash received 2014 divestiture mcc dispositions businesses primarily related transactions aspen santen see notes 3 4 consolidated financial statements well cash received connection astrazeneca’s option exercise see note 8 consolidated financial statements partially offset higher purchases lower proceeds sale securities investments cash used acquisition idenix see note 4 consolidated financial statements cash payment made upon formation collaboration bayer see note 4 consolidated financial statements cash used investing activities 31 billion 2013 compared 68 billion 2012 primarily reflecting higher proceeds sales securities investments lower capital expenditures partially offset higher purchases securities investments cash used financing activities 151 billion 2014 compared 60 billion 2013 driven primarily higher payments debt lower proceeds issuance debt higher purchases treasury stock decrease shortterm borrowings partially offset higher proceeds exercise stock options cash used financing activities 60 billion 2013 compared 33 billion 2012 higher use cash financing activities driven primarily higher purchases treasury stock well higher payments debt decrease shortterm borrowings partially offset higher proceeds issuance debt december 31 2014 total worldwide cash investments 292 billion including 157 billion cash equivalents shortterm investments 135 billion longterm investments generally 8090 cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated form dividends company records us deferred tax liabilities certain unremitted earnings amounts earned overseas expected indefinitely reinvested outside united states accrual us taxes provided amount cash investments held us foreign subsidiaries fluctuates due variety factors including timing receipt payments normal course business cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures portion treasury stock purchases dividends paid shareholders company’s contractual obligations december 31 2014 follows 1 includes future bulk supply purchases company committed connection certain divestitures including disposition api manufacturing business 2013 discussed 2 amounts reflect debt interest payments related company’s february 2015 debt issuance discussed 3 december 31 2014 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 42 billion including 13 billion reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2015 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments also excluded research development obligations potential future funding commitments approximately 70 million investments research venture capital funds loans payable current portion longterm debt reflects 143 million longdated notes subject repayment option holders required funding obligations 2015 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 40 million us pension plans 150 million international pension plans 65 million postretirement benefit plans 2015 august 2014 company terminated existing credit facility entered new 60 billion fiveyear credit facility matures august 2019 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility october 2014 company issued eurodenominated senior unsecured notes consisting €10 billion principal amount 1125 notes due 2021 €10 billion principal amount 1875 notes due 2026 €500 million principal amount 25 notes due 2034 interest notes payable annually notes series redeemable whole part time company’s option varying redemption prices net proceeds offering 31 billion used part repay debt validly tendered connection tender offers launched company certain outstanding notes debentures company paid 25 billion aggregate consideration applicable purchase price together accrued interest redeem 18 billion principal amount debt addition november 2014 merck redeemed 10 billion 400 notes due 2015 10 billion 600 notes due 2017 february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes consisting 300 million principal amount floating rate notes due 2017 700 million principal amount floating rate notes due 2020 125 billion principal amount 185 notes due 2020 125 billion aggregate principal amount 235 notes due 2022 25 billion aggregate principal amount 275 notes due 2025 20 billion aggregate principal amount 370 notes due 2045 company used substantial portion net proceeds offering repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including without limitation repurchases company’s common stock repayment outstanding commercial paper borrowings upcoming debt maturities december 2014 company entered bridge loan agreement certain banks pursuant company ability borrow 80 billion purpose obtaining shortterm financing acquisition cubist company borrow funds bridge loan issuing 80 billion senior unsecured notes discussed terminated bridge loan february 20 2015 december 2012 company filed securities registration statement us securities exchange commission “sec” automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company’s longterm credit ratings assigned moody’s investors service standard poor’s a1 stable outlook aa stable outlook respectively ratings continue allow access capital markets flexibility obtaining funds competitive terms company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer despite strong financial profile certain contingent events realized discussed note 10 consolidated financial statements could material adverse impact company’s liquidity capital resources company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2014 board directors declared quarterly dividend 045 per share company’s common stock payable january 2015 may 1 2013 company announced board directors authorized additional purchases 15 billion merck’s common stock treasury purchases may made openmarket transactions block transactions exchange privately negotiated transactions company purchased 77 billion common stock 134 million shares treasury 2014 company approximately 27 billion remaining may share repurchase program company purchased 65 billion 26 billion common stock 2013 2012 respectively previously authorized share repurchase programs financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined estimated 660 million 547 million december 31 2014 2013 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar would yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level cash flows contracts reported operating activities consolidated statements cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly strengthened 10 currency exposures company december 31 2014 2013 income taxes would declined approximately 25 million 2014 109 million 2013 company net long position relative major foreign currencies consideration forward contracts uniform strengthening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations march 2013 venezuelan government announced creation new foreign exchange mechanism called “complimentary system foreign currency acquirement” known sicad1 operates similar auction system allows entities specific sectors bid us dollars used payments related international investments certain intangibles march 2014 venezuelan government launched another foreign exchange mechanism known sicad2 indicated industry sectors would able access sicad2 use would restricted purpose sicad1 sicad2 average rates published central bank venezuela december 31 2014 average exchange rates inferred 120 vef per us dollar 4999 vef per us dollar respectively neither sicad1 sicad2 eliminated changed official rate 630 vef per us dollar december 31 2014 company approximately 670 million us dollar equivalent 630 official rate net monetary assets venezuelan entities large majority cash 2014 company received approximately 190 million venezuela transactions settled official rate 630 vef per us dollar approximately 600 million pending approval future settlement official rate february 2015 venezuelan government announced sicad2 replaced sistema marginal de divisas known simadi market intended operate based principles supply demand buyers sellers exchanging offers transact according venezuelan central bank average exchange rate first day trading february 12 2015 1700 vef per us dollar sicad1 mechanism remains unchanged recent announcements venezuelan government indicated essential goods including food medicine remain official rate 630 vef per us dollar company used either sicad mechanism settle transactions anticipate using either sicad1 simadi mechanisms settle transactions accordingly company concluded appropriate continue use official rate 630 vef per us dollar remeasurement purposes circumstances change company concludes would longer appropriate use official rate devaluation official rate occurs could result significant charge company’s future results operations company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income “oci” remains accumulated comprehensive income “aoci” either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2014 company party 17 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes libor recorded interest expense offset fair value changes swap contracts 2014 company terminated interest rate swap contracts effectively converted company’s 600 fixedrate notes due 2017 floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 3 million cash flows contracts reported operating activities consolidated statement cash flows february 2015 connection company’s february debt offering see note 9 consolidated financial statements merck entered ten additional interest rate swap contracts notional amounts 250 million effectively convert company’s 185 notes due 2020 company’s 235 notes due 2022 floatingrate instruments company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2014 2013 would positively affected net aggregate market value instruments 10 billion 11 billion respectively one percentage point decrease december 31 2014 2013 would negatively affected net aggregate market value 12 billion 13 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements mergers acquisitions determine whether acquisitions qualify business combinations asset acquisitions company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines acquisition consists inputs well processes applied inputs ability create outputs acquisition determined business combination business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition fair values intangible assets including acquired iprd determined utilizing information available near merger acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations company determines transaction accounted acquisition business transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense acquisition date fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized title risk loss passes customer typically time delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2014 2013 2012 summarized information changes aggregate indirect customer discount accrual follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 112 million 20 billion respectively december 31 2014 87 million 16 billion respectively december 31 2013 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 17 2014 15 2013 14 2012 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2014 2013 74 million 177 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2014 2013 approximately 215 million 160 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying providing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 12 million 2014 estimated 53 million aggregate years 2015 2019 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 125 million 213 million december 31 2014 2013 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 66 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 278 million 2014 276 million 2013 335 million 2012 december 31 2014 401 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 169 million 2014 716 million 2013 509 million 2012 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets decrease net periodic benefit cost pension postretirement benefit plans 2014 compared 2013 largely attributable change discount rate company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2014 discount rates company’s us pension postretirement benefit plans ranged 320 420 compared range 360 520 december 31 2013 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2015 company’s expected rate return range 730 875 range 2014 us pension postretirement benefit plans october 2014 society actuaries issued new retirement plan mortality assumptions used measuring us pension plan obligations company reflected impact new assumptions measurement us pension plan obligations december 31 2014 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 46 million favorable unfavorable impact net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 23 million favorable unfavorable impact net periodic benefit cost required funding obligations 2015 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses purchased assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macro economic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2014 foreign earnings 600 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability recently issued accounting standards may 2014 financial accounting standards board issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements guidance effective annual interim periods beginning 2017 early adoption permitted company currently assessing impact adoption consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health alliances healthcare services segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers merck’s alliances segment primarily includes results company’s relationship astrazeneca lp termination relationship june 30 2014 company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products overview 2015 merck continued execute research development focusedstrategy advance pipeline commercial portfolio maintaining disciplined approach cost management delivering capital returns shareholders company received several product approvals 2015 include expanded indications keytruda company’s antipd1 programmed death receptor1 therapy treatment advanced melanoma metastatic nonsmallcell lung cancer nsclc patients whose tumors express pdl1 disease progression following therapies well us food drug administration fda approval bridion sugammadex injection medication reversal two types neuromuscular blocking agents used surgery additionally january 2016 fda approved zepatier oncedaily single tablet combination therapy treatment chronic hepatitis c virus hcv genotype gt 1 gt4 infection without ribavirin business development critical part company’s strategy merck looks combine internal external innovation enhance pipeline 2015 merck acquired cubist pharmaceuticals inc cubist leader development new therapies treat serious potentially lifethreatening infections caused broad range increasingly drugresistant bacteria ccam biotherapuetics ltd ccam biopharmaceutical company focused discovery development novel cancer immunotherapies also 2015 merck entered multiyear collaboration ngm biopharmaceuticals inc ngm research discover develop commercialize novel biologic therapies across wide range therapeutic areas january 2016 merck acquired iomet pharma ltd iomet drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism worldwide sales 395 billion 2015 decline 6 compared 2014 including 6 unfavorable effect foreign exchange acquisition cubist 2015 divestiture merck’s consumer care business mcc 2014 well product divestitures termination 2014 company’s relationship astrazeneca lp azlp net unfavorable impact sales approximately 3 sales performance also unfavorably affected ongoing impacts loss market exclusivity several products unfavorable impacts partially offset volume growth oncology diabetes women’s health vaccine products positive performance merck’s animal health business merck continues support inline portfolio well ongoing upcoming product launches keytruda initially approved fda september 2014 treatment advanced melanoma patients disease progression therapies launching 40 markets including european union eu 2015 merck achieved multiple additional regulatory milestones keytruda including accelerated approval fda treatment patients metastatic nsclc whose tumors express pdl1 determined fdaapproved test disease progression platinumcontaining chemotherapy addition fda approved expanded indication keytruda include firstline treatment patients unresectable metastatic melanoma additionally 2015 european commission ec approved keytruda treatment advanced unresectable metastatic melanoma adults keytruda clinical trials program currently includes 30 tumor types 200 clinical trials including 100 trials combine keytruda cancer treatments see “research development” company also launching zepatier bridion united states company continues execute strategy pursuing business development opportunities complement internal research capabilities part merck’s prioritization efforts company also continues review existing assets determine whether provide best short longerterm value merck elsewhere connection portfolio assessment process company divested remaining ophthalmics business international markets 2015 company’s portfolio assessment process ongoing future divestitures may occur merck focusing research efforts therapeutic areas believes make impact addressing critical areas unmet medical need cancer hepatitis c cardiometabolic disease resistant microbial infection alzheimer’s disease 2015 company continued make strides latestage pipeline mk6072 bezlotoxumab investigational antitoxin prevention clostridium difficile c difficile infection recurrence currently review fda european medicines agency ema mk1293 insulin glargine candidate treatment patients type 1 type 2 diabetes developed collaboration also review eu zepatier keytruda review eu treatment nsclc addition phase 3 programs keytruda therapeutic areas bladder breast colorectal gastric head neck multiple myeloma esophageal cancers company also 10 candidates phase 3 clinical development core therapeutic areas well areas significant potential including mk3102 omarigliptin investigational onceweekly dipeptidyl peptidase4 dpp4 inhibitor development treatment adults type 2 diabetes mk0822 odanacatib oral onceweekly investigational treatment patients osteoporosis mk8835 ertugliflozin investigational oral sodium glucose cotransporter2 sglt2 inhibitor evaluated alone combination januvia sitagliptin metformin treatment type 2 diabetes mk8237 investigational allergy immunotherapy tablet house dust mite allergy merck expects submit applications regulatory approval united states candidates well mk1293 described 2016 result continued portfolio prioritization company outlicensing discontinuing selected latestage clinical development assets 2015 company outlicensed mk1602 mk8031 investigational small molecule oral calcitonin generelated peptide cgrp receptor antagonists developed treatment prevention migraine company continued make strong progress 2015 reducing cost base result disciplined cost management merck achieved overall savings goal 2015 noted company turn invested resources grow strongest brands support promising assets pipeline marketing administrative expenses declined 2015 compared 2014 reflecting part continued focus company prioritizing resources highest growth areas 2013 company initiated actions global restructuring program 2013 restructuring program part global initiative sharpen commercial research development focus actions program primarily include elimination positions sales administrative headquarters organizations well research development additionally actions include reduction company’s global real estate footprint improvements efficiency manufacturing supply network company recorded total pretax costs 527 million 2015 12 billion 2014 2013 related restructuring program actions 2013 restructuring program substantially completed end 2015 company met projected 20 billion annual net cost savings actions 2013 restructuring program actions 2013 restructuring program combined actions merger restructuring program discussed company also met annual net cost savings projection 25 billion compared fullyear 2012 expense levels global restructuring program merger restructuring program initiated 2010 subsequent merck scheringplough corporation scheringplough merger intended streamline cost structure combined company actions plan include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company recorded total pretax costs 583 million 2015 730 million 2014 11 billion 2013 related restructuring program nonfacility related restructuring actions merger restructuring program substantially complete beginning january 1 2016 remaining restructuring actions plans primarily relate ongoing facility rationalizations accounted aggregate prospectively company expects complete actions end 2017 incur approximately 15 billion additional pretax costs associated company’s restructuring actions included materials production costs marketing administrative expenses research development expenses restructuring costs company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested november 2015 merck’s board directors raised company’s quarterly dividend 046 per share 045 per share 2015 company returned 93 billion shareholders dividends share repurchases january 2016 merck announced reached agreement plaintiffs resolve vioxx shareholder class action litigation pending new jersey federal court agreement merck pay 830 million resolve settlement class members’ claims plus additional amount approved attorneys’ fees expenses connection settlement merck recorded net pretax charge 680 million fourth quarter 2015 includes anticipated insurance recoveries see note 10 consolidated financial statements earnings per common share assuming dilution attributable common shareholders eps 2015 156 compared 407 2014 eps years reflect impact acquisition divestiturerelated costs restructuring costs well certain items 2014 include 112 billion gain recognized connection divestiture mcc nongaap eps excludes items 359 2015 349 2014 see “nongaap income nongaap eps” competition health care environment competition markets company conducts business pharmaceutical industry general highly competitive highly regulated company’s competitors include worldwide researchbased pharmaceutical companies smaller research companies limited therapeutic focus generic drug manufacturers animal health care companies company’s operations may adversely affected generic biosimilar competition company’s products mature well technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors generic availability competitors’ branded products new information clinical trials marketed products postmarketing surveillance addition patent rights increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect intangible assets associated certain products competitive pressures intensified pressures industry grown pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources required meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances licensing arrangements refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacements even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth reduced sales company’s products therapeutic category highly competitive animal health business affected several factors including regulatory legislative issues scientific technological advances product innovation quality price company’s products effective promotional efforts frequent introduction generic products competitors health care environment government regulation global efforts toward health care cost containment continue exert pressure product pricing market access united states federal state governments many years also pursued methods reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities hospitals serving disproportionate share low income uninsured patients backdrop united states enacted major health care reform legislation 2010 patient protection affordable care act began implemented 2010 various insurance market reforms advanced state federal insurance exchanges launched 2014 end decade law expected expand access health care 32 million americans previously insurance coverage respect effect law pharmaceutical industry law increased mandated medicaid rebate 151 231 expanded rebate medicaid managed care utilization increased types entities eligible federal 340b drug discount program law also requires pharmaceutical manufacturers pay 50 point service discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” approximately 550 million 430 million 280 million recorded merck reduction revenue 2015 2014 2013 respectively related donut hole provision also pharmaceutical manufacturers required pay annual nontax deductible health care reform fee total annual industry fee 30 billion 2015 remain 30 billion 2016 fee assessed company proportion share prior year branded pharmaceutical sales certain government programs medicare medicaid company recorded 173 million 390 million 151 million costs within marketing administrative expenses 2015 2014 2013 respectively annual health care reform fee higher expenses 2014 reflect final regulations annual health care reform fee issued internal revenue service irs july 28 2014 final irs regulations accelerated recognition criteria fee obligation one year underlying sales used allocate fee occurred rather year fee paid result change merck recorded additional year expense 193 million 2014 january 21 2016 centers medicare medicaid services issued medicaid rebate final rule implements provisions patient protection affordable care act effective april 1 2016 rule provides comprehensive guidance calculation average manufacturer price best price two metrics utilized determine rebates drug manufacturers required pay state medicaid programs merck still evaluating rule determine whether material impact merck’s medicaid rebate liability company also faces increasing pricing pressure globally managed care organizations government agencies programs could negatively affect company’s sales profit margins united states include practices managed care organizations federal state exchanges institutional governmental purchasers ii us federal laws regulations related medicare medicaid including medicare prescription drug improvement modernization act 2003 patient protection affordable care act changes health care system enacted part health care reform united states well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries could result pricing pressures example health care reform contributing increase number patients medicaid program sales pharmaceutical products subject substantial rebates addition effort contain us federal deficit pharmaceutical industry could considered potential source savings via legislative proposals debated enacted types revenue generating cost saving proposals include additional direct price controls medicare prescription drug program part addition congress may consider proposals allow certain conditions importation medicines countries remains uncertain proposals may included part future federal budget deficit reduction proposals would directly indirectly affect company efforts toward health care cost containment remain intense several european countries many countries continued announce execute austerity measures include implementation pricing actions reduce prices generic patented drugs mandatory switches generic drugs company taking steps mitigate impact countries austerity measures continued negatively affect company’s revenue performance 2015 company anticipates austerity measures continue negatively affect revenue performance 2016 addition majority countries attempt contain drug costs engaging reference pricing authorities examine predetermined markets published prices drugs brand authorities use price data markets set new local prices brandname drugs including company’s guidelines examining reference pricing usually set local markets changed pursuant local regulations addition japan pharmaceutical industry subject governmentmandated biennial price reductions pharmaceutical products certain vaccines occur 2016 furthermore government order repricings classes drugs determines appropriate applicable rules certain markets outside united states also implemented cost management strategies health technology assessments require additional data reviews administrative processes increase complexity timing costs obtaining product reimbursement exert downward pressure available reimbursement company’s focus emerging markets increased governments many emerging markets also focused constraining health care costs enacted price controls related measures compulsory licenses aim put pressure price pharmaceuticals constrain market access company anticipates pricing pressures market access challenges continue 2016 varying degrees emerging markets beyond pricing market access challenges conditions emerging market countries affect company’s efforts continue grow markets including potential political instability significant currency fluctuation controls financial crises limited changing availability funding health care developments may adversely impact business environment company may engage thirdparty agents assist operating emerging market countries may affect ability realize continued growth may also increase company’s risk exposure addressing cost containment pressures company engages public policy advocacy policymakers continues work demonstrate medicines provide value patients pay health care company advocates government policymakers encourage longterm approach sustainable health care financing ensures access innovative medicines disproportionately target pharmaceuticals source budget savings markets historically low rates health care spending company encourages governments increase investments adopt market reforms order improve citizens’ access appropriate health care including medicines operating conditions become challenging global pressures competition industry regulation cost containment efforts although one predict effect factors company’s business company continually takes measures evaluate adapt improve organization business practices better meet customer needs believes well positioned respond evolving health care environment market forces pharmaceutical industry also subject regulation regional country state local agencies around world focused standards processes determining drug safety effectiveness well conditions sale reimbursement particular importance fda united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals cases fda requirements practices increased amount time resources necessary develop new products bring market united states time fda committed expediting development review products bearing “breakthrough therapy” designation appears accelerated regulatory review process medicines designation eu adopted directives legislation concerning classification labeling advertising wholesale distribution integrity supply chain enhanced pharmacovigilance monitoring approval marketing medicinal products human use provide mandatory standards throughout eu may supplemented implemented additional regulations eu member states company’s policies procedures already consistent substance directives consequently believed material effect company’s business company believes continue able conduct operations including launching new drugs regulatory environment operating results sales worldwide sales 395 billion 2015 decline 6 compared 2014 including 6 unfavorable effect foreign exchange acquisition cubist 2015 divestiture mcc 2014 well product divestitures termination company’s relationship astrazeneca lp azlp also 2014 discussed net unfavorable impact sales approximately 3 addition sales performance 2015 reflects declines pegintron victrelis medicines treatment hcv remicade treatment inflammatory diseases pneumovax 23 vaccine help prevent pneumococcal disease nasonex inhaled corticosteroid treatment nasal allergy symptoms vytorin cholesterol modifying medicine declines partially offset volume growth keytruda antipd1 therapy januvia janumet treatment type 2 diabetes gardasilgardasil 9 vaccines help prevent certain diseases caused certain types human papillomavirus hpv noxafil prevention invasive fungal infections simponi oncemonthly subcutaneous treatment inflammatory diseases implanonnexplanon singlerod subdermal contraceptive implants invanz treatment certain infections dulera inhalation aerosol combination medicine treatment asthma bridion medication reversal two types neuromuscular blocking agents used surgery well volume growth animal health products higher thirdparty manufacturing sales january 2015 company acquired cubist contributed sales 13 billion merck’s revenues 2015 2014 company divested certain ophthalmic products several international markets closed july 1 2014 addition october 1 2014 company divested mcc business including prescription rights claritin afrin sales decline 2015 attributable divestitures approximately 19 billion 15 billion related consumer care segment 400 million related pharmaceutical segment also 2014 company sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults resulted revenue 232 million additionally company’s relationship azlp terminated june 30 2014 therefore effective july 1 2014 company longer records supply sales azlp supply sales 463 million 2014 termination date reflected alliances segment sales united states 175 billion 2015 increase 3 compared 171 billion 2014 increase driven primarily acquisition cubist well higher sales keytruda gardasilgardasil 9 januviajanumet zetia cholesterol modifying medicine higher thirdparty manufacturing sales increases partially offset 2014 divestiture mcc termination company’s relationship azlp 2014 revenue recognized 2014 connection sale us marketing rights saphris well lower sales 2015 pneumovax 23 nasonex international sales 220 billion 2015 decline 13 compared 252 billion 2014 foreign exchange unfavorably affected international sales performance 11 2015 excluding unfavorable effect foreign exchange sales decrease reflects divestiture mcc well lower sales pharmaceutical segment largely reflecting declines europe japan partially offset growth emerging markets sales europe declined 19 2015 77 billion including 14 unfavorable effect foreign exchange excluding unfavorable effect foreign exchange decline driven primarily lower sales remicade well lower sales products treatment hcv product divestitures ongoing generic erosion fiscal austerity measures region partially offset growth simponi keytruda januviajanumet sales japan declined 23 2015 26 billion 11 due unfavorable effect foreign exchange sales decline largely driven product divestitures ongoing impacts loss market exclusivity several products including cozaar hyzaar treatments hypertension well lower sales pegintron januvia sales emerging markets 73 billion 2015 decline 6 including 11 unfavorable effect foreign exchange excluding unfavorable effect foreign exchange sales performance reflects volume growth diabetes hospital acute care oncology certain diversified brand products partially offset lower sales hcv products well product divestitures total international sales represented 56 60 total sales 2015 2014 respectively global efforts toward health care cost containment continue exert pressure product pricing market access worldwide united states health care reform contributing increase number patients medicaid program sales pharmaceutical products subject substantial rebates many international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2015 company anticipates pricing actions including biennial price reductions japan occur 2016 austerity measures continue negatively affect revenue performance 2016 worldwide sales totaled 422 billion 2014 decline 4 compared 440 billion 2013 foreign exchange unfavorably affected global sales performance 1 2014 decline reflects lower revenue resulting ongoing impacts loss market exclusivity several products including temodar treatment certain types brain tumors singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis cozaar hyzaar addition sales decline attributable product divestitures occurred 2014 2013 discussed termination company’s relationship azlp well divestiture mcc revenue decline also driven lower sales victrelis pegintron nasonex vytorin declines partially offset growth remicade simponi diabetes franchise januviajanumet dulera inhalation aerosol implanonnexplanon well higher sales hospital acute care animal health products addition company recognized revenue 232 million 2014 connection sale us marketing rights saphris october 2013 company sold active pharmaceutical ingredient api manufacturing business effective december 31 2013 certain related products within diversified brands november 2013 merck sold us rights certain ophthalmic products january 2014 sold us marketing rights saphris addition company sold us rights zioptan april 2014 also 2014 noted company divested certain ophthalmic products several international markets sold mcc business sales decline 2014 attributable divestitures approximately 11 billion approximately 575 million related pharmaceutical segment 345 million related consumer care segment 150 million related divested api manufacturing business nonsegment revenues also termination company’s relationship azlp resulted sales decline approximately 450 million alliances segment 2014 compared 2013 sales company’s products follows 1 sales cubicin 2015 represent sales subsequent cubist acquisition date sales cubicin 2014 2013 reflect sales japan pursuant previously existing licensing agreement 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates included income expense net amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health alliances healthcare services well consumer care divestiture october 1 2014 alliances segment includes revenue company’s relationship azlp termination june 30 2014 5 revenues primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales revenues 2014 also include 232 million received merck connection sale us marketing rights saphris revenues 2013 reflect 50 million revenue outlicense pipeline compound pharmaceutical segment primary care women’s health cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy medicines lowering ldl cholesterol 38 billion 2015 decline 9 compared 2014 including 7 unfavorable effect foreign exchange sales decline driven primarily lower volumes ezetrol canada lost market exclusivity september 2014 well lower volumes united states partially offset higher pricing united states combined worldwide sales zetia vytorin 42 billion 2014 decline 3 compared 2013 foreign exchange unfavorably affected global sales performance 1 2014 sales decline driven primarily lower volumes vytorin united states ezetrol canada due loss market exclusivity november 2014 merck announced investigational improveit study improved reduction outcomes vytorin efficacy international trial met primary secondary composite efficacy endpoints improveit patients taking vytorin combines simvastatin zetia experienced significantly fewer major cardiovascular events measured composite cardiovascular death nonfatal myocardial infarction nonfatal stroke rehospitalization unstable angina coronary revascularization occurring least 30 days randomization patients treated simvastatin alone results 18144 patient study highrisk patients presenting acute coronary syndromes presented american heart association 2014 scientific sessions april 2015 merck submitted data improveit fda support new indication reduction cardiovascular events vytorin zetia vytorin zetia currently indicated use along healthy diet reduce elevated ldl cholesterol patients hyperlipidemia current us prescribing information products states effect ezetimibe cardiovascular morbidity mortality alone incremental statin therapy determined february 2016 merck announced fda issued complete response letter crl regarding merck’s supplemental new drug applications merck reviewing letter determine next steps also february 2016 decentralized process merck received positive outcome mutual recognition procedure updated product information ezetrol inegy based results improveit following completion procedure eu member states concerned amend local labeling country basis include reduction risk cardiovascular events patients coronary heart disease history acute coronary syndrome agreement generic manufacturer may launch generic version zetia united states december 2016 us patent exclusivity periods zetia vytorin otherwise expire april 2017 company market exclusivity ezetrol major european markets october 2017 however company expects apply pediatric extensions term would extend date april 2018 company market exclusivity inegy markets april 2019 may 2014 merck announced fda approved zontivity reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease us prescribing information zontivity includes boxed warning regarding bleeding risk january 2015 zontivity approved ec coadministration acetylsalicylic acid appropriate clopidogrel reduce atherothrombotic events adult patients history myocardial infarction merck currently plans begin launching zontivity certain european markets 2016 company continues monitor assess zontivity related intangible asset merck continues focus building product awareness united states zontivity company’s efforts build product awareness united states launches europe successful company may take noncash impairment charge respect zontivity intangible asset 292 million december 31 2015 diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes 60 billion 2015 essentially flat compared 2014 including 7 unfavorable effect foreign exchange sales performance reflects higher volumes pricing united states well volume growth emerging markets europe volume declines comarketed sitagliptin japan due timing sales licensee partially offset growth 2015 combined global sales januvia janumet 60 billion 2014 increase 3 compared 2013 including 1 unfavorable effect foreign exchange growth driven primarily higher sales januvia janumet united states volume growth europe partially offset lower sales januvia japan due lower pricing april 2014 dpp4 inhibitors including januvia subject repricing japan june 2015 merck announced primary results trial evaluating cardiovascular outcomes sitagliptin tecos placebocontrolled study cardiovascular cv safety merck’s dpp4 inhibitor januvia sitagliptin added usual care 14000 patients study achieved primary composite cv endpoint noninferiority defined time first confirmed event following cvrelated death nonfatal myocardial infarction nonfatal stroke hospitalization unstable angina compared usual care without sitagliptin addition increase hospitalization heart failure rates allcause mortality similar treatments groups two key secondary endpoints data presented annual scientific meeting american diabetes association june 2015 september 2015 merck announced japanese pharmaceuticals medical devices agency approved marizev omarigliptin 25 mg 125 mg tablets oral onceweekly dpp4 inhibitor indicated treatment adults type 2 diabetes japan first country approved omarigliptin worldwide regulatory submissions follow general medicine women’s health worldwide sales nuvaring vaginal contraceptive product 732 million 2015 increase 1 compared 2014 723 million 2014 increase 5 compared 2013 foreign exchange unfavorably affected global sales performance 7 1 2015 2014 respectively sales growth years largely reflects higher pricing united states worldwide sales implanonnexplanon singlerod subdermal contraceptive implants rose 588 million 2015 17 increase compared 2014 including 6 unfavorable effect foreign exchange increase driven primarily higher demand united states emerging markets implanonnexplanon sales grew 25 502 million 2014 compared 2013 driven primarily higher demand united states global sales dulera inhalation aerosol combination medicine treatment asthma grew 16 2015 536 million increased 42 2014 460 million driven primarily higher demand united states global sales follistim aq marketed countries outside united states puregon fertility treatment 383 million 2015 decline 7 compared 2014 reflecting 9 unfavorable effect foreign exchange offset higher pricing united states worldwide sales follistim aq declined 14 412 million 2014 compared 2013 driven largely lower pricing united states well lower sales europe driven primarily volume declines foreign exchange unfavorably affected global sales performance 1 2014 patent provided market exclusivity follistim aq united states expired june 2015 hospital specialty hepatitis worldwide sales pegintron treatment chronic hcv 182 million 2015 decline 52 compared 2014 including 5 unfavorable effect foreign exchange decline driven lower volumes nearly regions availability newer therapeutic options continues reduce market share global sales pegintron 381 million 2014 decline 23 compared 2013 including 3 unfavorable effect foreign exchange decrease driven lower volumes regions availability newer therapeutic options resulted loss market share led patient treatment delays markets anticipating availability new therapeutic options global sales victrelis oral medicine treatment chronic hcv 18 million 2015 decline 89 compared 2014 driven lower volumes europe emerging markets availability newer therapeutic options continues reduce market share worldwide sales victrelis 153 million 2014 decline 64 compared 2013 driven lower volumes nearly regions particularly within united states availability newer therapeutic options resulted loss market share led patient treatment delays markets anticipating availability newer therapeutic options january 2016 fda approved zepatier treatment adult patients chronic hcv gt1 gt4 infection without ribavirin zepatier oncedaily fixeddose combination tablet containing ns5a inhibitor elbasvir 50 mg ns34a protease inhibitor grazoprevir 100 mg fda previously granted two breakthrough therapy designations zepatier treatment chronic hcv gt1 infection patients end stage renal disease hemodialysis treatment patients chronic hcv gt4 infection breakthrough therapy designation given investigational medicines serious lifethreatening conditions may offer substantial improvement existing therapies across multiple clinical studies zepatier achieved high rates sustained virologic response ranging 94 97 gt1infected patients 97 100 gt4infected patients sustained virologic response defined hcv rna levels measuring less lower limit quantification 12 weeks cessation treatment indicating patient’s hcv infection cured zepatier became available united states february 2016 zepatier review eu hiv worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection 15 billion 2015 decline 10 compared 2014 including 8 unfavorable effect foreign exchange decline driven primarily lower volumes united states lower demand pricing europe due competitive pressures partially offset higher volumes latin america higher pricing united states global sales isentress increased 2 2014 17 billion compared 2013 primarily reflecting volume growth europe emerging markets particularly latin america resulting government tenders partially offset volume declines united states reflecting competitive pressures foreign exchange unfavorably affected global sales performance 1 2014 hospital acute care january 2015 merck acquired cubist leader development therapies treat serious infections caused broad range bacteria cubist’s products include cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms sales cubicin 11 billion 2015 subsequent acquisition us composition patent cubicin expires june 2016 significant losses cubicin sales expected occur thereafter many markets outside united states cubicin commercialized companies accordance distribution agreements established prior merck’s acquisition cubist fourth quarter 2015 merck entered agreements reacquire marketing rights cubicin certain international markets including europe latin america australia new zealand china south africa certain asia pacific countries cubist’s products also include zerbaxa combination product approved fda december 2014 treatment adults complicated urinary tract infections caused designated susceptible gramnegative organisms complicated intraabdominal infections caused designated susceptible gramnegative grampositive organisms sivextro product approved fda june 2014 treatment acute bacterial skin structure infections absssi adults caused designated susceptible grampositive organisms sivextro also approved ec march 2015 treatment absssi adults company began launching sivextro second quarter 2015 september 2015 zerbaxa approved ec treatment complicated intraabdominal infections acute pyelonephritis complicated urinary tract infections adults zerbaxa sivextro phase 3 development united states treatment hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia global sales cancidas antifungal product 573 million 2015 decrease 16 compared 2014 reflecting 12 unfavorable effect foreign exchange volume declines certain emerging markets worldwide sales cancidas grew 3 2014 681 million compared 2013 largely reflecting volume growth asia pacific region particularly china foreign exchange unfavorably affected global sales performance 1 2014 worldwide sales noxafil prevention invasive fungal infections grew 21 2015 487 million increased 30 2014 402 million driven pricing higher demand united states volume growth europe reflecting positive impact approval new formulations foreign exchange unfavorably affected global sales performance 12 2015 sales bridion reversal two types neuromuscular blocking agents used surgery grew 4 2015 353 million rose 18 2014 340 million driven volume growth international markets sold foreign exchange unfavorably affected global sales performance 19 2015 6 2014 bridion approved marketed many countries outside united states december 2015 fda approved bridion reversal neuromuscular blockade induced rocuronium bromide vecuronium bromide adults undergoing surgery immunology sales remicade treatment inflammatory diseases marketed company europe russia turkey 18 billion 2015 decline 24 compared 2014 including 14 unfavorable effect foreign exchange february 2015 company lost market exclusivity remicade major european markets longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition company retained majority existing patients company lost market share new patients prescribed biosimilars company expects remicade sales decline accelerate throughout 2016 sales remicade 24 billion 2014 increase 4 compared 2013 reflecting sales growth europe partially offset decline russia sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey 690 million 2015 essentially flat compared 2014 driven higher demand europe reflecting part ongoing positive impact ulcerative colitis indication offset 19 unfavorable effect foreign exchange sales simponi grew 38 2014 689 million compared 2013 driven demand europe reflecting part positive impact ulcerative colitis indication products contained hospital specialty include among others invanz treatment certain infections primaxin antibacterial product oncology sales keytruda antipd1 programmed death receptor1 therapy 566 million 2015 55 million 2014 increase primarily reflects higher sales united states well emerging markets europe company continues launch keytruda september 2014 fda granted accelerated approval keytruda dose 2 mgkg every three weeks treatment patients unresectable metastatic melanoma disease progression following ipilimumab braf v600 mutation positive braf inhibitor december 2015 company announced fda approved expanded indication keytruda include firstline treatment patients unresectable metastatic melanoma regardless braf status additionally fda approved update product labeling keytruda treatment patients ipilimumabrefractory advanced melanoma addition october 2015 fda granted accelerated approval keytruda dose 2 mgkg every three weeks treatment patients metastatic nsclc whose tumors express pdl1 determined fdaapproved test disease progression platinumcontaining chemotherapy across squamous nonsquamous metastatic nsclc patients egfr alk genomic tumor aberrations disease progression fdaapproved therapy aberrations prior receiving keytruda addition approving keytruda nsclc fda approved first companion diagnostic enable physicians determine level pdl1 expression patient’s tumor july 2015 merck announced ec approved keytruda treatment advanced unresectable metastatic melanoma adults october 2015 merck announced national institute health care excellence nice uk issued draft recommendation form final appraisal determination recommending keytruda firstline treatment option adults advanced melanoma addition nice issued final guidance recommending keytruda treatment advanced melanoma disease progression ipilimumab company made additional regulatory filings countries filings planned keytruda clinical development program includes studies across broad range cancer types see “research development” global sales emend prevention chemotherapyinduced postoperative nausea vomiting 535 million 2015 decline 3 reflecting 6 unfavorable effect foreign exchange partially offset higher pricing united states volume growth europe worldwide sales emend 553 million 2014 increase 9 compared 2013 including 1 unfavorable effect foreign exchange largely reflecting volume growth regions february 2016 merck announced fda approved supplemental new drug application singledose emend injection prevention delayed nausea vomiting adults receiving initial repeat courses moderately emetogenic chemotherapy approval emend injection first intravenous singledose nk1 receptor antagonist approved united states highly emetogenic chemotherapy well moderately emetogenic chemotherapy sales temodar marketed temodal outside united states treatment certain types brain tumors 312 million 2015 decline 11 compared 2014 reflecting 14 unfavorable effect foreign exchange partially offset growth emerging markets global sales temodar declined 51 350 million 2014 foreign exchange unfavorably affected global sales performance 3 2014 sales decline 2014 driven primarily generic competition united states well europe agreement generic manufacturer launched generic version temodar united states august 2013 us patent exclusivity periods otherwise expired february 2014 diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world respiratory worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis 931 million 2015 decline 15 compared 2014 including 10 unfavorable effect foreign exchange sales decline 2015 driven primarily lower volumes japan lower demand europe result generic competition global sales singulair 11 billion 2014 decline 9 compared 2013 including 5 unfavorable effect foreign exchange primarily reflecting lower sales europe result generic competition company lost market exclusivity singulair united states major international markets exception japan expects generic competition markets continue patent provides market exclusivity singulair japan expire 2016 singulair sales japan 452 million 2015 global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms 858 million 2015 decline 22 compared 2014 including 6 unfavorable effect foreign exchange decline driven primarily lower volumes united states reflecting competition alternative generic treatment options well supply constraints supply issue resolved nasonex became available october addition lower volumes pricing europe ongoing generic erosion also contributed nasonex sales decline agreement generic manufacturers able launch generic version nasonex european markets january 1 2014 generic versions nasonex since launched markets accordingly company continues experience volume pricing declines nasonex sales europe worldwide sales nasonex decreased 18 11 billion 2014 compared 2013 foreign exchange unfavorably affected global sales performance 2 2014 sales decline driven primarily lower demand united states well lower volumes europe canada resulting generic competition 2009 apotex inc apotex corp collectively apotex filed application fda seeking approval sell generic version nasonex june 2012 us district court district new jersey ruled company patent infringement suit apotex holding apotex’s generic version nasonex infringe company’s formulation patent june 2013 court appeals federal circuit issued decision affirming us district court decision company exhausted appeal options apotex yet launched generic version nasonex united states however apotex’s generic version becomes available significant losses us nasonex sales could occur us sales nasonex 449 million 2015 global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatments hypertension declined 17 2015 667 million decreased 20 2014 806 million foreign exchange unfavorably affected global sales performance 9 4 2015 2014 respectively patents provided market exclusivity cozaar hyzaar united states major international markets expired accordingly company experiencing declines cozaar hyzaar sales expects declines continue worldwide sales ophthalmic products cosopt trusopt 61 million 2015 257 million 2014 416 million 2013 declines driven largely divestiture cosopt trusopt many international markets 2014 addition sale us rights cosopt pf 2013 also contributed sales decline 2014 compared 2013 december 2015 company divested remaining ophthalmics portfolio international markets mundipharma ophthalmology products limited see note 4 consolidated financial statements products contained diversified brands include among others clarinex nonsedating antihistamine arcoxia treatment arthritis pain company markets outside united states fosamax marketed fosamac japan fosamax plus marketed fosavance throughout eu treatment case fosamax prevention osteoporosis zocor statin modifying cholesterol propecia product treatment male pattern hair loss vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd spmsd company’s joint venture sanofi pasteur results reflected equity income affiliates included income expense net see “selected joint venture affiliate information” supply sales spmsd however included merck’s sales gardasilgardasil 9 vaccines help prevent certain diseases caused certain types hpv 19 billion 2015 increase 10 compared 2014 including 1 unfavorable effect foreign exchange sales growth driven primarily higher sales united states resulting higher pricing increased volumes reflecting timing public sector purchases well increased government tenders asia pacific region partially offset declines latin america due price volume gardasil 9 merck’s 9valent hpv vaccine approved fda december 2014 use girls young women 9 26 years age gardasil 9 includes greatest number hpv types available hpv vaccine december 2015 fda approved expanded age indication gardasil 9 include use males 16 26 years age prevention anal cancers precancerous dysplastic lesions genital warts caused certain hpv types merck’s sales gardasil 17 billion 2014 decline 5 compared 2013 including 2 unfavorable effect foreign exchange decline reflects lower sales asia pacific japan canada partially offset higher government tenders brazil national immunization program well higher public sector purchases united states sales 2014 2013 included 56 million 37 million respectively purchases us centers disease control prevention cdc pediatric vaccine stockpile company party certain thirdparty license agreements respect gardasilgardasil 9 including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasilgardasil 9 sales 17 25 vary country included materials production costs merck’s sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 454 million 2015 395 million 2014 314 million 2013 sales growth 2015 compared 2014 driven higher sales united states reflecting increased volumes driven part measles outbreaks united states well higher pricing increase 2014 compared 2013 driven primarily higher sales united states reflecting approximately 30 million government purchases cdc pediatric vaccine stockpile merck’s sales mmr ii vaccine help protect measles mumps rubella 365 million 2015 326 million 2014 307 million 2013 sales growth 2015 compared 2014 driven higher demand resulting measles outbreaks united states higher pricing merck’s sales varivax vaccine help prevent chickenpox varicella 686 million 2015 672 million 2014 684 million 2013 sales growth 2015 compared 2014 reflects higher volumes certain emerging markets higher pricing united states partially offset lower volumes united states sales performance 2014 compared 2013 reflects lower sales united states largely offset growth emerging markets merck’s sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 749 million 2015 decline 2 compared 2014 including 2 unfavorable effect foreign exchange sales performance 2015 compared 2014 reflects lower volumes united states partially offset higher demand canada higher pricing united states merck’s sales zostavax 765 million 2014 increase 1 compared 2013 driven primarily higher sales asia pacific region due ongoing launches partially offset lower demand united states well canada company continuing educate us customers broad managed care coverage zostavax process obtaining reimbursement merck continuing launch zostavax outside united states merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children 610 million 2015 decline 7 compared 2014 including 3 unfavorable effect foreign exchange decline driven primarily effects public sector purchasing united states merck’s sales rotateq increased 4 2014 659 million compared 2013 primarily reflecting higher sales certain emerging markets merck’s sales pneumovax 23 vaccine help prevent pneumococcal disease declined 27 2015 542 million compared 2014 driven primarily lower demand united states due near term market dynamics sales emerging markets merck’s sales pneumovax 23 grew 14 2014 746 million compared 2013 driven primarily higher sales japan national immunization program well higher sales united states attributable price volume foreign exchange unfavorably affected sales performance 2 3 2015 2014 respectively segments company’s segments animal health alliances healthcare services segments material separate reporting prior disposition october 1 2014 company also consumer care segment sales 15 billion 2014 19 billion 2013 animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected competition frequent introduction generic products global sales animal health products 33 billion 2015 decline 4 compared 2014 including 13 unfavorable effect foreign exchange sales performance 2015 reflects volume growth companion animal products driven primarily higher sales bravecto chewable tablets dogs treat fleas ticks began launching europe united states 2014 well volume growth swine aqua products worldwide sales animal health products totaled 35 billion 2014 growth 3 compared 2013 including 2 unfavorable effect foreign exchange sales growth driven primarily higher sales companion animal products reflecting launch bravecto europe united states well higher sales poultry aqua products partially offset lower sales zilmax feed supplement beef cattle alliances segment includes results company’s relationship azlp june 30 2014 astrazeneca exercised option buy merck’s interest subsidiary merck’s interest nexium prilosec result july 1 2014 company longer records equity income azlp supply sales azlp primarily relating sales nexium prilosec terminated see “selected joint venture affiliate information” revenue azlp 463 million 2014 june 30 termination date 920 million 2013 costs expenses 100 greater 1 includes 63 million 49 million 279 million iprd impairment charges 2015 2014 2013 respectively materials production materials production costs 149 billion 2015 168 billion 2014 170 billion 2013 costs include expenses amortization intangible assets recorded connection business acquisitions totaled 47 billion 2015 42 billion 2014 47 billion 2013 addition expenses 2015 include 105 million amortization purchase accounting adjustments cubist’s inventories costs 2015 2014 2013 also include intangible asset impairment charges 45 million 11 billion 486 million respectively related marketed products intangibles see note 7 consolidated financial statements company may recognize additional noncash impairment charges future related intangibles measured fair value capitalized connection acquisitions charges could material additionally costs 2013 include 41 million intangible asset impairment charge related licensing agreement also included materials production costs associated restructuring activities amounted 361 million 482 million 446 million 2015 2014 2013 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 622 2015 compared 603 2014 615 2013 amortization intangible assets purchase accounting adjustments inventories well restructuring impairment charges noted reduced gross margin 132 percentage points 2015 136 percentage points 2014 128 percentage points 2013 excluding impacts gross margin improvement 2015 compared 2014 driven primarily favorable effects foreign exchange lower inventory writeoffs well net impact acquisitions divestitures gross margin decline 2014 compared 2013 driven primarily unfavorable effects inventory writeoffs largely related victrelis well changes product mix partially offset sale us marketing rights saphris marketing administrative marketing administrative expenses declined 11 2015 103 billion 2015 largely reflecting favorable effects foreign exchange prior year divestiture mcc additional expenses prior year related health care reform fee discussed lower restructuring costs well lower selling costs partially offset higher promotional spending largely related product launches well higher costs related january acquisition cubist higher acquisition divestiturerelated costs marketing administrative expenses decreased 3 2014 116 billion driven primarily lower selling costs promotional spending divestiture mcc favorable effects foreign exchange partially offset additional year expense related health care reform fee well higher acquisition divestiturerelated costs expenses 2015 2014 2013 include restructuring costs 78 million 200 million 145 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include 436 million 234 million 94 million acquisition divestiturerelated costs 2015 2014 2013 respectively consisting integration transaction certain costs related business acquisitions including severance costs part company’s formal restructuring programs well transaction certain costs related divestitures july 28 2014 irs issued final regulations annual nontax deductible health care reform fee imposed patient protection affordable care act based allocation company’s market share prior year branded pharmaceutical sales certain government programs final irs regulations accelerated recognition criteria fee obligation one year underlying sales used allocate fee occurred rather year fee paid result change merck recorded additional year expense 193 million 2014 research development research development expenses 67 billion 2015 decline 7 compared 72 billion 2014 driven primarily favorable effects foreign exchange expenses recognized prior year increase estimated fair value liabilities contingent consideration lower restructuring costs charge prior year related collaboration bayer ag bayer prior year divestiture mcc partially offset acquisition cubist higher licensing costs higher clinical development spending research development expenses declined 4 2014 72 billion compared 75 billion 2013 reflecting targeted reductions lower clinical development spend result portfolio prioritization cost savings resulting restructuring activities lower acquired inprocess research development iprd impairment charges partially offset higher charges increase estimated fair value liabilities contingent consideration higher restructuring costs charge related collaboration bayer research development expenses comprised costs directly incurred merck research laboratories mrl company’s research development division focuses human healthrelated activities approximately 40 billion 2015 37 billion 2014 42 billion 2013 also included research development expenses costs incurred divisions support research development activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health segments aggregate 26 billion 28 billion 29 billion 2015 2014 2013 respectively research development expenses also include iprd impairment charges 63 million 49 million 279 million 2015 2014 2013 respectively see “research development” company may recognize additional noncash impairment charges future cancellation delay pipeline programs measured fair value capitalized connection acquisitions charges could material addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection acquisitions 2015 company recorded reduction expenses 24 million decrease fair value liabilities contingent consideration 2014 recorded charge 316 million increase estimated fair value liabilities contingent consideration see note 5 consolidated financial statements research development expenses 2015 2014 2013 also reflect 52 million 283 million 101 million respectively accelerated depreciation asset abandonment costs associated restructuring activities restructuring costs restructuring costs primarily representing separation related costs associated restructuring activities 619 million 10 billion 17 billion 2015 2014 2013 respectively costs 2015 2014 2013 include 363 million 594 million 898 million respectively expenses related 2013 restructuring program remaining costs 2015 2014 nearly remaining costs recorded 2013 related merger restructuring program 2015 2014 2013 separation costs 208 million 674 million 14 billion respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated positions eliminated 2013 restructuring program approximately 2535 2015 4555 2014 1540 2013 positions eliminated merger restructuring program approximately 1235 2015 1530 2014 4475 2013 position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed income expense net income expense net 15 billion expense 2015 compared 116 billion income 2014 unfavorability driven primarily gains recognized 2014 including 112 billion gain related divestiture mcc see note 4 consolidated financial statements 741 million gain related astrazeneca’s option exercise see note 8 consolidated financial statements 480 million gain divestiture certain ophthalmic products several international markets see note 4 consolidated financial statements 204 million gain related divestiture company’s sirna therapeutics inc subsidiary see note 4 consolidated financial statements unfavorability also driven 680 million net charge recorded 2015 related settlement vioxx shareholder class action litigation see note 10 consolidated financial statements foreign exchange losses 876 million 2015 related devaluation company’s net monetary assets venezuela see note 14 consolidated financial statements lower equity income azlp partially offsetting unfavorability items 628 million loss extinguishment debt 2014 see note 9 consolidated financial statements 250 million gain 2015 sale certain migraine clinical development programs see note 4 consolidated financial statements 147 million gain divestiture company’s remaining ophthalmics business international markets see note 4 consolidated financial statements higher equity income certain research investment funds 93 million goodwill impairment charge 2014 related company’s joint venture supera see note 7 consolidated financial statements income expense net 116 billion income 2014 compared 411 million expense 2013 driven primarily gains recognized 2014 noted lower foreign exchange losses due venezuelan currency devaluation 2013 partially offset charges recognized 2014 related extinguishment debt goodwill impairment noted well lower equity income azlp 2014 segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates certain depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items including gains divestitures net charge related settlement vioxx shareholder class action litigation gain astrazeneca’s option exercise foreign exchange losses related devaluation company’s net monetary assets venezuela loss extinguishment debt additional year expense related health care reform fee reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales pharmaceutical segment profits declined 2 2015 compared 2014 primarily reflecting unfavorable effect foreign exchange pharmaceutical segment profits declined 4 2014 compared 2013 driven primarily unfavorable effects product divestitures loss market exclusivity certain products partially offset cost savings productivity measures declines segment profits 2015 2014 reflect termination company’s relationship azlp well divestiture mcc taxes income effective income tax rates 174 2015 309 2014 185 2013 reflect impacts acquisition divestiturerelated costs restructuring costs partially offset beneficial impact foreign earnings effective income tax rate 2015 also reflects favorable impact net benefit 410 million related settlement certain federal income tax issues impact net charge related settlement vioxx shareholder class action litigation fully deductible combined us federal state tax rates favorable impact tax legislation enacted fourth quarter 2015 well unfavorable effect nontax deductible foreign exchange losses related venezuela see note 14 consolidated financial statements effective income tax rate 2014 reflects impact gain divestiture mcc taxed combined us federal state tax rates addition effective income tax rate 2014 includes net tax benefit 517 million recorded connection astrazeneca’s option exercise see note 8 consolidated financial statements benefit approximately 300 million associated capital loss generated connection sale sirna see note 4 consolidated financial statements effective income tax rate 2014 also includes unfavorable impact additional year expense nontax deductible health care reform fee company recorded accordance final regulations issued third quarter irs effective income tax rate 2013 reflects net benefit 165 million settlements certain federal income tax issues net benefits reductions tax reserves upon expiration applicable statutes limitations favorable impact tax legislation enacted first quarter 2013 extended rd tax credit 2012 2013 well outofperiod net tax benefit approximately 160 million associated resolution previously disclosed legacy scheringplough federal income tax issue see note 15 consolidated financial statements company examination numerous tax authorities various jurisdictions globally ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures however one item currently discussion irs relating 2006 2008 examination company concluded position sustained upon audit however item result unfavorable outcome settlement could material adverse impact company’s financial position liquidity results operations net income attributable noncontrolling interests net income attributable noncontrolling interests 17 million 2015 14 million 2014 113 million 2013 declines 2015 2014 compared 2013 reflect part termination company’s relationship azlp resulting retirement kbi preferred stock see note 11 consolidated financial statements addition amount 2014 includes portion intangible asset goodwill impairment charges related company’s joint venture supera see note 7 consolidated financial statements attributable noncontrolling interests net income earnings per common share net income attributable merck co inc 44 billion 2015 119 billion 2014 44 billion 2013 eps 156 2015 407 2014 147 2013 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income eps prepared accordance generally accepted accounting principles united states gaap additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows 1 amount 2014 includes net benefit 517 million recorded connection astrazeneca’s option exercise 2 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement contingent consideration also excluded integration transaction certain costs associated business acquisitions including severance costs part company’s formal restructuring programs well transaction certain costs related divestitures costs considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 3 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis excluded nongaap income nongaap eps 2015 foreign exchange losses related devaluation company’s net monetary assets venezuela see note 14 consolidated financial statements net charge related settlement vioxx shareholder class action litigation see note 10 consolidated financial statements gain sale certain migraine clinical development programs see note 4 consolidated financial statements gain divestiture company’s remaining ophthalmics business international markets see note 4 consolidated financial statements well net tax benefit related settlement certain federal income tax issues see note 15 consolidated financial statements excluded nongaap income nongaap eps 2014 certain gains including gain divestiture mcc see note 4 consolidated financial statements gain recognized conjunction astrazeneca’s option exercise including related net tax benefit transaction see note 8 consolidated financial statements gain divestiture certain ophthalmic products several international markets see note 4 consolidated financial statements well loss extinguishment debt see note 9 consolidated financial statements additional year expense related health care reform fee discussed tax benefit sale sirna tax benefits settlements certain federal income tax issues see note 15 consolidated financial statements research development chart reflecting company’s current research pipeline february 19 2016 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally keytruda fdaapproved antipd1 programmed death receptor1 therapy clinical development expanded indications different cancer types keytruda currently approved treatment melanoma advanced melanoma nsclc see “pharmaceutical segment” december 2015 merck announced results pivotal keynote010 study evaluate potential immunotherapy compared chemotherapy based prospective measurement pdl1 expression patients advanced nsclc phase 23 study keytruda significantly improved overall survival compared chemotherapy patients level pdl1 expression based data merck submitted supplemental biologics license application fda filed marketing authorization application ema november 2015 merck announced fda granted breakthrough therapy designation keytruda treatment patients microsatellite instability high metastatic colorectal cancer fda’s breakthrough therapy designation intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints keytruda previously granted breakthrough therapy status advanced melanoma advanced nsclc keytruda clinical development program consists 200 clinical trials including 100 trials combine keytruda cancer treatments studies encompass 30 cancer types including bladder colorectal esophageal gastric head neck melanoma multiple myeloma nonsmallcell lung triple negative breast several currently phase 3 clinical development mk6072 bezlotoxumab investigational antitoxin prevention c difficile infection recurrence currently review fda ema january 2016 merck announced fda accepted review biologics license application bla bezlotoxumab granted priority review prescription drug user fee act action date july 23 2016 september 2015 merck announced two pivotal phase 3 clinical studies bezlotoxumab met primary efficacy endpoint reduction c difficile recurrence week 12 compared placebo used conjunction standard care antibiotics treatment c difficile company also seeking approval eu intends file canada 2016 currently therapies approved prevention recurrent disease caused c difficile mk1293 insulin glargine candidate treatment patients type 1 type 2 diabetes developed collaboration samsung bioepis december 2015 company submitted application regulatory approval eu plans submit mk1293 fda 2016 mk5172a zepatier currently review eu treatment chronic hcv oncedaily fixeddose combination tablet containing ns5a inhibitor elbasvir 50 mg ns34a protease inhibitor grazoprevir 100 mg zepatier approved fda january 2016 treatment adult patients chronic hcv gt1 gt4 infection without ribavirin v419 investigational pediatric hexavalent combination vaccine dtap5ipvhibhepb review fda developed approved commercialized partnership merck sanofi pasteur vaccine designed help protect six important diseases diphtheria tetanus pertussis whooping cough polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hib hepatitis b november 2 2015 fda issued crl respect bla v419 companies reviewing crl plan communication fda february 2016 ec granted marketing authorization v419 prophylaxis diphtheria tetanus pertussis hepatitis b poliomyelitis invasive disease caused hib infants toddlers age 6 weeks v419 marketed vaxelis eu spmsd company’s joint venture sanofi pasteur addition candidates regulatory review company several drug candidates phase 3 clinical development addition keytruda programs discussed company anticipates filing applications regulatory approval fda respect certain candidates 2016 including mk1293 noted mk0822 odanacatib oral onceweekly investigational treatment patients osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis september 2014 merck announced data pivotal phase 3 fracture outcomes study odanacatib postmenopausal women osteoporosis longterm odanacatib fracture trial loft odanacatib met primary endpoints significantly reduced risk three types osteoporotic fractures radiographicallyassessed vertebral clinical hip clinical nonvertebral compared placebo also reduced risk secondary endpoint clinical vertebral fractures addition treatment odanacatib led progressive increases five years bone mineral density lumbar spine total hip rates adverse events overall loft generally balanced patients taking odanacatib placebo adjudicated events morphealike skin lesions atypical femoral fractures occurred often odanacatib group placebo group adjudicated major adverse cardiovascular events generally balanced overall treatment groups numerically adjudicated stroke events odanacatib placebo adjudicated atrial fibrillation reported often odanacatib group placebo group numeric imbalance mortality observed numeric difference appear related particular reported cause causes death merck continues collect data blinded extension study planning additional analyses data trial including independent readjudication major adverse cardiovascular events mace support regulatory submissions merck plans submit new drug application nda fda odanacatib 2016 following completion independent adjudication analysis mace merck also plans submit applications ema ministry health labour welfare japan mk3102 omarigliptin investigational onceweekly dpp4 inhibitor development treatment adults type 2 diabetes september 2015 company announced omarigliptin achieved primary efficacy endpoint phase 3 study omarigliptin found noninferior januvia reducing patients’ a1c estimate person’s blood glucose twoto threemonth period levels baseline similar a1c reductions achieved groups headtohead study designed evaluate onceweekly treatment omarigliptin 25 mg compared 100 mg januvia daily results presented oral session 51st european association study diabetes annual meeting also september 2015 merck announced japanese pharmaceuticals medical devices agency approved marizev omarigliptin 25 mg 125 mg tablets japan first country approved omarigliptin merck plans submit omarigliptin regulatory approval united states 2016 worldwide regulatory submissions follow mk8835 ertugliflozin investigational oral sglt2 inhibitor evaluated treatment type 2 diabetes collaboration pfizer inc ertugliflozin also studied combination januvia sitagliptin metformin merck expects submit applications regulatory approval united states ertugliflozin two fixeddose combination tablets end 2016 mk8237 investigational allergy immunotherapy tablet house dust mite allergy part north america partnership merck alkabello merck plans submit nda fda mk8237 first half 2016 mk8931 verubecestat merck’s novel investigational oral ßamyloid precursor protein sitecleaving enzyme bace inhibitor treatment alzheimer’s disease studied phase 3 trial apecs designed evaluate safety efficacy mk8931 versus placebo patients amnestic mild cognitive impairment due alzheimer’s disease also known prodromal alzheimer’s disease mk8931 also studied another phase 23 randomized placebocontrolled study patients mildtomoderate alzheimer’s disease epoch study completed enrollment fourth quarter 2015 estimated reach primary trial completion mid2017 mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein cetp development raising hdlc reducing ldlc anacetrapib evaluated 30000 patient eventdriven cardiovascular clinical outcomes trial sponsored oxford university reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease projected conclude early 2017 november 2015 merck announced data monitoring committee dmc reveal outcomes study completed planned review unblinded study data recommended study continue changes dmc reviewed safety efficacy data study included assessment futility merck remains blinded actual results analysis reveal safety efficacy data reveal steering committee merck continue monitor progress study additional interim efficacy analyses planned mk7655a combination relebactam investigational betalactamase inhibitor imipenemcilastatin approved carbapenem antibiotic fda designated combination qualified infectious disease product designated fast track status treatment hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia complicated intraabdominal infections complicated urinary tract infections mk8228 letermovir investigational oral oncedaily antiviral candidate prevention treatment human cytomegalovirus infection letermovir received orphan drug status eu united states also granted fast track designation mk8342b referred next generation ring investigational combination etonogestrel 17βestradiol vaginal ring contraception treatment dysmenorrhea women seeking contraception mk0431j investigational fixeddose combination sitagliptin ipragliflozin development commercialization japan collaboration astellas pharma inc astellas ipragliflozin sglt2 inhibitor codeveloped astellas kotobuki pharmaceutical co ltd kotobuki approved use japan copromoted merck kotobuki v920 investigational rvsvzebov ebola vaccine candidate studied large scale phase 23 clinical trials currently underway west africa november 2014 merck newlink genetics announced exclusive licensing collaboration agreement investigational ebola vaccine december 2015 merck announced application emergency use assessment listing eual v920 accepted review world health organization according eual process designed expedite availability vaccines needed public health emergencies another outbreak ebola procedure intended assist united nations’ procurement agencies member states acceptability using vaccine candidate emergencyuse setting eual designation prequalification rather special procedure implemented outbreak disease high rates morbidity andor mortality lack treatment andor prevention options instances may recommend making vaccine available limited time clinical trial data gathered formal regulatory agency review national regulatory authority decision grant v920 eual status based data regarding quality safety efficacyeffectiveness well riskbenefit analysis emergency use eual designation allows emergency use vaccine remains investigational yet licensed commercial distribution v212 inactivated varicella zoster virus vaccine development prevention herpes zoster company conducting two phase 3 trials one autologous hematopoietic cell transplant patients solid tumor malignancies undergoing chemotherapy hematological malignancies mk1439 doravirine investigational oncedaily oral nextgeneration nonnucleoside reverse transcriptase inhibitor developed merck treatment hiv1 infection 2015 company also divested discontinued certain drug candidates july 2015 merck allergan plc allergan entered agreement pursuant allergan acquired exclusive worldwide rights mk1602 mk8031 merck’s investigational small molecule oral cgrp receptor antagonists developed treatment prevention migraine see note 4 consolidated financial statements mk4261 surotomycin investigational oral antibiotic development treatment c difficile associated diarrhea merck acquired surotomycin part purchase cubist second quarter 2015 company received unfavorable efficacy data randomized doubleblinded activecontrolled study patients c difficile associated diarrhea evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge 2015 see note 7 consolidated financial statements mk2402 bevenopran oral investigational therapy development potential treatment opioidinduced constipation patients chronic noncancer pain merck acquired bevenopran part purchase cubist company made decision continue development program seeking outlicense asset mk8962 corifollitropin alfa injection investigational fertility treatment controlled ovarian stimulation women participating assisted reproductive technology july 2014 merck received crl fda nda corifollitropin alfa injection merck made decision discontinue development corifollitropin alfa injection united states business reasons corifollitropin alfa injection marketed elonva certain markets outside united states company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities company committed making externally sourced programs greater component pipeline strategy renewed focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company continues evaluate certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases neurodegenerative diseases osteoporosis respiratory diseases women’s health acquired inprocess research development connection acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2015 balance iprd 42 billion amount 32 billion relates clinical development program mk3682 company acquired 2014 acquisition idenix pharmaceuticals inc idenix 2015 2014 2013 approximately 280 million 654 million 346 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2015 company recorded 63 million iprd impairment charges within research development expenses amount 50 million relates surotomycin clinical development program obtained connection acquisition cubist 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted 2014 company recorded 49 million iprd impairment charges primarily result changes cash flow assumptions certain compounds obtained connection supera joint venture well discontinuation certain animal health programs 2013 company recorded 279 million iprd impairment charges amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2015 estimated costs complete projects acquired connection acquisitions phase 3 development human health analogous stage development animal health approximately 480 million acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent significant transactions described merck actively monitoring landscape growth opportunities meet company’s strategic criteria january 2016 merck acquired iomet privately held ukbased drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism total purchase consideration transaction included upfront cash payment 150 million future additional milestone payments 250 million contingent upon certain clinical regulatory milestones achieved acquisition provides merck iomet’s preclinical pipeline ido indoleamine23dioxygenase 1 tdo tryptophan23dioxygenase dualacting idotdo inhibitors company process determining preliminary fair value assets acquired liabilities assumed total consideration transferred business acquisition transaction closed january 11 2016 accordingly results operations acquired business included company’s results operations beginning date july 2015 merck acquired ccam privately held biopharmaceutical company focused discovery development novel cancer immunotherapies acquisition provides merck ccam’s lead pipeline candidate cm24 novel monoclonal antibody targeting immune checkpoint protein ceacam1 evaluated phase 1 study treatment advanced recurrent malignancies including melanoma nonsmallcell lung bladder gastric colorectal ovarian cancers total purchase consideration transaction 201 million included upfront payment 96 million cash future additional payments 510 million associated attainment certain clinical development regulatory commercial milestones company determined fair value 105 million acquisition date transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date merck recognized intangible asset iprd 180 million net assets 7 million excess consideration transferred fair value net assets acquired 14 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflects stage development project associated probability successful completion asset’s probabilityadjusted future net cash flows discounted present value using discount rate 105 fair value contingent consideration determined utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment also utilizing discount rate 105 actual cash flows likely different assumed transaction closed july 31 2015 accordingly results operations acquired business included company’s results operations beginning date february 2015 merck ngm privately held biotechnology company entered multiyear collaboration research discover develop commercialize novel biologic therapies across wide range therapeutic areas collaboration includes multiple drug candidates currently preclinical development ngm including np201 evaluated treatment diabetes obesity nonalcoholic steatohepatitis ngm lead research development existing preclinical candidates autonomy identify pursue discovery stage programs discretion merck option license resulting ngm programs following human proof concept trials merck exercises option merck lead global product development commercialization resulting products approved terms agreement merck made upfront payment ngm 94 million included research development expenses purchased 15 equity stake ngm 106 million merck committed 250 million fund ngm’s efforts initial fiveyear term collaboration potential additional funding certain conditions met prior merck initiating phase 3 study licensed program ngm may elect either receive milestone royalty payments certain cases cofund development participate global cost revenue share arrangement 50 agreement also provides ngm option participate copromotion cofunded program united states merck option extend research agreement two additional twoyear terms party certain termination rights agreement event uncured material breach party additionally merck certain termination rights event occurrence certain defined conditions upon termination event depending circumstances parties varying rights obligations respect continued development commercialization compounds discovered agreement certain related payment obligations january 2015 merck acquired cubist leader development therapies treat serious infections caused broad range bacteria total consideration 83 billion see note 4 consolidated financial statements transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date estimated fair values identifiable intangible assets related currently marketed products determined using income approach company’s estimates projected net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing discount rate 8 actual cash flows likely different assumed significant intangible assets relate zerbaxa cubicin sivextro company recorded fair value incomplete research project surotomycin mk4261 time acquisition reached technological feasibility alternative future use amount capitalized accounted indefinitelived intangible asset subject impairment testing completion abandonment project fair value surotomycin determined using income approach probabilityadjusted future net cash flows discounted present value using discount rate 9 second quarter 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge connection cubist acquisition liabilities recorded potential future consideration contingent upon achievement future salesbased milestones fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate 8 used present value probabilityweighted cash flows changes inputs could result different fair value measurement selected joint venture affiliate information astrazeneca lp 1982 merck entered agreement astra ab astra develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc ami merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc kbi contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp partnership exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp azlp upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products revenue 463 million 2014 920 million 2013 primarily relating sales nexium well prilosec addition merck earned certain partnership returns azlp 192 million 2014 352 million 2013 recorded equity income affiliates june 30 2014 astrazeneca exercised option purchase merck’s interest kbi 419 million cash amount 327 million reflects estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized time income expense net contingency eliminated sales occur 2015 2014 182 million 140 million respectively deferred income recognized bringing cumulative deferred income recognized december 31 2015 322 million remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net result astrazeneca’s option exercise company’s remaining interest azlp redeemed accordingly company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion kbi preferred stock see note 11 consolidated financial statements elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance result astrazeneca exercising option july 1 2014 company longer records equity income azlp supply sales azlp terminated sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows simcere msd shanghai pharmaceutical co ltd march 2015 merck simcere pharmaceutical co ltd simcere executed restructuring agreement merck agreed transfer 51 ownership interest simcere msd shanghai pharmaceutical co ltd joint venture simcere result merck deconsolidated joint venture recorded net loss 7 million income expense net 2015 capital expenditures capital expenditures 13 billion 2015 13 billion 2014 15 billion 2013 expenditures united states 879 million 2015 873 million 2014 902 million 2013 depreciation expense 16 billion 2015 25 billion 2014 22 billion 2013 11 billion 20 billion 15 billion respectively applied locations united states total depreciation expense 2015 2014 2013 included accelerated depreciation 174 million 900 million 577 million respectively associated restructuring activities see note 3 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders cash provided operating activities 124 billion 2015 79 billion 2014 117 billion 2013 decline cash provided operating activities 2014 compared 2013 reflects approximately 50 billion taxes paid divestiture mcc cash provided operating activities 2013 includes payment made company 480 million connection settlement enhance litigation cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures portion treasury stock purchases dividends paid shareholders cash used investing activities 48 billion 2015 compared 374 million 2014 primarily reflecting cash received 2014 divestiture mcc higher cash received 2014 dispositions businesses connection astrazeneca’s option exercise well cash used acquisition cubist 2015 partially offset lower purchases securities investments higher proceeds sales securities investments cash used 2014 acquisition idenix cash payment made 2014 upon formation collaboration bayer cash used investing activities 374 million 2014 compared 31 billion 2013 reflecting cash received 2014 divestiture mcc dispositions businesses well cash received connection astrazeneca’s option exercise partially offset higher purchases lower proceeds sale securities investments cash used acquisition idenix cash payment made upon formation collaboration bayer cash used financing activities 53 billion 2015 compared 151 billion 2014 driven primarily higher proceeds issuance debt lower payments debt lower purchases treasury stock partially offset lower proceeds exercise stock options decrease shortterm borrowings cash used financing activities 151 billion 2014 compared 60 billion 2013 driven primarily higher payments debt lower proceeds issuance debt higher purchases treasury stock decrease shortterm borrowings partially offset higher proceeds exercise stock options 2015 company recorded charges 876 million related devaluation net monetary assets venezuela large majority cash see note 14 consolidated financial statements december 31 2015 total worldwide cash investments 265 billion including 134 billion cash equivalents shortterm investments 130 billion longterm investments generally 8090 cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated form dividends company records us deferred tax liabilities certain unremitted earnings amounts earned overseas expected indefinitely reinvested outside united states accrual us taxes provided amount cash investments held us foreign subsidiaries fluctuates due variety factors including timing receipt payments normal course business cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures portion treasury stock purchases dividends paid shareholders company’s contractual obligations december 31 2015 follows 1 includes future bulk supply purchases company committed connection certain divestitures 2 january 2016 850 million debt matured repaid 3 company anticipates receiving insurance proceeds approximately 380 million partially fund liability see note 10 consolidated financial statements 4 december 31 2015 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 42 billion including 12 billion reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2016 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments also excluded research development obligations potential future funding commitments approximately 120 million investments research venture capital funds loans payable current portion longterm debt reflects 226 million longdated notes subject repayment option holders required funding obligations 2016 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 50 million us pension plans 150 million international pension plans 60 million postretirement benefit plans 2016 august 2014 company terminated existing credit facility entered 60 billion fiveyear credit facility matures august 2019 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes consisting 300 million principal amount floating rate notes due 2017 700 million principal amount floating rate notes due 2020 125 billion principal amount 185 notes due 2020 125 billion aggregate principal amount 235 notes due 2022 25 billion aggregate principal amount 275 notes due 2025 20 billion aggregate principal amount 370 notes due 2045 company used portion net proceeds offering 79 billion repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including repurchases company’s common stock repayment outstanding commercial paper borrowings debt maturities also february 2015 company redeemed 19 billion legacy cubist debt acquired acquisition see note 4 consolidated financial statements december 2015 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2015 board directors declared quarterly dividend 046 per share company’s common stock payable january 2016 march 2015 merck’s board directors authorized additional purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions company purchased 42 billion common stock 75 million shares treasury 2015 company approximately 85 billion remaining march share repurchase program company purchased 77 billion 65 billion common stock 2014 2013 respectively previously authorized share repurchase programs financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates primary objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premiums writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined estimated 502 million 660 million december 31 2015 2014 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar would yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows primary objective balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level cash flows contracts reported operating activities consolidated statements cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly strengthened 10 currency exposures company december 31 2015 2014 income taxes would declined approximately 45 million 2015 25 million 2014 company net long receivable position relative major foreign currencies consideration forward contracts uniform strengthening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate addition official rate 630 vef per us dollar venezuelan government maintains two official rates sistema complementario de administracion de divisas sicad sistema marginal de divisas simadi sicad simadi average rates published central bank venezuela december 31 2015 average exchange rates inferred 1350 vef per us dollar 19870 vef per us dollar respectively historically venezuelan government indicated essential goods including food medicine would remain official rate 630 vef per us dollar second quarter 2015 upon evaluation evolving economic conditions venezuela volatility country combined decline transactions settled official rate company determined unlikely outstanding net monetary assets would settled official rate accordingly second quarter 2015 company recorded charge 715 million within income expense net devalue net monetary assets venezuela amount represented company’s estimate us dollar amount would ultimately collected third quarter 2015 company recorded additional exchange losses 138 million reflecting ongoing effect translating transactions net monetary assets consistent second quarter result deterioration economic conditions venezuela continued declines transactions settled official rate fourth quarter 2015 company began using simadi rate report venezuelan operations company also revalued remaining net monetary assets simadi rate resulted additional charge fourth quarter 2015 161 million accordingly december 31 2015 company approximately 20 million us dollar equivalent simadi rate remaining net monetary assets venezuelan entities large majority cash merck’s sales venezuela approximately 625 million 2015 company reduced operations venezuela however merck continues work government venezuela import essential medicines country result transitioning simadi rate fourth quarter 2015 purposes reporting venezuelan operations merck anticipates sales venezuela 2016 de minimis company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income “oci” remains accumulated comprehensive income “aoci” either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2015 company party 30 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2015 2014 would positively affected net aggregate market value instruments 12 billion 10 billion respectively one percentage point decrease december 31 2015 2014 would negatively affected net aggregate market value 15 billion 12 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions determine whether acquisitions qualify business combinations asset acquisitions company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines acquisition consists inputs well processes applied inputs ability create outputs acquisition determined business combination business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations company determines transaction accounted acquisition business transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense acquisition date fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized title risk loss passes customer typically time delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2015 2014 2013 summarized information changes aggregate indirect customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 145 million 27 billion respectively december 31 2015 112 million 20 billion respectively december 31 2014 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 15 2015 17 2014 15 2013 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2015 2014 63 million 74 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2015 2014 approximately 245 million 215 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 8 million 2015 estimated 59 million aggregate years 2016 2020 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 109 million 125 million december 31 2015 2014 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 57 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 299 million 2015 278 million 2014 276 million 2013 december 31 2015 407 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 253 million 2015 169 million 2014 716 million 2013 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension postretirement benefit plans largely attributable changes discount rate affecting net amortization company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2015 discount rates company’s us pension postretirement benefit plans ranged 380 480 compared range 320 420 december 31 2014 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2016 company’s expected rate return range 730 875 range 2015 us pension postretirement benefit plans company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 46 million favorable unfavorable impact net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 45 million favorable unfavorable impact net periodic benefit cost required funding obligations 2016 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2015 foreign earnings 592 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability recently issued accounting standards may 2014 financial accounting standards board fasb issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements august 2015 fasb approved oneyear deferral effective date making guidance effective interim annual periods beginning 2018 reporting entities may choose adopt standard original effective date company currently assessing impact adoption consolidated financial statements april 2015 fasb issued accounting guidance requires debt issuance costs presented direct deduction carrying amount debt balance sheet opposed presented deferred charge new guidance effective interim annual periods beginning 2016 december 31 2015 company debt issuance costs recorded deferred charges approximately 100 million january 2016 fasb issued revised guidance accounting reporting financial instruments new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income new guidance also simplifies impairment testing equity investments without readily determinable fair values changes certain disclosure requirements guidance effective interim annual periods beginning 2018 early adoption permitted company currently assessing impact adoption consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities sales vaccines major european markets marketed company’s sanofi pasteur msd spmsd joint venture termination december 31 2016 beginning 2017 merck record vaccine sales european markets previously part joint venture company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients merck’s alliances segment primarily includes results company’s relationship astrazeneca lp termination relationship june 30 2014 october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products overview 2016 merck continued execute innovation strategy company’s sustained investment research yielded number recent approvals regulatory milestones across various therapeutic areas company received several approvals 2016 include expanded indications keytruda company’s antipd1 programmed death receptor1 therapy approved us food drug administration fda firstline treatment metastatic nonsmallcell lung cancer nsclc well treatment head neck cancer additionally 2016 fda european commission ec approved zepatier oncedaily single tablet combination therapy treatment chronic hepatitis c virus hcv genotype gt 1 gt4 infection ribavirin certain patient populations worldwide sales 398 billion 2016 increase 1 compared 2015 including 2 unfavorable effect foreign exchange sales growth driven oncology hcv vaccine hospital acute care products reflecting part ongoing launches keytruda zepatier bridion well positive performance merck’s animal health business growth areas largely offset effects generic biosimilar competition resulted declines products remicade nasonex business development remains important component company’s overall strategy merck seeks identify best external innovation augment portfolio pipeline particular focus earlytomidstage pipeline assets merck looks growth opportunities meet company’s strategic criteria looking best scientific opportunities merck remains financially disciplined pursuing business opportunities company believes contribute longterm growth sustainable value shareholders january 2016 merck acquired iomet pharma ltd iomet drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism july 2016 merck acquired afferent pharmaceuticals afferent privately held pharmaceutical company focused development therapeutic candidates targeting p2x3 receptor treatment common poorlymanaged neurogenic conditions chronic cough addition 2016 merck entered strategic collaboration license agreement moderna therapeutics moderna develop commercialize novel messenger rna mrnabased personalized cancer vaccines merck continues support inline portfolio well ongoing upcoming product launches keytruda launching around world multiple indications 2016 merck achieved multiple additional regulatory milestones keytruda including approval fda firstline treatment patients nsclc whose tumors high pdl1 expression tumor proportion score tps 50 determined fdaapproved test egfr alk genomic tumor aberrations also treatment patients recurrent metastatic head neck squamous cell carcinoma disease progression platinumcontaining chemotherapy additionally 2016 ec approved keytruda treatment locally advanced metastatic nsclc patients whose tumors express pdl1 received least one prior chemotherapy regimen january 2017 ec approved keytruda firstline treatment metastatic nsclc adults whose tumors high pdl1 expression tps 50 egfr alk positive tumor mutations additionally company continuing launch zepatier united states emerging markets launching european union eu japan merck focusing research efforts therapeutic areas believes impact human health oncology diabetes cardiometabolic disease resistant microbial infection alzheimer’s disease addition recent regulatory approvals discussed company continued advance programs latestage pipeline several regulatory submissions merck five supplemental biologics license applications sbla priority review fda keytruda including use combination chemotherapy firstline treatment patients metastatic advanced nonsquamous nsclc regardless pdl1 expression egfr alk genomic tumor aberrations treatment patients classical hodgkin lymphoma treatment previously treated patients advanced microsatellite instabilityhigh cancer firstline treatment patients locally advanced metastatic urothelial cancer including bladder cancers secondline treatment patients locally advanced metastatic urothelial cancer disease progression platinumcontaining chemotherapy merck driving broad immunooncology development program investing longterm potential keytruda become foundational treatment range cancers keytruda clinical development program includes 400 clinical trials 30 tumor types 200 trials combine keytruda cancer treatments mk1293 insulin glargine candidate treatment patients type 1 type 2 diabetes developed collaboration also review fda addition phase 3 programs keytruda therapeutic areas breast colorectal esophageal gastric hepatocellular multiple myeloma renal cancers company also candidates phase 3 clinical development several therapeutic areas see “research development” past year company continued focus productivity improvements looking opportunities reallocate resources across portfolio grow strongest brands support promising assets pipeline marketing administrative expenses declined 2016 compared 2015 reflecting part continued focus company prioritizing resources highest growth areas research development expenses 2016 reflect increased clinical development spending company continues invest pipeline november 2016 merck’s board directors raised company’s quarterly dividend 047 per share 046 per share 2016 company returned 86 billion shareholders dividends share repurchases january 2017 merck entered settlement license agreement resolve worldwide patent infringement litigation related keytruda connection settlement merck recorded pretax charge 625 million fourth quarter 2016 see note 10 consolidated financial statements earnings per common share assuming dilution attributable common shareholders eps 2016 141 compared 156 2015 eps years reflect impact acquisition divestiturerelated costs including charge 2016 related uprifosbuvir clinical development program well restructuring costs certain items nongaap eps excludes items 378 2016 359 2015 see “nongaap income nongaap eps” operating results sales worldwide sales 398 billion 2016 increase 1 compared 2015 foreign exchange unfavorably affected global sales performance 2 2016 includes lower benefit revenue hedging activities compared 2015 revenue growth primarily reflects higher sales oncology franchise largely keytruda launch hcv treatment zepatier growth vaccine products including gardasilgardasil 9 varivax pneumovax 23 also contributing sales growth 2016 higher sales hospital acute care products including bridion noxafil growth within diabetes franchise januvia janumet well higher sales animal health products particularly bravecto increases partially offset sales declines attributable ongoing effects generic biosimilar competition certain products including remicade nasonex along products within diversified brands declines isentress pegintron dulera inhalation aerosol also partially offset revenue growth 2016 sales performance 2016 reflects decline approximately 625 million due reduced operations company venezuela result evolving economic conditions volatility country sales united states 185 billion 2016 increase 5 compared 175 billion 2015 within pharmaceutical segment sales united states grew 5 2016 driven primarily launches zepatier bridion along higher sales keytruda gardasilgardasil 9 partially offset lower sales nasonex cubicin dulera inhalation aerosol isentress international sales 213 billion 2016 decline 3 compared 220 billion 2015 foreign exchange unfavorably affected international sales performance 4 2016 international sales within pharmaceutical segment declined 3 2016 including 3 unfavorable effect foreign exchange largely reflecting declines certain emerging markets offset increase japan sales emerging markets 67 billion 2016 decline 9 including 6 unfavorable effect foreign exchange driven primarily reduced operations venezuela partially offset growth markets sales japan grew 6 2016 28 billion includes 10 favorable effect foreign exchange excluding favorable effect foreign exchange sales decline japan largely driven loss market exclusivity singulair combined ongoing generic erosion products within diversified brands partially offset higher sales belsomra sales europe 77 billion 2016 essentially flat compared 2015 including 2 unfavorable effect foreign exchange excluding unfavorable effect foreign exchange sales performance europe primarily reflects volume growth keytruda cubicin simponi adempas liptruzet januvia franchise partially offset ongoing biosimilar competition generic erosion certain products particularly remicade pricing pressures region total international sales represented 54 56 total sales 2016 2015 respectively global efforts toward health care cost containment continue exert pressure product pricing market access worldwide united states health care reform contributing increase number patients medicaid program sales pharmaceutical products subject substantial rebates many international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2016 company anticipates pricing actions austerity measures continue negatively affect revenue performance 2017 worldwide sales 395 billion 2015 decline 6 compared 2014 including 6 unfavorable effect foreign exchange acquisition cubist pharmaceuticals inc cubist 2015 divestiture merck’s consumer care mcc business 2014 well product divestitures termination company’s relationship astrazeneca lp azlp also 2014 discussed net unfavorable impact sales approximately 3 addition sales performance 2015 reflects declines pegintron victrelis remicade pneumovax 23 nasonex vytorin declines partially offset volume growth keytruda januvia janumet gardasilgardasil 9 noxafil simponi implanonnexplanon invanz dulera inhalation aerosol bridion well volume growth animal health products higher thirdparty manufacturing sales january 2015 company acquired cubist contributed sales 13 billion merck’s revenues 2015 2014 company divested certain ophthalmic products several international markets closed july 1 2014 addition october 1 2014 company divested mcc business including prescription rights claritin afrin sales decline 2015 attributable divestitures approximately 19 billion 15 billion related consumer care segment 400 million related pharmaceutical segment also 2014 company sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults resulted revenue 232 million additionally company’s relationship azlp terminated june 30 2014 therefore effective july 1 2014 company longer records supply sales azlp supply sales 463 million 2014 termination date reflected alliances segment sales company’s products follows 1 sales cubicin 2015 represent sales subsequent cubist acquisition date sales cubicin 2014 reflect sales japan pursuant previously existing licensing agreement 2 amounts reflect sales vaccines sold major european markets company’s joint venture spmsd results reflected equity income affiliates included income expense net amounts however reflect supply sales spmsd december 31 2016 merck sanofi pasteur terminated spmsd joint venture see note 8 consolidated financial statements 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health healthcare services alliances well consumer care divestiture october 1 2014 alliances segment includes revenue company’s relationship azlp termination june 30 2014 5 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2016 2014 also includes approximately 170 million 232 million respectively connection sale marketing rights certain products pharmaceutical segment primary care women’s health cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy medicines lowering ldl cholesterol 37 billion 2016 decline 2 compared 2015 including 1 unfavorable effect foreign exchange addition 2016 company recorded sales 146 million atozet medicine lowering ldl cholesterol company markets certain countries outside united states global sales ezetimibe family including atozet 38 billion 2016 growth 1 compared 2015 reflecting volume growth europe higher pricing united states largely offset lower sales venezuela due reduced operations country lower volumes united states reflecting part generic competition zetia agreement generic manufacturer launched generic version zetia united states december 2016 company experiencing rapid decline us zetia sales company anticipates decline accelerate future periods us patent exclusivity periods zetia vytorin otherwise expire april 2017 company anticipates declines us zetia vytorin sales thereafter us sales zetia vytorin 16 billion 473 million respectively 2016 company market exclusivity major european markets ezetrol april 2018 inegy april 2019 combined worldwide sales ezetimibe family 38 billion 2015 decline 9 compared 2014 including 8 unfavorable effect foreign exchange sales decline driven primarily lower volumes ezetrol canada lost market exclusivity september 2014 well lower volumes united states partially offset higher pricing united states pursuant collaboration merck bayer ag bayer see note 3 consolidated financial statements merck lead commercial rights adempas novel cardiovascular drug treatment pulmonary arterial hypertension countries outside americas bayer lead rights americas including united states 2016 merck began promoting distributing adempas europe transition merck territories continue 2017 merck recorded sales adempas 169 million 2016 includes sales merck’s marketing territories well merck’s share profits sale adempas bayer’s marketing territories september 2016 merck sold marketing rights zontivity united states canada aralez pharmaceuticals inc 25 million upfront payment royalties graduated rates plus potential future consideration dependent upon achievement certain aggregate annual salesbased milestones previously march 2016 following several business decisions reduced sales expectations zontivity united states europe company lowered cash flow projections zontivity company utilized market participant assumptions considered several different scenarios determine fair value intangible asset related zontivity compared related carrying value resulted impairment charge 252 million recorded materials production costs 2016 diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes 61 billion 2016 increase 2 compared 2015 sales growth driven primarily higher volumes united states europe canada partially offset pricing pressures united states europe lower sales venezuela due company’s reduced operations country combined global sales januvia janumet 60 billion 2015 essentially flat compared 2014 including 7 unfavorable effect foreign exchange sales performance reflects higher volumes pricing united states well volume growth emerging markets europe volume declines comarketed sitagliptin japan due timing sales licensee partially offset growth 2015 general medicine women’s health worldwide sales nuvaring vaginal contraceptive product 777 million 2016 increase 6 compared 2015 732 million 2015 increase 1 compared 2014 foreign exchange unfavorably affected global sales performance 1 7 2016 2015 respectively sales growth years largely reflects higher pricing united states volume declines europe partially offset revenue growth 2016 august 2016 us district court ruled company’s delivery system patent nuvaring invalid company appealing verdict us court appeals federal circuit however given us district court’s decision may generic entrants us market advance april 2018 patent expiration occur company anticipates significant decline us nuvaring sales thereafter us sales nuvaring 576 million 2016 result unfavorable us district court decision company evaluated intangible asset related nuvaring impairment concluded impaired intangible asset value nuvaring 319 million december 31 2016 worldwide sales implanonnexplanon singlerod subdermal contraceptive implants grew 606 million 2016 increase 3 compared 2015 including 3 unfavorable effect foreign exchange sales growth reflects higher demand united states partially offset declines certain emerging markets particularly venezuela implanonnexplanon sales rose 588 million 2015 17 increase compared 2014 including 6 unfavorable effect foreign exchange increase driven primarily higher demand united states emerging markets global sales dulera inhalation aerosol combination medicine treatment asthma 436 million 2016 decline 19 compared 2015 including 1 unfavorable effect foreign exchange decline driven lower sales united sales reflecting competitive pricing pressures partially offset higher demand worldwide sales dulera inhalation aerosol grew 16 2015 536 million driven primarily higher demand united states global sales follistim aq marketed countries outside united states puregon fertility treatment 355 million 2016 decline 7 compared 2015 including 2 unfavorable effect foreign exchange sales decline primarily reflects lower volumes europe due part supply issues lower demand certain emerging markets worldwide sales follistim aq 383 million 2015 decline 7 compared 2014 reflecting 9 unfavorable effect foreign exchange offset higher pricing united states 2016 company determined business reasons would terminate north america partnership agreement alkabelló included grastek ragwitek allergy immunotherapy tablets sublingual use decision due efficacy safety concerns tablets merck provided alkabelló six months’ notice terminating agreement therefore compounds returned alkabelló connection decision company wroteoff 95 million intangible assets related products see note 7 consolidated financial statements hospital specialty hepatitis global sales zepatier 555 million 2016 zepatier approved fda january 2016 treatment adult patients chronic hcv gt1 gt4 infection ribavirin certain patient populations zepatier approved ec july 2016 became available european markets late november 2016 launches expected continue across eu 2017 company also launching zepatier japan emerging markets worldwide sales pegintron treatment chronic hcv declined 65 2016 63 million decreased 52 2015 182 million declines driven lower volumes nearly regions availability newer therapeutic options resulted continued loss market share global sales victrelis oral medicine treatment chronic hcv 18 million 2015 decline 89 compared sales 153 million 2014 driven lower volumes europe emerging markets availability newer therapeutic options resulted continued loss market share sale victrelis de minimis 2016 hiv worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection 14 billion 2016 decline 8 compared 2015 including 2 unfavorable effect foreign exchange sales decline driven primarily lower volumes united states well lower demand pricing europe due competitive pressures partially offset favorable adjustment discount reserves united states higher demand certain emerging markets global sales isentress 15 billion 2015 decline 10 compared 2014 including 8 unfavorable effect foreign exchange decline driven primarily lower volumes united states lower demand pricing europe due competitive pressures partially offset higher volumes latin america higher pricing united states hospital acute care global sales cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms 11 billion 2016 decline 4 compared 2015 us composition patent cubicin expired june 2016 company experiencing significant decline us cubicin sales expects decline continue sales decline united states partially offset sales cubicin certain international markets company acquired marketing rights fourth quarter 2015 including europe latin america australia new zealand china south africa certain asia pacific countries company anticipates lose market exclusivity cubicin europe 2017 worldwide sales noxafil prevention invasive fungal infections grew 22 2016 595 million driven primarily higher pricing united states volume growth europe reflecting ongoing positive impact approval new formulations higher demand emerging markets global sales noxafil rose 21 2015 487 million driven pricing higher demand united states well volume growth europe reflecting positive impact approval new formulations foreign exchange unfavorably affected global sales performance 3 2016 12 2015 global sales invanz treatment certain infections 561 million 2016 decline 1 compared 2015 including 2 unfavorable effect foreign exchange sales performance 2016 reflects volume growth certain emerging markets higher pricing united states largely offset decline venezuela worldwide sales invanz 569 million 2015 increase 8 compared 2014 reflecting higher sales united states volume growth emerging markets partially offset 9 unfavorable effect foreign exchange company lose us patent protection invanz november 2017 company anticipates significant decline us invanz sales thereafter us sales invanz 329 million 2016 global sales cancidas antifungal product sold primarily outside united states 558 million 2016 decline 3 compared 2015 reflecting 4 unfavorable effect foreign exchange pricing declines europe offset higher volumes certain emerging markets particularly china worldwide sales cancidas 573 million 2015 decrease 16 compared 2014 reflecting 12 unfavorable effect foreign exchange volume declines certain emerging markets eu compound patent cancidas expires april 2017 company anticipates decline cancidas sales european markets thereafter sales cancidas europe 297 million 2016 global sales bridion reversal two types neuromuscular blocking agents used surgery 482 million 2016 growth 37 compared 2015 including 2 favorable effect foreign exchange sales growth reflects volume growth markets including united states approved fda december 2015 partially offset decline venezuela due reduced operations company country sales bridion increased 4 2015 353 million driven volume growth international markets foreign exchange unfavorably affected global sales performance 19 2015 october 2016 merck announced fda approved zinplava injection 25 mgml zinplava indicated reduce recurrence clostridium difficile infection cdi patients 18 years age older receiving antibacterial drug treatment cdi high risk cdi recurrence zinplava became available united states february 2017 zinplava approved ec january 2017 company anticipates zinplava available eu march 2017 immunology sales remicade treatment inflammatory diseases marketed company europe russia turkey 13 billion 2016 decline 29 compared 2015 18 billion 2015 decline 24 compared 2014 foreign exchange unfavorably affected sales performance 1 2016 14 2015 february 2015 company lost market exclusivity remicade major european markets longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition expects declines continue sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey 766 million 2016 increase 11 compared 2015 including 3 unfavorable effect foreign exchange sales growth driven primarily higher volumes europe reflecting part ongoing positive impact ulcerative colitis indication sales simponi 690 million 2015 essentially flat compared 2014 driven higher demand europe reflecting part ongoing positive impact ulcerative colitis indication offset 19 unfavorable effect foreign exchange oncology sales keytruda antipd1 therapy 14 billion 2016 566 million 2015 55 million 2014 yearoveryear increases primarily reflect higher sales united states europe emerging markets company continues launch keytruda october 2016 merck announced fda approved keytruda firstline treatment patients nsclc whose tumors high pdl1 expression tps 50 determined fdaapproved test egfr alk genomic tumor aberrations new indication keytruda antipd1 therapy approved firstline treatment setting patients addition fda approved labeling update include data keynote010 secondline greater treatment setting patients metastatic nsclc whose tumors express pdl1 tps 1 determined fdaapproved test disease progression platinumcontaining chemotherapy patients egfr alk genomic tumor aberrations disease progression fdaapproved therapy aberrations prior receiving keytruda december 2016 keytruda approved japan treatment certain patients pdl1positive unresectable advancedrecurrent nsclc first secondline treatment settings additionally january 2017 ec approved keytruda firstline treatment metastatic nsclc adults whose tumors high pdl1 expression tps 50 egfr alk positive tumor mutations august 2016 merck announced fda approved keytruda treatment patients recurrent metastatic head neck squamous cell carcinoma hnscc disease progression platinumcontaining chemotherapy keytruda approved united states eu treatment previously untreated metastatic nsclc patients whose tumors express high levels pdl1 previously treated metastatic nsclc patients whose tumors express pdl1 well treatment advanced melanoma keytruda also approved united states previously treated recurrent metastatic hnscc company launched keytruda 50 markets globally merck five sblas priority review fda keytruda including use combination chemotherapy firstline treatment patients metastatic advanced nonsquamous nsclc regardless pdl1 expression egfr alk genomic tumor aberrations treatment patients classical hodgkin lymphoma treatment previously treated patients advanced microsatellite instabilityhigh cancer firstline treatment patients locally advanced metastatic urothelial cancer including bladder cancers secondline treatment patients locally advanced metastatic urothelial cancer disease progression platinumcontaining chemotherapy company plans additional regulatory filings united states countries keytruda clinical development program includes studies across broad range cancer types see “research development” january 2017 merck entered settlement license agreement resolve worldwide patent infringement litigation related keytruda see note 10 consolidated financial statements global sales emend prevention chemotherapyinduced postoperative nausea vomiting 549 million 2016 increase 3 compared 2015 including 1 unfavorable effect foreign exchange largely reflecting higher pricing united states partially offset volume declines japan february 2016 merck announced fda approved supplemental new drug application singledose emend injection prevention delayed nausea vomiting adults receiving initial repeat courses moderately emetogenic chemotherapy worldwide sales emend 535 million 2015 decline 3 reflecting 6 unfavorable effect foreign exchange partially offset higher pricing united states volume growth europe diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world respiratory worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis 915 million 2016 decrease 2 compared 2015 including 2 favorable effect foreign exchange sales performance primarily reflects lower volumes japan patents provided market exclusivity singulair japan expired february october 2016 result company experiencing singulair volume declines japan expects decline continue singulair sales japan 455 million 2016 years prior 2016 company lost market exclusivity singulair united states major international markets exception japan company longer market exclusivity singulair major market global sales singulair 931 million 2015 decline 15 compared 2014 including 10 unfavorable effect foreign exchange sales decline 2015 driven primarily lower volumes japan lower demand europe result generic competition global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms 537 million 2016 decline 37 compared 2015 driven primarily lower volumes united states resulting generic competition march 2016 apotex launched generic version nasonex united states pursuant june 2012 us district court district new jersey ruling upheld appeal us court appeals federal circuit holding apotex’s generic version nasonex infringe company’s formulation patent accordingly company experiencing substantial decline us nasonex sales expects decline continue decline global nasonex sales 2016 also driven lower volumes pricing europe ongoing generic erosion lower sales venezuela due reduced operations company country worldwide sales nasonex 858 million 2015 decline 22 compared 2014 including 6 unfavorable effect foreign exchange decline driven primarily lower volumes united states reflecting competition alternative generic treatment options well supply constraints addition lower volumes pricing europe ongoing generic erosion also contributed nasonex sales decline 2015 global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatments hypertension declined 23 2016 511 million decreased 17 2015 667 million foreign exchange unfavorably affected global sales performance 3 9 2016 2015 respectively patents provided market exclusivity cozaar hyzaar united states major international markets expired accordingly company experiencing declines cozaar hyzaar sales expects declines continue vaccines following discussion vaccines include sales vaccines sold major european markets spmsd company’s joint venture sanofi pasteur sanofi results reflected equity income affiliates included income expense net see “selected joint venture affiliate information” supply sales spmsd however included december 31 2016 merck sanofi terminated spmsd ended joint vaccines operations europe see note 8 consolidated financial statements beginning 2017 merck record vaccine sales european markets previously part spmsd joint venture merck’s sales gardasilgardasil 9 vaccines help prevent certain cancers diseases caused certain types hpv 22 billion 2016 growth 14 compared 2015 sales growth driven primarily higher volumes pricing united states well higher demand certain emerging markets partially offset decline government tenders brazil october 2016 fda approved 2dose vaccination regimen gardasil 9 use girls boys 9 14 years age us centers disease control prevention’s advisory committee immunization practices voted recommend 2dose vaccination regimen certain 9 14 year olds company anticipates 2dose vaccination regimen unfavorable effect sales gardasil 9 period transition merck’s sales gardasilgardasil 9 19 billion 2015 increase 10 compared 2014 including 1 unfavorable effect foreign exchange sales growth driven primarily higher sales united states resulting higher pricing increased volumes reflecting timing public sector purchases well increased government tenders asia pacific region partially offset declines latin america due price volume gardasil 9 merck’s 9valent hpv vaccine approved fda december 2014 use females 9 26 years age males 9 15 years age gardasil 9 includes greatest number hpv types available hpv vaccine december 2015 fda approved expanded age indication gardasil 9 include use males 16 26 years age prevention anal cancers precancerous dysplastic lesions genital warts caused certain hpv types company party certain thirdparty license agreements respect gardasilgardasil 9 including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasilgardasil 9 sales 16 24 vary country included materials production costs merck’s sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 495 million 2016 454 million 2015 395 million 2014 sales growth 2016 compared 2015 driven primarily higher demand pricing united states sales growth 2015 compared 2014 primarily reflects higher sales united states reflecting increased volumes driven part measles outbreaks united states well higher pricing merck’s sales mmr ii vaccine help protect measles mumps rubella 353 million 2016 365 million 2015 326 million 2014 sales performance 2015 compared 2016 2014 driven higher demand resulting measles outbreaks united states merck’s sales varivax vaccine help prevent chickenpox varicella 792 million 2016 686 million 2015 672 million 2014 sales growth 2016 compared 2015 driven primarily higher sales united states reflecting effects public sector purchasing higher pricing partially offset lower demand volume growth certain emerging markets reflecting timing government tenders also contributed sales increase 2016 compared 2015 sales growth 2015 compared 2014 reflects higher volumes certain emerging markets higher pricing united states partially offset lower volumes united states merck’s sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 685 million 2016 decline 9 compared 2015 including 1 unfavorable effect foreign exchange decline driven primarily lower volumes united states partially offset higher pricing united states higher demand certain emerging markets merck’s sales zostavax 749 million 2015 decline 2 compared 2014 including 2 unfavorable effect foreign exchange sales performance 2015 compared 2014 reflects lower volumes united states partially offset higher demand canada higher pricing united states company continuing educate us customers broad managed care coverage zostavax process obtaining reimbursement merck continuing launch zostavax outside united states merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children 652 million 2016 increase 7 compared 2015 610 million 2015 decline 7 compared 2014 including 3 unfavorable effect foreign exchange sales performance periods driven primarily effects public sector purchasing united states volume growth certain emerging markets also contributed sales growth 2016 merck’s sales pneumovax 23 vaccine help prevent pneumococcal disease 641 million 2016 increase 18 compared 2015 driven primarily higher volumes pricing united states higher demand certain emerging markets merck’s sales pneumovax 23 542 million 2015 decrease 27 compared 2014 driven primarily lower demand united states sales declines emerging markets foreign exchange favorably affected sales performance 1 2016 unfavorably affected sales performance 2 2015 segments company’s segments animal health healthcare services alliances segments material separate reporting alliances segment includes revenue azlp termination company’s relationship azlp june 30 2014 see “selected joint venture affiliate information” prior disposition october 1 2014 company also consumer care segment sales 15 billion 2014 animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected competition frequent introduction generic products worldwide sales animal health products 35 billion 2016 33 billion 2015 35 billion 2014 global sales animal health products increased 4 2016 compared 2015 including 4 unfavorable effect foreign exchange sales growth primarily reflects volume growth across species areas particularly products companion animals driven primarily higher sales bravecto well poultry swine products worldwide sales animal health products declined 4 2015 compared 2014 including 13 unfavorable effect foreign exchange sales performance 2015 reflects volume growth companion animal products driven primarily higher sales bravecto began launching europe united states 2014 well volume growth swine aqua products may 2016 company received marketing approval european medicines agency ema bravecto spoton solution cats dogs july 2016 company received approval united states market product tradename bravecto topical july 2016 merck announced executed agreement acquire controlling interest vallée leading privately held producer animal health products brazil see note 3 consolidated financial statements costs expenses 100 greater materials production materials production costs 139 billion 2016 149 billion 2015 168 billion 2014 costs include expenses amortization intangible assets recorded connection business acquisitions totaled 37 billion 2016 47 billion 2015 42 billion 2014 costs 2016 2015 2014 also include intangible asset impairment charges 347 million 45 million 11 billion respectively related marketed products intangibles see note 7 consolidated financial statements company may recognize additional noncash impairment charges future related intangible assets measured fair value capitalized connection business acquisitions charges could material addition expenses 2015 include 105 million amortization purchase accounting adjustments cubist’s inventories also included materials production costs expenses associated restructuring activities amounted 181 million 361 million 482 million 2016 2015 2014 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 651 2016 compared 622 2015 603 2014 improvement gross margin 2016 compared 2015 driven primarily lower net impact amortization intangible assets purchase accounting adjustments inventories well intangible asset impairment charges restructuring costs noted reduced gross margin 106 percentage points 2016 compared 132 percentage points 2015 lower inventory writeoffs favorable effects foreign exchange also contributed gross margin improvement 2016 compared 2015 gross margin improvement 2015 compared 2014 driven primarily favorable effects foreign exchange lower inventory writeoffs well net impact acquisitions divestitures amortization intangible assets purchase accounting adjustments inventories well restructuring intangible asset impairment charges noted reduced gross margin by136 percentage points 2014 marketing administrative marketing administrative expenses 98 billion 2016 decline 5 compared 2015 driven largely lower acquisition divestiturerelated costs favorable effects foreign exchange lower administrative expenses legal defense costs well lower selling costs higher promotional spending largely related product launches higher restructuring costs partially offset decline expenses 103 billion 2015 decline 11 compared 2014 largely reflecting favorable effects foreign exchange 2014 divestiture mcc additional expenses 2014 related health care reform fee discussed lower restructuring costs well lower selling costs partially offset higher promotional spending largely related product launches higher costs related january acquisition cubist higher acquisition divestiturerelated costs expenses include acquisition divestiturerelated costs 78 million 436 million 234 million 2016 2015 2014 respectively consisting integration transaction certain costs related business acquisitions including severance costs part company’s formal restructuring programs well transaction certain costs related divestitures businesses acquisition divestiturerelated costs 2015 include costs related acquisition cubist see note 3 consolidated financial statements expenses 2016 2015 2014 also include restructuring costs 95 million 78 million 200 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed july 28 2014 internal revenue service irs issued final regulations annual nontax deductible health care reform fee imposed patient protection affordable care act based allocation company’s market share prior year branded pharmaceutical sales certain government programs final irs regulations accelerated recognition criteria fee obligation one year underlying sales used allocate fee occurred rather year fee paid result change merck recorded additional year expense 193 million 2014 research development research development rd expenses 101 billion 2016 compared 67 billion 2015 increase driven primarily higher acquired inprocess research development iprd impairment charges increased clinical development spending higher restructuring licensing costs partially offset reduction expenses associated decrease estimated fair value measurement liabilities contingent consideration well favorable effects foreign exchange rd expenses 67 billion 2015 decline 7 compared 2014 driven primarily favorable effects foreign exchange expenses recognized 2014 increase estimated fair value liabilities contingent consideration lower restructuring costs charge 2014 related collaboration bayer ag bayer 2014 divestiture mcc partially offset acquisition cubist higher licensing costs higher clinical development spending 2015 rd expenses comprised costs directly incurred merck research laboratories mrl company’s research development division focuses human healthrelated activities approximately 43 billion 2016 40 billion 2015 37 billion 2014 also included rd expenses costs incurred divisions support rd activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health segments aggregate 25 billion 26 billion 28 billion 2016 2015 2014 respectively rd expenses also include iprd impairment charges 36 billion 63 million 49 million 2016 2015 2014 respectively see “research development” company may recognize additional noncash impairment charges future related cancellation delay pipeline programs measured fair value capitalized connection business acquisitions charges could material addition rd expenses include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection acquisitions 2016 2015 company recorded reduction expenses 402 million 24 million respectively decrease estimated fair value liabilities contingent consideration related discontinuation delay certain programs see note 3 consolidated financial statements 2014 company recorded charge 316 million increase estimated fair value liabilities contingent consideration rd expenses 2016 2015 2014 also reflect 142 million 52 million 283 million respectively accelerated depreciation asset abandonment costs associated restructuring activities restructuring costs company incurs substantial costs restructuring program activities related merck’s productivity cost reduction initiatives well connection integration certain acquired businesses 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network nonfacility related restructuring actions programs substantially complete remaining activities primarily relate ongoing facility rationalizations restructuring costs primarily representing separation related costs associated restructuring activities 651 million 619 million 10 billion 2016 2015 2014 respectively 2016 2015 2014 separation costs 216 million 208 million 674 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated approximately 2625 positions 2016 3770 positions 2015 6085 positions 2014 related restructuring activities position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed company recorded aggregate pretax costs 11 billion 2016 11 billion 2015 20 billion 2014 related restructuring program activities see note 4 consolidated financial statements company expects substantially complete remaining actions programs end 2017 incur approximately 700 million additional pretax costs income expense net income expense net 720 million expense 2016 15 billion expense 2015 116 billion income 2014 details components income expense net see note 14 consolidated financial statements segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates certain depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items including charge related settlement worldwide keytruda patent litigation gains divestitures net charge related settlement vioxx shareholder class action litigation gain astrazeneca’s option exercise foreign exchange losses related devaluation company’s net monetary assets venezuela loss extinguishment debt additional year expense related health care reform fee reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales pharmaceutical segment profits grew 2 2016 compared 2015 primarily reflecting higher sales pharmaceutical segment profits declined 2 2015 compared 2014 primarily reflecting unfavorable effects foreign exchange taxes income effective income tax rates 154 2016 174 2015 309 2014 reflect impacts acquisition divestiturerelated costs 2016 include 36 billion iprd impairment charges well restructuring costs beneficial impact foreign earnings effective income tax rate 2015 also reflects favorable impact net benefit 410 million related settlement certain federal income tax issues impact net charge related settlement vioxx shareholder class action litigation fully deductible combined us federal state tax rates favorable impact tax legislation enacted fourth quarter 2015 well unfavorable effect nontax deductible foreign exchange losses related venezuela see note 14 consolidated financial statements effective income tax rate 2014 reflects impact gain divestiture mcc taxed combined us federal state tax rates addition effective income tax rate 2014 includes net tax benefit 517 million recorded connection astrazeneca’s option exercise see note 8 consolidated financial statements benefit approximately 300 million associated capital loss generated connection sale sirna see note 3 consolidated financial statements effective income tax rate 2014 also includes unfavorable impact additional year expense nontax deductible health care reform fee company recorded accordance final regulations issued irs company examination numerous tax authorities various jurisdictions globally ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures however one item currently discussion irs relating 2006 2008 examination company concluded position sustained upon audit however item result unfavorable outcome settlement could material adverse impact company’s financial position liquidity results operations net income earnings per common share net income attributable merck co inc 39 billion 2016 44 billion 2015 119 billion 2014 eps 141 2016 156 2015 407 2014 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance merck providing management believes information enhances investors’ understanding company’s results permits investors understand management assesses performance nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items considered nonrecurring consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap eps management uses measures internally planning forecasting purposes measure performance company along metrics senior management’s annual compensation derived part using nongaap income nongaap eps since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies information nongaap income nongaap eps considered addition substitute superior net income eps prepared accordance generally accepted accounting principles united states gaap reconciliation gaap financial measures nongaap financial measures follows 1 estimated tax impact excluded items determined applying statutory rate originating territory nongaap adjustments amount 2014 includes net benefit 517 million recorded connection astrazeneca’s option exercise 2 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection business acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement contingent consideration also excluded integration transaction certain costs associated business acquisitions including severance costs part company’s formal restructuring programs well transaction certain costs associated divestitures businesses restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 4 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs certain items nongaap income nongaap eps exclude certain items adjusted evaluating individual basis considering quantitative qualitative aspects typically consist items unusual nature significant results particular period indicative future operating results excluded nongaap income nongaap eps 2016 charge settle worldwide patent litigation related keytruda see note 10 consolidated financial statements excluded nongaap income nongaap eps 2015 foreign exchange losses related devaluation company’s net monetary assets venezuela see note 14 consolidated financial statements net charge related settlement vioxx shareholder class action litigation see note 10 consolidated financial statements gain sale certain migraine clinical development programs see note 3 consolidated financial statements gain divestiture company’s remaining ophthalmics business international markets see note 3 consolidated financial statements well net tax benefit related settlement certain federal income tax issues see note 15 consolidated financial statements excluded nongaap income nongaap eps 2014 certain gains including gain divestiture mcc see note 3 consolidated financial statements gain recognized conjunction astrazeneca’s option exercise including related net tax benefit transaction see note 8 consolidated financial statements gain divestiture certain ophthalmic products several international markets see note 3 consolidated financial statements well loss extinguishment debt see note 9 consolidated financial statements additional year expense related health care reform fee discussed tax benefits sale company’s sirna therapeutics inc sirna subsidiary see note 3 consolidated financial statements research development chart reflecting company’s current research pipeline february 24 2017 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states keytruda fdaapproved antipd1 therapy clinical development expanded indications different cancer types keytruda currently approved treatment nsclc melanoma advanced melanoma head neck cancer see “pharmaceutical segment” february 2017 fda accepted review two sblas keytruda patients locally advanced metastatic urothelial cancer including bladder cancers application firstline use granted priority review treatment patients ineligible cisplatincontaining therapy application secondline use granted priority review patients disease progression platinumcontaining chemotherapy prescription drug user fee act pdufa action date applications june 14 2017 fda previously granted breakthrough therapy designation keytruda secondline treatment patients locally advanced metastatic urothelial cancer disease progression platinumcontaining chemotherapy january 2017 fda accepted review sbla keytruda plus chemotherapy pemetrexed plus carboplatin firstline treatment patients metastatic advanced nonsquamous nsclc regardless pdl1 expression egfr alk genomic tumor aberrations first application regulatory approval keytruda combination another treatment fda granted priority review pdufa action date may 10 2017 sbla reviewed fda’s accelerated approval program december 2016 fda accepted review sbla keytruda treatment patients refractory classical hodgkin lymphoma patients relapsed three prior lines therapy fda granted priority review pdufa action date march 15 2017 sbla reviewed fda’s accelerated approval program november 2016 fda accepted review sbla keytruda treatment previously treated patients advanced microsatellite instabilityhigh msih cancer fda granted priority review pdufa action date march 8 2017 sbla reviewed fda’s accelerated approval program fda recently granted breakthrough therapy designation keytruda unresectable metastatic msih noncolorectal cancer previously granted treatment patients unresectable metastatic msih colorectal cancer additionally keytruda also received breakthrough therapy designation fda treatment patients primary mediastinal bcell lymphoma refractory relapsed two prior lines therapy fda’s breakthrough therapy designation intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints keytruda clinical development program consists 400 clinical trials including 200 trials combine keytruda cancer treatments studies encompass 30 cancer types including bladder colorectal esophageal gastric head neck hepatocellular hodgkin lymphoma nonhodgkin lymphoma melanoma multiple myeloma nasopharyngeal nsclc ovarian prostate renal triplenegative breast many currently phase 3 clinical development trials planned cancers mk1293 investigational followon biologic insulin glargine candidate treatment patients type 1 type 2 diabetes review fda mk1293 approved eu january 2017 mk1293 developed collaboration partially funded samsung bioepis v419 investigational pediatric hexavalent combination vaccine dtap5ipvhibhepb review fda developed approved commercialized partnership merck sanofi vaccine designed help protect six important diseases diphtheria tetanus pertussis whooping cough polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hib hepatitis b november 2 2015 fda issued complete response letter crl respect biologics license application v419 companies reviewing crl plan communication fda february 2016 ec granted marketing authorization v419 prophylaxis diphtheria tetanus pertussis hepatitis b poliomyelitis invasive disease caused hib infants toddlers age 6 weeks v419 marketed vaxelis eu addition candidates regulatory review company several drug candidates phase 3 clinical development addition keytruda programs discussed mk8931 verubecestat investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 treatment alzheimer’s disease february 2017 merck announced external data monitoring committee edmc recommended termination phase 23 epoch study verubecestat mildtomoderate alzheimer’s disease based low probability success study edmc recommended separate phase 3 study apecs evaluating verubecestat amnestic mild cognitive impairment due alzheimer’s disease also known prodromal alzheimer’s disease continue planned estimated primary completion date apecs study fully enrolled february 2019 mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein cetp development raising hdlc reducing ldlc anacetrapib evaluated 30000 patient eventdriven cardiovascular clinical outcomes trial sponsored oxford university reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease november 2015 merck announced data monitoring committee dmc reveal outcomes study completed planned review unblinded study data recommended study continue changes dmc reviewed safety efficacy data study included assessment futility merck remains blinded actual results analysis reveal safety efficacy data study last patient’s last visit occurred january 2017 company anticipates receiving topline results study midyear 2017 mk7655a combination relebactam investigational betalactamase inhibitor imipenemcilastatin approved carbapenem antibiotic fda designated combination qualified infectious disease product designated fast track status treatment hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia complicated intraabdominal infections complicated urinary tract infections mk8228 letermovir investigational oral oncedaily intravenous infusion antiviral candidate prevention clinicallysignificant cytomegalovirus cmv infection letermovir received orphan drug status eu united states also granted fast track designation october 2016 merck announced pivotal phase 3 clinical study letermovir met primary endpoint global multicenter randomized placebocontrolled study evaluated efficacy safety letermovir adult 18 years older cmvseropositive recipients allogeneic hematopoietic stem cell transplant merck plans submit regulatory applications approval letermovir united states eu 2017 mk8835 ertugliflozin investigational oral sglt2 inhibitor evaluated treatment type 2 diabetes collaboration pfizer inc pfizer september 2016 merck pfizer announced phase 3 study vertis sita2 ertugliflozin met primary endpoint 5 mg 15 mg daily doses ertugliflozin showed significantly greater reductions a1c average measure blood glucose past two three months added patients background sitagliptin metformin ertugliflozin also studied combination januvia sitagliptin metformin december 2016 merck submitted new drug applications fda ertugliflozin two fixeddose combinations mk8835a ertugliflozin plus januvia mk8835b ertugliflozin plus metformin company anticipates response fda first quarter 2017 ertugliflozin two fixeddose combinations currently review eu terms collaboration agreement pfizer merck make 90 million milestone payment pfizer 2017 mk0431j investigational fixeddose combination sitagliptin ipragliflozin development commercialization japan collaboration astellas pharma inc astellas ipragliflozin sglt2 inhibitor codeveloped astellas kotobuki pharmaceutical co ltd kotobuki approved use japan copromoted merck kotobuki v920 investigational rvsvzebov ebola vaccine candidate studied large scale phase 23 clinical trials november 2014 merck newlink genetics announced exclusive licensing collaboration agreement investigational ebola vaccine december 2015 merck announced application emergency use assessment listing eual v920 accepted review world health organization according eual process designed expedite availability vaccines needed public health emergencies another outbreak ebola decision grant v920 eual status based data regarding quality safety efficacyeffectiveness well riskbenefit analysis emergency use eual designation allows emergency use vaccine remains investigational yet licensed commercial distribution july 2016 merck announced fda granted v920 breakthrough therapy designation ema granted vaccine candidate prime priority medicines status december 2016 end study results ring vaccination trial reported lancet supporting july 2015 interim assessment v920 offers substantial protection ebola virus disease reported cases among vaccinated individuals 10 days vaccination randomized nonrandomized clusters results ongoing studies anticipated second half 2017 mk1242 vericiguat investigational treatment heart failure studied phase 3 clinical trial patients suffering chronic heart failure development vericiguat part worldwide strategic collaboration merck bayer see note 3 consolidated financial statements v212 inactivated varicella zoster virus vaccine development prevention herpes zoster company completed phase 3 trial autologous hematopoietic cell transplant patients conducting another phase 3 trial patients solid tumor malignancies undergoing chemotherapy hematological malignancies study autologous hematopoietic cell transplant patients met primary endpoints merck presented results study american society blood marrow transplantation meetings february 2017 mk1439 doravirine investigational nonnucleoside reverse transcriptase inhibitor developed merck treatment hiv1 infection february 2017 company received positive results first phase 3 study showing doravirine noninferior alternative regimen achieving maintaining hiv1 suppression infected adults 48 weeks treatment 2016 company also divested discontinued certain drug candidates merck announced discontinuing development odanacatib investigational cathepsin k inhibitor osteoporosis seek regulatory approval use merck previously reported numeric imbalance adjudicated stroke events pivotal phase 3 fracture outcomes study postmenopausal women company decided discontinue development independent adjudication analysis major adverse cardiovascular events confirmed increased risk stroke company determined business reasons would terminate north america partnership agreement alkabelló included mk8237 investigational allergy immunotherapy tablet house dust mite allergy merck given alkabelló six months’ notice terminating agreement therefore compound returned alkabelló decision due efficacy safety concerns connection decision company recorded iprd impairment charge see note 7 consolidated financial statements company also decided business reasons discontinue clinical development mk8342b referred next generation ring investigational combination etonogestrel 17ßestradiol vaginal ring contraception treatment dysmenorrhea women seeking contraception decision due efficacy safety concerns result decision company recorded iprd impairment charge see note 7 consolidated financial statements merck announced business reasons proceed submitting marketing applications omarigliptin investigational onceweekly dpp4 inhibitor united states europe decision result concerns efficacy safety omarigliptin company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities company committed making externally sourced programs greater component pipeline strategy focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company continues evaluate certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases neurodegenerative diseases respiratory diseases acquired inprocess research development connection business acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2016 balance iprd 17 billion 2016 company recorded iprd projects obtained connection acquisitions afferent iomet discussed 2016 2015 2014 8 million 280 million 654 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2016 company recorded 36 billion iprd impairment charges within research development expenses amount 29 billion relates clinical development program uprifosbuvir nucleotide prodrug clinical development evaluated treatment hcv company determined recent changes product profile well changes merck’s expectations pricing market opportunity taken together constituted triggering event required company evaluate uprifosbuvir intangible asset impairment utilizing market participant assumptions considering different scenarios company concluded best estimate current fair value intangible asset related uprifosbuvir 240 million resulting recognition pretax impairment charge noted iprd impairment charges 2016 also include charges 180 million 143 million related discontinuation programs obtained connection acquisitions ccam biotherapeutics ltd oncoethix respectively resulting unfavorable efficacy data additional 72 million relates programs obtained connection smartcells acquisition following decision terminate lead compound due lack efficacy pursue backup compound reduced projected future cash flows iprd impairment charges 2016 also include 112 million related inlicensed program house dust mite allergies business reasons returned licensor remaining iprd impairment charges 2016 primarily relate deprioritized pipeline programs deemed alternative use period including 79 million impairment charge investigational candidate contraception discontinuation delay certain clinical development programs resulted reduction related liabilities contingent consideration see note 3 consolidated financial statements 2015 company recorded 63 million iprd impairment charges 50 million related surotomycin clinical development program 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted 2014 company recorded 49 million iprd impairment charges primarily result changes cash flow assumptions certain compounds obtained connection company’s joint venture supera farma laboratorios sa well discontinuation certain animal health programs additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2016 estimated costs complete projects acquired connection acquisitions phase 3 development human health approximately 290 million acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent significant transactions described merck actively monitoring landscape growth opportunities meet company’s strategic criteria july 2016 merck acquired afferent privately held pharmaceutical company focused development therapeutic candidates targeting p2x3 receptor treatment common poorlymanaged neurogenic conditions afferent’s lead investigational candidate mk7264 formerly af219 selective nonnarcotic orallyadministered p2x3 antagonist evaluated phase 2b clinical trial treatment refractory chronic cough well phase 2 clinical trial idiopathic pulmonary fibrosis cough total consideration transferred 510 million included cash paid outstanding afferent shares 487 million well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf afferent addition former afferent shareholders eligible receive total additional 750 million contingent upon attainment certain clinical development commercial milestones multiple indications candidates including mk7264 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date company determined fair value contingent consideration 223 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment using appropriate discount rate dependent nature timing milestone payment merck recognized intangible asset iprd 832 million net deferred tax liabilities 258 million net assets 29 million primarily consisting cash acquired excess consideration transferred fair value net assets acquired 130 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probabilityadjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 actual cash flows likely different assumed june 2016 merck moderna entered strategic collaboration license agreement develop commercialize novel mrnabased personalized cancer vaccines development program entail multiple studies several types cancer include evaluation mrnabased personalized cancer vaccines combination merck’s keytruda pursuant terms agreement merck made upfront cash payment moderna 200 million recorded research development expenses following human proof concept studies merck right elect make additional payment moderna merck exercises right two companies equally share cost profits worldwide collaboration development personalized cancer vaccines moderna right elect copromote personalized cancer vaccines united states agreement entails exclusivity around combinations keytruda moderna merck ability combine mrnabased personalized cancer vaccines nonpd1 agents january 2016 merck acquired iomet privately held ukbased drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism acquisition provides merck iomet’s preclinical pipeline ido indoleamine23dioxygenase 1 tdo tryptophan23dioxygenase dualacting idotdo inhibitors transaction accounted acquisition business total purchase consideration transaction included cash payment 150 million future additional milestone payments 250 million contingent upon certain clinical regulatory milestones achieved company determined fair value contingent consideration 94 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment utilizing discount rate 105 merck recognized intangible assets iprd 155 million net deferred tax assets 32 million excess consideration transferred fair value net assets acquired 57 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach assets’ probabilityadjusted future net cash flows discounted present value also using discount rate 105 actual cash flows likely different assumed selected joint venture affiliate information sanofi pasteur msd december 31 2016 merck sanofi terminated equallyowned joint venture formed 1994 develop market vaccines europe see note 8 consolidated financial statements sales joint venture products prior termination follows astrazeneca lp june 30 2014 astrazeneca exercised option resulted redemption merck’s remaining interest astrazeneca lp azlp partnership merck astrazeneca 419 million cash see note 8 consolidated financial statements amount 327 million reflected estimate fair value merck’s interest nexium prilosec products sold azlp portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized income 5 million 182 million 140 million 2016 2015 2014 respectively income expense net contingency eliminated sales occurred deferred income amount fully amortized first quarter 2016 company began recognizing income corresponding receivable amounts due merck astrazeneca based sales performance nexium prilosec subject trueup june 2018 company recognized 93 million income 2016 included income expense net remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion preferred stock elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance 2014 prior termination merck recorded revenue azlp 463 million earned partnership returns 192 million recorded equity income affiliates included income expense net capital expenditures capital expenditures 16 billion 2016 13 billion 2015 13 billion 2014 expenditures united states 10 billion 2016 879 million 2015 873 million 2014 depreciation expense 16 billion 2016 16 billion 2015 25 billion 2014 10 billion 11 billion 20 billion respectively applied locations united states total depreciation expense 2016 2015 2014 included accelerated depreciation 227 million 174 million 900 million respectively associated restructuring activities see note 4 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders cash provided operating activities 104 billion 2016 125 billion 2015 80 billion 2014 cash provided operating activities 2016 reflects net payment approximately 680 million fund vioxx shareholder class action litigation settlement covered insurance proceeds see note 10 consolidated financial statements cash provided operating activities 2014 reflects approximately 50 billion taxes paid divestiture mcc cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures portion treasury stock purchases dividends paid shareholders cash used investing activities 32 billion 2016 compared 48 billion 2015 lower use cash 2016 driven primarily cash used 2015 acquisition cubist well lower purchases securities investments 2016 partially offset lower proceeds sales securities investments 2016 use cash 2016 acquisitions afferent staywell cash used investing activities 48 billion 2015 compared 374 million 2014 primarily reflecting cash received 2014 divestiture mcc higher cash received 2014 dispositions businesses connection astrazeneca’s option exercise well cash used acquisition cubist 2015 partially offset lower purchases securities investments higher proceeds sales securities investments cash used 2014 acquisition idenix cash payment made 2014 upon formation collaboration bayer cash used financing activities 90 billion 2016 compared 54 billion 2015 driven primarily lower proceeds issuance debt partially offset decrease shortterm borrowings prior year lower payments debt lower purchases treasury stock higher proceeds exercise stock options cash used financing activities 54 billion 2015 compared 152 billion 2014 driven primarily higher proceeds issuance debt lower payments debt lower purchases treasury stock partially offset lower proceeds exercise stock options decrease shortterm borrowings 2015 company recorded charges 876 million related devaluation net monetary assets venezuela large majority cash see note 14 consolidated financial statements december 31 2016 total worldwide cash investments 258 billion including 143 billion cash equivalents shortterm investments 114 billion longterm investments generally 8090 cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated form dividends company records us deferred tax liabilities certain unremitted earnings amounts earned overseas expected indefinitely reinvested outside united states accrual us taxes provided amount cash investments held us foreign subsidiaries fluctuates due variety factors including timing receipt payments normal course business cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures portion treasury stock purchases dividends paid shareholders company’s contractual obligations december 31 2016 follows 1 includes future inventory purchases company committed connection certain divestitures 2 february 2017 300 million floating rate notes matured repaid 3 december 31 2016 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 44 billion including 20 billion reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2017 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments 2017 company make 90 million milestone payment connection clinical program developed collaboration see “research development” also excluded research development obligations potential future funding commitments approximately 90 million investments research venture capital funds loans payable current portion longterm debt reflects 267 million longdated notes subject repayment option holders required funding obligations 2017 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 50 million us pension plans 160 million international pension plans 25 million postretirement benefit plans 2017 november 2016 company issued €10 billion principal amount senior unsecured notes consisting €500 million principal amount 050 notes due 2024 €500 million principal amount 1375 notes due 2036 company intends use net proceeds offering 11 billion general corporate purposes including without limitation repayment outstanding commercial paper borrowings indebtedness upcoming maturities june 2016 company terminated existing credit facility entered new 60 billion fiveyear credit facility matures june 2021 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility december 2015 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes company used portion net proceeds offering 79 billion repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including repurchases company’s common stock repayment outstanding commercial paper borrowings debt maturities also february 2015 company redeemed 19 billion legacy cubist debt acquired acquisition see note 3 consolidated financial statements october 2014 company issued €25 billion principal amount senior unsecured notes net proceeds offering 31 billion used part repay debt validly tendered connection tender offers launched company certain outstanding notes debentures company paid 25 billion aggregate consideration applicable purchase price together accrued interest redeem 18 billion principal amount debt november 2014 merck redeemed additional 20 billion principal amount senior unsecured notes effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2016 board directors declared quarterly dividend 047 per share company’s common stock payable january 2017 march 2015 merck’s board directors authorized additional purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions company purchased 34 billion common stock 60 million shares treasury 2016 company approximately 51 billion remaining march share repurchase program company purchased 42 billion 77 billion common stock 2015 2014 respectively previously authorized share repurchase programs financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted foreign currency denominated sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options merck principally sells foreign currency revenue hedging program uniform weakening us dollar would yield largest overall potential loss market value hedge instruments market value merck’s hedges would declined estimated 538 million 502 million december 31 2016 2015 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows company manages operating activities net asset positions local level order mitigate effect exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statements cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2016 income taxes would declined approximately 26 million 2016 company net short payable position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange december 31 2015 company net long receivable position relative major foreign currencies consideration forward contracts therefore uniform 10 strengthening us dollar would reduced income taxes approximately 45 million measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations 2015 venezuelan government identified multiple exchange rates included cencoex rate 63 vef per us dollar simadi rate venezuelan government indicated essential goods including food medicine would remain cencoex rate second quarter 2015 upon evaluation evolving economic conditions venezuela volatility country combined decline transactions settled cencoex rate company determined unlikely outstanding net monetary assets would settled cencoex rate accordingly second quarter 2015 company recorded charge 715 million within income expense net devalue net monetary assets venezuela amount represented company’s estimate us dollar amount would ultimately collected third quarter 2015 company recorded additional exchange losses 138 million aggregate reflecting ongoing effect translating transactions net monetary assets consistent second quarter result deterioration economic conditions venezuela continued declines transactions settled cencoex rate subsequently replaced dipro rate fourth quarter 2015 company began using simadi rate 19870 vef per us december 31 2015 report venezuelan operations company also revalued remaining net monetary assets simadi rate subsequently replaced dicom rate resulted additional charge fourth quarter 2015 161 million company may also use forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates recorded income expense net effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income oci remains accumulated comprehensive income aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk may 2016 four interest rate swaps notional amounts 250 million matured swaps effectively converted company’s 10 billion 070 fixedrate notes due 2016 variable rate debt december 31 2016 company party 26 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2016 2015 would positively affected net aggregate market value instruments 13 billion 12 billion respectively one percentage point decrease december 31 2016 2015 would negatively affected net aggregate market value 16 billion 15 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions determine whether acquisitions qualify business combinations asset acquisitions company makes certain judgments include assessment inputs processes outputs associated acquired set activities october 1 2016 company adopted new accounting guidance intended clarify whether transactions accounted acquisitions disposals assets businesses company determines substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs prior adoption new guidance company would consider acquisition disposition business inputs well processes applied inputs ability create outputs business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset generally determined period substantial majority cash flows expected generated begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations company determines transaction accounted acquisition business transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense acquisition date fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd also determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized title risk loss passes customer typically time delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2016 2015 2014 summarized information changes aggregate indirect customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 196 million 27 billion respectively december 31 2016 145 million 27 billion respectively december 31 2015 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 14 2016 15 2015 17 2014 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2016 2015 80 million 63 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2016 2015 approximately 185 million 245 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 11 million 2016 estimated 44 million aggregate years 2017 2021 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 83 million 109 million december 31 2016 2015 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 64 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 300 million 2016 299 million 2015 278 million 2014 december 31 2016 443 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 56 million 2016 253 million 2015 169 million 2014 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net amortization decrease net periodic benefit cost postretirement benefit plans 2016 compared 2015 largely attributable changes retiree medical benefits approved company december 2015 company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due discount rates company’s us pension postretirement benefit plans ranged 340 430 december 31 2016 compared range 380 480 december 31 2015 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate 2017 expected rate return company’s us pension postretirement benefit plans range 800 875 compared range 730 875 2016 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 81 million favorable unfavorable impact company’s current year net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 46 million favorable unfavorable impact merck’s current year net periodic benefit cost required funding obligations 2017 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed streamline company’s cost structure result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangible assets excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2016 foreign earnings 631 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability recently issued accounting standards may 2014 financial accounting standards board fasb issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements august 2015 fasb approved oneyear deferral effective date making guidance effective interim annual periods beginning 2018 new standard permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect adopting guidance recognized date initial application modified retrospective method company adopt new standard january 1 2018 currently plans use modified retrospective method majority company’s business ship bill primary revenue stream merck expect significant differences however company’s analysis preliminary subject change merck completed assessment multiple element arrangements certain discount trade promotion programs january 2016 fasb issued revised guidance accounting reporting financial instruments new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income new guidance also simplifies impairment testing equity investments without readily determinable fair values changes certain disclosure requirements guidance effective interim annual periods beginning 2018 early adoption permitted company currently assessing impact adoption consolidated financial statements february 2016 fasb issued new accounting guidance accounting reporting leases new guidance requires lessees recognize rightofuse asset lease liability recorded balance sheet leases meet definition shortterm lease leases classified either operating finance operating leases result straightline expense income statement similar current operating leases finance leases result expense recognized earlier years lease term similar current capital leases new guidance effective interim annual periods beginning 2019 early adoption permitted company currently evaluating impact adoption consolidated financial statements june 2016 fasb issued amended guidance accounting credit losses financial instruments within scope guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries new guidance effective interim annual periods beginning 2020 earlier application permitted 2019 company currently evaluating impact adoption consolidated financial statements august 2016 fasb issued guidance classification certain cash receipts payments statement cash flows intended reduce diversity practice guidance effective interim annual periods beginning 2018 early adoption permitted guidance applied retrospectively periods presented may applied prospectively retrospective application would impracticable company currently evaluating effect standard consolidated statement cash flows october 2016 fasb issued guidance accounting income tax consequences intraentity transfers assets inventory existing guidance recognition current deferred income taxes intraentity asset transfer prohibited asset sold third party new guidance require recognition income tax consequences intraentity transfer asset exception inventory intraentity transfer occurs guidance effective interim annual periods beginning 2018 early adoption permitted new guidance applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption company anticipate adoption new guidance material effect consolidated financial statements november 2016 fasb issued guidance requiring amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows guidance effective interim annual periods beginning 2018 applied using retrospective transition method period presented early adoption permitted company currently evaluating effect standard consolidated statement cash flows january 2017 fasb issued guidance provides elimination step 2 goodwill impairment test impairment charges recognized amount recorded amount carrying amount exceeds reporting unit’s fair value certain limitations new guidance effective interim annual periods 2021 company anticipate adoption new guidance material effect consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities december 31 2016 merck sanofi pasteur sa sanofi terminated equallyowned joint venture sanofi pasteur msd spmsd developed marketed vaccines europe beginning 2017 merck recording vaccine sales incurring costs result operating vaccines business european markets previously part spmsd joint venture accounted equity method affiliate company also animal health segment discovers develops manufactures markets animal health products including vaccines company sells veterinarians distributors animal producers company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients overview 2017 merck continued bring innovation patients physicians expanding focus oncology advancing programs latestage pipeline throughout 2017 keytruda company’s antipd1 programmed death receptor1 therapy received approval several additional indications globally including us food drug administration fda approval combination pemetrexed carboplatin commonly used chemotherapy regimen firstline treatment metastatic nonsquamous nonsmallcell lung cancer nsclc irrespective pdl1 expression keytruda antipd1 treatment approved firstline setting monotherapy combination therapy appropriate patients metastatic nsclc addition lynparza oral poly adpribose polymerase parp inhibitor developed collaboration received fda approval treatment patients germline brcamutated her2negative metastatic breast cancer previously treated chemotherapy additionally november 2017 fda approved prevymis prophylaxis prevention cytomegalovirus cmv infection disease december 2017 fda approved steglatro steglujan segluromet treatment type 2 diabetes january 2018 prevymis also approved european union eu worldwide sales 401 billion 2017 increase 1 compared 2016 sales growth driven primarily launches keytruda zepatier bridion well positive performance merck’s animal health business addition revenue 2017 benefited sale vaccines markets previously part nowterminated spmsd vaccines joint venture growth areas largely offset effects generic biosimilar competition resulted sales declines products including zetia vytorin cubicin remicade augmenting merck’s portfolio pipeline external innovation remains important component company’s overall strategy july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types lynparza oral parp inhibitor currently approved certain types ovarian breast cancer companies develop commercialize lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines companies also jointly develop commercialize astrazeneca’s selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple indications including thyroid cancer addition october 2017 merck acquired rigontec gmbh rigontec leader accessing retinoic acidinducible gene pathway part innate immune system novel distinct approach cancer immunotherapy induce immediate longterm antitumor immunity also march 2017 merck acquired controlling interest vallée sa vallée leading privately held producer animal health products brazil merck continues prioritize resources maximize opportunities ongoing upcoming product launches keytruda launching around world multiple indications 2017 merck achieved multiple additional regulatory milestones keytruda including approval fda combination therapy appropriate patients metastatic nsclc noted well monotherapy approval treatment certain patients recurrent locally advanced metastatic gastric gastroesophageal junction adenocarcinoma treatment certain patients locally advanced metastatic urothelial carcinoma type bladder cancer treatment adult pediatric patients classical hodgkin lymphoma chl treatment adult pediatric patients unresectable metastatic microsatellite instabilityhigh msih mismatch repair deficient solid tumors 2017 keytruda also received approval eu treatment certain patients chl urothelial carcinoma merck continues evaluate pipeline focusing research efforts opportunities believes greatest potential address unmet medical needs addition recent regulatory approvals discussed company continued advance programs latestage pipeline several regulatory submissions mk1439 doravirine investigational nonnucleoside reverse transcriptase inhibitor treatment hiv1 infection mk1439a doravirine lamivudine tenofovir disoproxil fumarate currently review fda addition fda accepted review supplemental biologics license application bla keytruda treatment adult pediatric patients refractory primary mediastinal bcell lymphoma pmbcl refractory relapsed two prior lines therapy additionally steglatro steglujan segluromet review eu company’s phase 3 oncology programs include keytruda therapeutic areas breast colorectal esophageal gastric head neck hepatocellular nasopharyngeal renal smallcell lung cancers lynparza pancreatic prostate cancer selumetinib thyroid cancer additionally company candidates phase 3 clinical development several therapeutic areas see “research development” company continues support innovation strategy remaining disciplined prioritizing resources wherever possible fund investment many opportunities merck’s pipeline believes help drive longterm growth also fund nearterm opportunities grow revenue research development expenses 2017 reflect increased clinical development spending company continues invest pipeline november 2017 merck’s board directors raised company’s quarterly dividend 048 per share 047 per share 2017 company returned 92 billion shareholders dividends share repurchases earnings per common share assuming dilution attributable common shareholders eps 2017 087 compared 141 2016 eps years reflect impact acquisition divestiturerelated costs 2016 includes charge related uprifosbuvir clinical development program well restructuring costs certain items 2017 include provisional net tax charge related recent enactment us tax legislation aggregate charge related formation collaboration astrazeneca nongaap eps exclude items 398 2017 378 2016 see “nongaap income nongaap eps” cyberattack june 27 2017 company experienced network cyberattack led disruption worldwide operations including manufacturing research sales operations company’s manufacturing sites operational manufacturing active pharmaceutical ingredient api formulating packaging shipping product company’s external manufacturing impacted throughout time merck continued fulfill orders ship product due cyberattack anticipated company unable fulfill orders certain products certain markets unfavorable effect sales 2017 approximately 260 million addition company recorded manufacturingrelated expenses primarily unfavorable manufacturing variances materials production costs well expenses related remediation efforts marketing administrative expenses research development expenses aggregated approximately 285 million 2017 net insurance recoveries approximately 45 million due residual backlog orders certain products company anticipates 2018 sales unfavorably affected certain markets approximately 200 million cyberattack merck expect significant impairment value intangible assets related marketed products inventories result cyberattack referenced company insurance coverage insuring costs resulting cyberattacks received insurance proceeds however may disputes insurers availability insurance coverage claims related incident additionally temporary production shutdown cyberattack contributed company’s inability meet higher expected demand gardasil 9 resulted merck’s decision borrow doses gardasil 9 us centers disease control prevention cdc pediatric vaccine stockpile company subsequently replenished portion borrowed doses 2017 net effect borrowing subsequent partial replenishment reduction sales 125 million 2017 company anticipates replenish remaining borrowed doses second half 2018 hurricane maria september 2017 hurricane maria made direct landfall puerto rico company one plant puerto rico makes limited number pharmaceutical products company also works contract manufacturers island merck’s plant sustain substantial damage production activities plant resumed power restored facility yet fully reliable plant continues prepared use alternative sources power water company making progress fully restore normal operations despite significant damage island’s infrastructure supply chains within puerto rico improving yet fully restored immaterial impact sales 2017 company expects immaterial impact sales 2018 operating results sales worldwide sales 401 billion 2017 increase 1 compared 2016 sales growth 2017 driven primarily higher sales recently launched products including keytruda zepatier bridion additionally sales 2017 benefited december 31 2016 termination spmsd marketed vaccines major european markets 2017 merck began recording vaccine sales markets previously part spmsd joint venture resulting incremental vaccine sales approximately 400 million 2017 higher sales pneumovax 23 adempas well animal health products also contributed revenue growth 2017 increases largely offset effects generic competition certain products including zetia lost us market exclusivity december 2016 vytorin lost us market exclusivity april 2017 cubicin due us patent expiration june 2016 cancidas lost eu patent protection april 2017 revenue growth also offset continued biosimilar competition remicade ongoing generic erosion products including singulair nasonex collectively sales decline attributable products affected generic biosimilar competition 33 billion 2017 lower sales products within diversified brands franchise includes certain products approaching expiration marketing exclusivity longer protected patents developed markets including dulera inhalation aerosol well lower combined sales diabetes franchise januvia janumet declines sales isentressisentress hd also partially offset revenue growth additionally sales 2017 reduced 125 million due borrowing company made cdc pediatric vaccine stockpile doses gardasil 9 discussed also anticipated company unable fulfill orders certain products certain markets due cyberattack unfavorable effect sales 2017 approximately 260 million sales united states 174 billion 2017 decline 6 compared 185 billion 2016 decrease driven primarily effects generic competition zetia vytorin cubicin declines products within diversified brands including nasonex dulera inhalation aerosol lower sales januviajanumet gardasilgardasil 9 isentressisentress hd zostavax also contributed us sales decline 2017 declines partially offset higher sales keytruda zepatier bridion pneumovax 23 along higher sales animal health products international sales 227 billion 2017 increase 6 compared 213 billion 2016 primarily reflecting growth keytruda zepatier higher sales vaccines due termination spmsd joint venture well higher sales animal health products sales growth partially offset ongoing biosimilar competition remicade well generic erosion cancidas products within diversified brands international sales represented 57 54 total sales 2017 2016 respectively global efforts toward health care cost containment continue exert pressure product pricing market access worldwide united states pricing pressures continue many company’s products several international markets governmentmandated pricing actions reduced prices generic patented drugs addition austerity measures negatively affected company’s revenue performance 2017 company anticipates pricing actions including biennial price reductions japan occur 2018 austerity measures continue negatively affect revenue performance 2018 worldwide sales 398 billion 2016 increase 1 compared 2015 foreign exchange unfavorably affected global sales performance 2 2016 includes lower benefit revenue hedging activities compared 2015 revenue growth primarily reflects higher sales keytruda launch hcv treatment zepatier growth vaccine products including gardasilgardasil 9 varivax pneumovax 23 also contributing sales growth 2016 higher sales hospital acute care products including bridion noxafil growth within diabetes franchise januvia janumet well higher sales animal health products particularly bravecto increases largely offset sales declines attributable ongoing effects generic biosimilar competition certain products including remicade nasonex along products within diversified brands declines isentress dulera inhalation aerosol also partially offset revenue growth 2016 sales performance 2016 reflects decline approximately 625 million due reduced operations company venezuela result economic conditions volatility country sales company’s products follows us plus international may equal total due rounding 1 sales cubicin 2015 represent sales subsequent cubist acquisition date 2 december 31 2016 merck sanofi terminated equallyowned joint venture spmsd marketed vaccines major european markets see note 9 accordingly vaccine sales 2017 include sales european markets previously part spmsd amounts 2016 2015 include sales vaccines sold spmsd results reflected equity income affiliates included income expense net amounts 2016 2015 however include supply sales spmsd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health healthcare services alliances 5 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2017 2016 also includes 85 million 170 million respectively related sale marketing rights certain products pharmaceutical segment primary care women’s health cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy atozet marketed certain countries outside united states medicines lowering ldl cholesterol 23 billion 2017 decline 40 compared 2016 sales decline driven lower volumes pricing zetia vytorin united states result generic competition agreement generic manufacturer launched generic version zetia united states december 2016 us patent exclusivity periods zetia vytorin otherwise expired april 2017 accordingly company experiencing rapid substantial declines us zetia vytorin sales expects declines continue company lose market exclusivity major european markets ezetrol april 2018 inegy april 2019 anticipates sales declines markets thereafter sales ezetrol inegy markets 552 million 457 million respectively 2017 combined worldwide sales zetia vytorin atozet 38 billion 2016 growth 1 compared 2015 reflecting volume growth europe higher pricing united states largely offset lower sales venezuela due reduced operations company country lower volumes united states reflecting part generic competition zetia pursuant collaboration bayer ag bayer see note 4 consolidated financial statements merck lead commercial rights adempas cardiovascular drug treatment pulmonary arterial hypertension countries outside americas bayer lead rights americas including united states companies share profits equally collaboration 2016 merck began promoting distributing adempas europe transition bayer merck territories including japan continued 2017 merck recorded sales adempas 300 million 2017 169 million 2016 30 million 2015 includes sales merck’s marketing territories well merck’s share profits sale adempas bayer’s marketing territories diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes 59 billion 2017 decline 3 compared 2016 including 1 favorable effect foreign exchange sales decline driven primarily ongoing pricing pressure partially offset continued volume growth globally combined global sales januvia janumet 61 billion 2016 increase 2 compared 2015 sales growth driven primarily higher volumes united states europe canada partially offset pricing pressures united states europe lower sales venezuela due company’s reduced operations country april 2017 merck announced fda issued complete response letter crl regarding merck’s supplemental new drug applications nda januvia janumet xr sitagliptin metformin hcl extendedrelease applications merck seeking include data tecos trial evaluating cardiovascular outcomes sitagliptin prescribing information sitagliptincontaining medicines merck taking actions respond crl december 2017 fda approved steglatro ertugliflozin tablets oral sodiumglucose cotransporter 2 sglt2 inhibitor fixeddose combination steglujan ertugliflozin sitagliptin tablets fixeddose combination sglt2 inhibitor dipeptidyl peptidase4 inhibitor januvia sitagliptin fda also approved fixeddose combination segluromet ertugliflozin metformin hydrochloride steglatro steglujan segluromet indicated improve glycemic control adults type 2 diabetes mellitus products part worldwide except japan collaboration merck pfizer inc pfizer codevelopment copromotion ertugliflozin result fda approval merck make 60 million payment pfizer accrued fourth quarter 2017 amount capitalized amortized estimated useful life subject impairment testing merck exclusively promote steglatro two fixeddose combination products united states merck pfizer share revenues certain costs 6040 basis merck 60 share pfizer may entitled additional milestone payments january 2018 committee medicinal products human use chmp european medicines agency ema adopted positive opinion recommending approval ertugliflozin two fixeddose combination products chmp positive opinion considered european commission ec approval products eu received merck make additional 40 million milestone payment pfizer general medicine women’s health worldwide sales nuvaring vaginal contraceptive product 761 million 2017 decline 2 compared 2016 including 1 favorable effect foreign exchange sales decline driven primarily lower sales united states reflecting lower volumes partially offset higher pricing lower demand europe global sales nuvaring 777 million 2016 increase 6 compared 2015 including 1 unfavorable effect foreign exchange sales growth largely reflects higher pricing united states partially offset volume declines europe patent provides us market exclusivity nuvaring expire april 2018 company anticipates significant decline us nuvaring sales thereafter worldwide sales implanonnexplanon singlerod subdermal contraceptive implants grew 686 million 2017 increase 13 compared 2016 primarily reflecting higher pricing volume growth united states global sales implanonnexplanon 606 million 2016 increase 3 compared 2015 including 3 unfavorable effect foreign exchange sales growth reflects higher demand united states partially offset declines international markets particularly venezuela hospital specialty hepatitis global sales zepatier treatment chronic hepatitis c hcv infection 17 billion 2017 555 million 2016 sales growth driven primarily higher sales europe united states japan following product launch 2016 merck also launched zepatier international markets company beginning experience unfavorable effects increasing competition declining patient volumes anticipates sales zepatier future materially adversely affected factors hiv worldwide sales isentressisentress hd hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection 12 billion 2017 decline 13 compared 2016 sales decline primarily reflects lower demand united states europe due competitive pressures may 2017 fda approved isentress hd oncedaily dose isentress july 2017 ec granted marketing authorization oncedaily dose isentress marketed isentress 600 mg global sales isentress 14 billion 2016 decline 8 compared 2015 including 2 unfavorable effect foreign exchange sales decline driven primarily lower volumes united states well lower demand pricing europe due competitive pressures partially offset favorable adjustment discount reserves united states hospital acute care global sales bridion reversal two types neuromuscular blocking agents used surgery 704 million 2017 growth 46 compared 2016 driven strong global demand particularly united states worldwide sales 482 million 2016 growth 37 compared 2015 including 2 favorable effect foreign exchange sales growth reflects volume growth markets including united states approved fda december 2015 partially offset decline venezuela due reduced operations company country worldwide sales noxafil prevention invasive fungal infections 636 million 2017 increase 7 compared 2016 primarily reflecting higher demand pricing united states well volume growth europe global sales noxafil grew 22 2016 595 million driven primarily higher pricing united states volume growth europe reflecting ongoing positive impact approval new formulations higher demand asia pacific region foreign exchange unfavorably affected global sales performance 3 2016 global sales invanz treatment certain infections 602 million 2017 increase 7 compared 2016 driven primarily higher sales united states reflecting higher pricing partially offset lower demand well higher demand brazil worldwide sales invanz 561 million 2016 decline 1 compared 2015 including 2 unfavorable effect foreign exchange sales performance 2016 reflects higher pricing united states largely offset decline venezuela patent provided us market exclusivity invanz expired november 2017 company anticipates significant decline us invanz sales future periods global sales cancidas antifungal product sold primarily outside united states 422 million 2017 decline 24 compared 2016 driven primarily generic competition certain european markets eu compound patent cancidas expired april 2017 accordingly company experiencing significant decline cancidas sales european markets expects decline continue worldwide sales cancidas 558 million 2016 decline 3 compared 2015 reflecting 4 unfavorable effect foreign exchange pricing declines europe offset higher volumes china global sales cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms 382 million 2017 decline 65 compared 2016 11 billion 2016 decline 4 compared 2015 us composition patent cubicin expired june 2016 accordingly company experiencing rapid substantial decline us cubicin sales result generic competition expects decline continue company anticipates lose market exclusivity cubicin european markets early 2018 november 2017 merck announced fda approved prevymis letermovir prophylaxis prevention cmv infection disease adult cmvseropositive recipients r allogeneic hematopoietic stem cell transplant result fda approval merck made €105 million 125 million milestone payment aicuris 2017 amount capitalized amortized estimated useful life subject impairment testing january 2018 prevymis approved ec result merck make additional €30 million milestone payment aicuris merck also filed prevymis regulatory approval markets including japan immunology sales remicade treatment inflammatory diseases marketed company europe russia turkey 837 million 2017 decline 34 compared 2016 13 billion 2016 decline 29 compared 2015 foreign exchange unfavorably affected sales performance 1 2016 company lost market exclusivity remicade major european markets 2015 longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition expects declines continue sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey 819 million 2017 growth 7 compared 2016 including 1 favorable effect foreign exchange sales growth primarily reflects higher demand europe sales simponi 766 million 2016 increase 11 compared 2015 including 3 unfavorable effect foreign exchange sales growth driven primarily higher volumes europe reflecting part ongoing positive impact ulcerative colitis indication oncology sales keytruda antipd1 therapy 38 billion 2017 14 billion 2016 566 million 2015 yearoveryear increases driven volume growth markets particularly united states europe japan company continues launch keytruda multiple new indications globally us sales keytruda 23 billion 2017 792 million 2016 393 million 2015 sales united states continue build across multiple approved indications particular treatment nsclc reflecting continued adoption keytruda firstline setting monotherapy patients metastatic nsclc whose tumors high pdl1 expression well uptake keytruda combination pemetrexed carboplatin commonly used chemotherapy regimen firstline treatment metastatic nonsquamous nsclc without pdl1 expression indications including melanoma head neck cancer bladder cancer also contributed growth 2017 sales growth international markets reflects positive performance melanoma indications well greater contribution treatment patients nsclc reimbursement established additional markets first secondline settings march 2017 fda approved keytruda treatment adult pediatric patients chl refractory treatment relapsed three prior lines therapy may 2017 ec approved keytruda treatment adult patients relapsed refractory chl failed autologous stem cell transplant brentuximab vedotin transplantineligible failed brentuximab vedotin may 2017 fda approved keytruda combination pemetrexed carboplatin firstline treatment metastatic nonsquamous nsclc irrespective pdl1 expression keytruda antipd1 treatment approved firstline setting monotherapy combination therapy appropriate patients metastatic nsclc october 2016 keytruda approved fda monotherapy firstline setting patients metastatic nsclc whose tumors high pdl1 expression egfr alk genomic tumor aberrations keytruda monotherapy also indicated secondline greater treatment setting patients metastatic nsclc whose tumors express pdl1 disease progression platinumcontaining chemotherapy patients egfr alk genomic tumor aberrations disease progression fdaapproved therapy aberrations prior receiving keytruda additionally january 2017 ec approved keytruda firstline treatment metastatic nsclc adults whose tumors high pdl1 expression egfr alk positive tumor mutations also may 2017 fda approved keytruda treatment certain patients locally advanced metastatic urothelial carcinoma type bladder cancer firstline setting keytruda approved treatment patients locally advanced metastatic urothelial carcinoma ineligible cisplatincontaining chemotherapy secondline setting keytruda approved treatment patients locally advanced metastatic urothelial carcinoma disease progression following platinumcontaining chemotherapy within 12 months neoadjuvant adjuvant treatment platinumcontaining chemotherapy september 2017 ec approved keytruda use monotherapy treatment locally advanced metastatic urothelial carcinoma adults received prior platinumcontaining chemotherapy well adults eligible cisplatincontaining chemotherapy additionally may 2017 fda approved keytruda firstofitskind indication treatment adult pediatric patients previously treated unresectable metastatic msih mismatch repair deficient solid tumors unique indication keytruda first cancer therapy approved use based biomarker regardless tumor type september 2017 fda approved keytruda treatment patients recurrent locally advanced metastatic gastric gastroesophageal junction adenocarcinoma whose tumors express pdl1 december 2017 merck announced pivotal phase 3 keynote061 trial investigating keytruda secondline treatment patients advanced gastric gastroesophageal junction adenocarcinoma meet primary endpoint overall survival os patients whose tumors expressed pdl1 additionally progression free survival pfs pdl1 positive population show statistical significance safety profile observed keynote061 consistent observed previously reported studies keytruda new safety signals identified current indication remains unchanged company continues evaluate keytruda gastric gastroesophageal junction adenocarcinoma keynote062 phase 3 clinical trial studying keytruda monotherapy combination chemotherapy firstline treatment patients pdl1 positive advanced gastric gastroesophageal junction cancer keynote585 phase 3 trial studying keytruda combination chemotherapy neoadjuvantadjuvant setting august 2016 merck announced fda approved keytruda treatment patients recurrent metastatic head neck squamous cell carcinoma hnscc disease progression platinumcontaining chemotherapy july 2017 merck announced pivotal phase 3 keynote040 trial investigating keytruda previously treated patients recurrent metastatic hnscc meet prespecified primary endpoint os safety profile observed keynote040 consistent observed previously reported studies keytruda new safety signals identified current indication remains unchanged clinical trials continue including keynote048 phase 3 clinical trial keytruda firstline treatment recurrent metastatic hnscc result additional approvals received 2017 noted keytruda approved united states eu monotherapy treatment certain patients nsclc melanoma chl urothelial carcinoma keytruda also approved united states monotherapy treatment certain patients hnscc gastric gastroesophageal junction adenocarcinoma msih mismatch repair deficient cancer combination pemetrexed carboplatin certain patients nsclc keytruda also approved japan treatment radically unresectable melanoma pdl1positive unresectable advanced recurrent nsclc relapsed refractory chl radically unresectable urothelial carcinoma keytruda clinical development program includes studies across broad range cancer types see “research development” january 2017 merck entered settlement license agreement resolve worldwide patent infringement litigation related keytruda see note 11 consolidated financial statements pursuant settlement company pay royalties 65 net sales keytruda 2017 2023 25 net sales keytruda 2024 2026 lynparza oral parp inhibitor developed part collaboration formed july 2017 astrazeneca see note 4 consolidated financial statements currently approved certain types ovarian breast cancer january 2018 fda approved lynparza use patients brcamutated her2negative metastatic breast cancer previously treated chemotherapy neoadjuvant adjuvant metastatic setting result approval merck make 70 million milestone payment astrazeneca see note 4 consolidated financial statements also january 2018 japanese ministry health labour welfare approved lynparza use maintenance therapy patients platinumsensitive relapsed ovarian cancer regardless brca mutation status responded last platinumbased chemotherapy lynparza first parp inhibitor approved japan diversified brands merck’s diversified brands include human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world respiratory worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis 732 million 2017 decline 20 compared 2016 915 million 2016 decrease 2 compared 2015 foreign exchange unfavorably affected global sales performance 1 2017 favorably affected global sales performance 2 2016 sales declines driven lower volumes japan result generic competition patents provided market exclusivity singulair japan expired 2016 result company experiencing significant decline singulair sales japan expects decline continue company longer market exclusivity singulair major market global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms 387 million 2017 decline 28 compared 2016 537 million 2016 decline 37 compared 2015 foreign exchange favorably affected global sales performance 1 2017 company experiencing substantial decline us nasonex sales result generic competition expects decline continue decline global nasonex sales 2016 also driven lower volumes pricing europe ongoing generic erosion lower sales venezuela due reduced operations company country global sales dulera inhalation aerosol combination medicine treatment asthma 287 million 2017 decline 34 compared 2016 driven lower sales united states reflecting ongoing competitive pricing pressure well lower demand worldwide sales dulera inhalation aerosol 436 million 2016 decline 19 compared 2015 including 1 unfavorable effect foreign exchange decline driven lower sales united sales reflecting competitive pricing pressure partially offset higher demand vaccines december 31 2016 merck sanofi terminated equallyowned joint venture spmsd developed marketed vaccines europe accordingly vaccine sales 2017 include sales merck vaccines european markets previously part spmsd joint venture whereas sales periods prior 2017 prior 2017 vaccine sales european markets sold spmsd joint venture results reflected equity income affiliates included income expense net see note 15 consolidated financial statements supply sales spmsd however included vaccine sales periods prior 2017 incremental vaccine sales resulting termination spmsd joint venture 2017 approximately 400 million approximately 215 million relate gardasilgardasil 9 worldwide sales gardasilgardasil 9 vaccines help prevent certain cancers diseases caused certain types human papillomavirus hpv 23 billion 2017 growth 6 compared 2016 sales growth driven primarily higher sales europe resulting termination spmsd joint venture noted well higher demand asia pacific due part launch china partially offset lower sales united states lower sales united states reflect timing public sector purchases addition 2017 company made request borrow doses gardasil 9 cdc pediatric vaccine stockpile cdc granted company’s decision borrow doses cdc driven part temporary shutdown resulting cyberattack occurred june well overall higher demand expected result borrowing company reversed sales related borrowed doses recognized corresponding liability company subsequently replenished nearly half doses borrowed stockpile net effect borrowing subsequent partial replenishment reduction sales 125 million 2017 company anticipates replenish remaining borrowed doses second half 2018 result recognition sales reversal remaining liability additionally october 2016 fda approved 2dose vaccination regimen gardasil 9 use girls boys 9 14 years age cdc’s advisory committee immunization practices acip voted recommend 2dose vaccination regimen certain 9 14 year olds company experiencing impact transition 3dose vaccine regimen 2dose vaccination regimen however increased patient starts helping offset negative effects transition merck’s sales gardasilgardasil 9 22 billion 2016 growth 14 compared 2015 sales growth driven primarily higher volumes pricing united states well higher demand asia pacific region partially offset decline government tenders brazil company party certain thirdparty license agreements respect gardasilgardasil 9 including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasilgardasil 9 sales 10 18 vary country included materials production costs global sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 528 million 2017 495 million 2016 454 million 2015 increase 2017 compared 2016 driven primarily higher pricing volumes united states well volume growth international markets particularly europe sales growth 2016 compared 2015 driven primarily higher demand pricing united states worldwide sales mmr ii vaccine help protect measles mumps rubella 382 million 2017 353 million 2016 365 million 2015 sales growth 2017 compared 2016 largely attributable higher sales europe resulting termination spmsd joint venture sales performance 2016 compared 2015 driven higher demand 2015 resulting measles outbreaks united states global sales varivax vaccine help prevent chickenpox varicella 767 million 2017 792 million 2016 686 million 2015 sales decline 2017 compared 2016 driven primarily lower volumes brazil due loss government tender well lower sales united states reflecting lower demand partially offset higher pricing higher sales europe resulting termination spmsd joint venture partially offset decline sales growth 2016 compared 2015 driven primarily higher sales united states reflecting effects public sector purchasing higher pricing partially offset lower demand volume growth brazil reflecting timing government tenders also contributed sales increase 2016 compared 2015 worldwide sales pneumovax 23 vaccine help prevent pneumococcal disease 821 million 2017 increase 28 compared 2016 driven primarily higher demand pricing united states well higher sales europe resulting termination spmsd joint venture merck’s sales pneumovax 23 641 million 2016 increase 18 compared 2015 driven primarily higher volumes pricing united states higher demand asia pacific region foreign exchange unfavorably affected sales performance 1 2017 favorably affected sales performance 1 2016 global sales rotateq vaccine help protect rotavirus gastroenteritis infants children 686 million 2017 increase 5 compared 2016 driven primarily higher sales europe resulting termination spmsd joint venture merck’s sales rotateq 652 million 2016 increase 7 compared 2015 including 3 unfavorable effect foreign exchange sales performance driven primarily effects public sector purchasing united states well volume growth several international markets worldwide sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 668 million 2017 decline 2 compared 2016 including 1 favorable effect foreign exchange sales decline driven primarily lower demand united states reflecting approval competitor’s vaccine received preferential recommendation acip october 2017 prevention shingles zostavax company anticipates competition material adverse effect sales zostavax future periods us sales decline largely offset growth europe resulting termination spmsd joint venture volume growth asia pacific region merck’s sales zostavax 685 million 2016 decline 9 compared 2015 including 1 unfavorable effect foreign exchange decline driven primarily lower volumes united states partially offset higher pricing united states higher demand asia pacific region segments company’s segments animal health healthcare services alliances segments material separate reporting animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected competition frequent introduction generic products worldwide sales animal health products 39 billion 2017 35 billion 2016 33 billion 2015 global sales animal health products grew 11 2017 compared 2016 primarily reflecting higher sales companion animal products largely driven growth bravecto line products kill fleas ticks dogs cats 12 weeks reflecting growth oral formulation continued uptake topical formulation launched 2016 animal health sales growth also driven higher sales ruminant poultry swine products worldwide sales animal health products increased 4 2016 compared 2015 including 4 unfavorable effect foreign exchange sales growth reflects volume growth across species areas particularly products companion animals driven primarily higher sales bravecto well poultry swine products march 2017 merck acquired controlling interest vallée leading privately held producer animal health products brazil see note 3 consolidated financial statements costs expenses materials production materials production costs 128 billion 2017 139 billion 2016 149 billion 2015 costs include expenses amortization intangible assets recorded connection business acquisitions totaled 31 billion 2017 37 billion 2016 47 billion 2015 costs 2017 2016 2015 also include intangible asset impairment charges 58 million 347 million 45 million respectively related marketed products intangibles recorded connection business acquisitions see note 8 consolidated financial statements costs 2017 also include 76 million intangible asset impairment charge related licensing agreement company may recognize additional noncash impairment charges future related intangible assets measured fair value capitalized connection business acquisitions charges could material addition expenses 2015 include 105 million amortization purchase accounting adjustments cubist’s inventories also included materials production costs expenses associated restructuring activities amounted 138 million 181 million 361 million 2017 2016 2015 respectively primarily reflecting accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 682 2017 compared 651 2016 622 2015 improvements gross margin reflect lower net impact amortization intangible assets intangible asset impairment charges restructuring costs noted reduced gross margin 82 percentage points 2017 106 percentage points 2016 132 percentage points 2015 gross margin improvement 2017 compared 2016 also reflects favorable effects product mix manufacturingrelated costs associated cyberattack partially offset gross margin improvement 2017 improvement gross margin 2016 compared 2015 also driven lower inventory writeoffs favorable effects foreign exchange marketing administrative marketing administrative expenses 98 billion 2017 increase 1 compared 2016 higher administrative costs including costs associated company operating vaccines business european markets previously part spmsd joint venture remediation costs related cyberattack higher promotional expenses related product launches partially offset lower restructuring acquisition divestiturerelated costs lower selling expenses favorable effect foreign exchange expenses 98 billion 2016 decline 5 compared 2015 driven largely lower acquisition divestiturerelated costs favorable effects foreign exchange lower administrative expenses legal defense costs well lower selling costs higher promotional spending largely related product launches higher restructuring costs partially offset decline expenses 2017 2016 2015 include restructuring costs 2 million 95 million 78 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include acquisition divestiturerelated costs 44 million 78 million 436 million 2017 2016 2015 respectively consisting integration transaction certain costs related business acquisitions divestitures acquisition divestiturerelated costs 2015 include costs related acquisition cubist see note 3 consolidated financial statements research development research development rd expenses 102 billion 2017 increase 1 compared 2016 increase driven primarily charge 2017 related formation collaboration astrazeneca unfavorable effect changes estimated fair value measurement liabilities contingent consideration higher clinical development spending largely offset lower inprocess research development iprd impairment charges lower restructuring costs rd expenses 101 billion 2016 compared 67 billion 2015 increase driven primarily higher iprd impairment charges increased clinical development spending higher restructuring licensing costs partially offset reduction expenses associated decrease estimated fair value measurement liabilities contingent consideration well favorable effects foreign exchange rd expenses comprised costs directly incurred merck research laboratories mrl company’s research development division focuses human healthrelated activities 46 billion 2017 43 billion 2016 40 billion 2015 also included rd expenses costs incurred divisions support rd activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health segments aggregate 27 billion 25 billion 26 billion 2017 2016 2015 respectively additionally rd expenses 2017 include 235 billion aggregate charge related formation collaboration astrazeneca see note 4 consolidated financial statements rd expenses also include iprd impairment charges 483 million 36 billion 63 million 2017 2016 2015 respectively see “research development” company may recognize additional noncash impairment charges future related cancellation delay pipeline programs measured fair value capitalized connection business acquisitions charges could material addition rd expenses include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection acquisitions 2017 company recorded charges 27 million increase estimated fair value liabilities contingent consideration 2016 2015 company recorded reduction expenses 402 million 24 million respectively decrease estimated fair value liabilities contingent consideration related discontinuation delay certain programs see note 6 consolidated financial statements rd expenses 2017 2016 2015 also reflect 11 million 142 million 52 million respectively accelerated depreciation asset abandonment costs associated restructuring activities restructuring costs company incurs substantial costs restructuring program activities related merck’s productivity cost reduction initiatives well connection integration certain acquired businesses 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network restructuring costs primarily representing separation related costs associated restructuring activities 776 million 651 million 619 million 2017 2016 2015 respectively 2017 2016 2015 separation costs 552 million 216 million 208 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated approximately 2450 positions 2017 2625 positions 2016 3770 positions 2015 related restructuring activities also included restructuring costs asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed company recorded aggregate pretax costs 927 million 2017 11 billion 2016 11 billion 2015 related restructuring program activities see note 5 consolidated financial statements company substantially completed actions programs approximately 500 million additional pretax costs expected incurred 2018 relating anticipated employee separations remaining assetrelated costs income expense net income expense net 12 million expense 2017 720 million expense 2016 15 billion expense 2015 details components income expense net see note 15 consolidated financial statements segment profits comprised segment sales less standard costs certain operating expenses directly incurred segment components equity income loss affiliates certain depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges changes estimated fair value measurement liabilities contingent consideration restructuring costs portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items including loss extinguishment debt 2017 charge related settlement worldwide keytruda patent litigation 2016 gains divestitures 2016 2015 well net charge related settlement vioxx shareholder class action litigation foreign exchange losses related devaluation company’s net monetary assets venezuela 2015 reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales pharmaceutical segment profits grew 2 2017 compared 2016 primarily reflecting higher sales favorable effects product mix pharmaceutical segment profits grew 2 2016 compared 2015 primarily reflecting higher sales taxes income effective income tax rates 629 2017 154 2016 174 2015 reflect impacts acquisition divestiturerelated costs 2016 include 36 billion iprd impairment charges well restructuring costs beneficial impact foreign earnings addition effective income tax rate 2017 includes provisional net charge 26 billion related enactment us tax legislation known tax cuts jobs act tcja see note 16 consolidated financial statements effective income tax rate 2017 also reflects unfavorable impact 235 billion aggregate pretax charge recorded connection formation collaboration astrazeneca tax benefit recognized partially offset favorable impact net benefit 234 million related settlement certain federal income tax issues see note 16 consolidated financial statements benefit 88 million related settlement state income tax issue effective income tax rate 2015 reflects favorable impact net benefit 410 million related settlement certain federal income tax issues impact net charge related settlement vioxx shareholder class action litigation fully deductible combined us federal state tax rates favorable impact tax legislation enacted fourth quarter 2015 well unfavorable effect nontax deductible foreign exchange losses related venezuela see note 15 consolidated financial statements net income earnings per common share net income attributable merck co inc 24 billion 2017 39 billion 2016 44 billion 2015 eps 087 2017 141 2016 156 2015 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance merck providing management believes information enhances investors’ understanding company’s results permits investors understand management assesses performance nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items considered nonrecurring consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap eps management uses measures internally planning forecasting purposes measure performance company along metrics senior management’s annual compensation derived part using nongaap income nongaap eps since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies information nongaap income nongaap eps considered addition substitute superior net income eps prepared accordance generally accepted accounting principles united states gaap reconciliation gaap financial measures nongaap financial measures follows 1 estimated tax impact excluded items determined applying statutory rate originating territory nongaap adjustments 2 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection business acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement contingent consideration also excluded integration transaction certain costs associated business acquisitions divestitures restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 5 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs certain items nongaap income nongaap eps exclude certain items adjusted evaluating individual basis considering quantitative qualitative aspects typically consist items unusual nature significant results particular period indicative future operating results excluded nongaap income nongaap eps 2017 aggregate charge related formation collaboration astrazeneca see note 4 consolidated financial statements provisional net tax charge related enactment tcja net benefit related settlement certain federal income tax issues benefit related settlement state income tax issue see note 16 consolidated financial statements excluded nongaap income nongaap eps 2016 charge settle worldwide patent litigation related keytruda see note 11 consolidated financial statements excluded nongaap income nongaap eps 2015 foreign exchange losses related devaluation company’s net monetary assets venezuela see note 15 consolidated financial statements net charge related previously disclosed settlement vioxx shareholder class action litigation gain sale certain migraine clinical development programs see note 3 consolidated financial statements gain divestiture company’s remaining ophthalmics business international markets see note 3 consolidated financial statements well net tax benefit related settlement certain federal income tax issues see note 16 consolidated financial statements research development chart reflecting company’s current research pipeline february 23 2018 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally keytruda approved antipd1 therapy clinical development expanded indications different cancer types december 2017 fda accepted review supplemental bla keytruda treatment adult pediatric patients refractory pmbcl relapsed two prior lines therapy fda granted priority review status prescription drug user fee action pdufa target action date april 3 2018 additionally keytruda received breakthrough therapy designation fda combination axitnib firstline treatment patients advanced metastatic renal cell carcinoma treatment highrisk earlystage triplenegative breast cancer combination neoadjuvant chemotherapy treatment merkel cell carcinoma also january 2018 merck eisai co ltd eisai announced receipt breakthrough therapy designation fda eisai’s multiple receptor tyrosine kinase inhibitor lenvima lenvatinib combination keytruda potential treatment patients advanced andor metastatic renal cell carcinoma lenvima keytruda combination therapy jointly developed eisai merck marks 12th breakthrough therapy designation granted keytruda fda’s breakthrough therapy designation intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints january 2018 merck announced pivotal phase 3 keynote189 trial investigating keytruda combination pemetrexed alimta cisplatin carboplatin firstline treatment patients metastatic nonsquamous nsclc met dual primary endpoints os pfs based interim analysis conducted independent data monitoring committee treatment keytruda combination pemetrexed plus platinum chemotherapy resulted significantly longer os pfs pemetrexed plus platinum chemotherapy alone results keynote189 presented upcoming medical meeting submitted regulatory authorities 2017 fda placed full clinical hold keynote183 keynote185 partial clinical hold cohort 1 keynote023 three combination studies keytruda lenalidomide pomalidomide versus lenalidomide pomalidomide alone blood cancer multiple myeloma decision followed review data monitoring committee deaths observed keytruda arms keynote183 keynote185 fda determined data available time indicated risks keytruda plus pomalidomide lenalidomide outweighed potential benefit patients multiple myeloma patients enrolled keynote183 keynote185 keytrudalenalidomidedexamethasone cohort keynote023 discontinued investigational treatment keytruda clinical hold apply studies keytruda clinical development program consists 700 clinical trials including 400 trials combine keytruda cancer treatments studies encompass 30 cancer types including bladder colorectal esophageal gastric head neck hepatocellular hodgkin lymphoma nonhodgkin lymphoma melanoma nasopharyngeal nsclc ovarian pmbcl prostate renal smallcell lung triplenegative breast many currently phase 3 clinical development trials planned cancers mk8835 ertugliflozin investigational oral sglt2 inhibitor development help improve glycemic control adults type 2 diabetes two fixeddose combination products mk8835a ertugliflozin januvia mk8835b ertugliflozin metformin review eu january 2018 chmp ema adopted positive opinion recommending approval medicines chmp positive opinion considered ec ertugliflozin two fixeddose combination products approved fda december 2017 mk0431j investigational fixeddose combination sitagliptin ipragliflozin review japan pharmaceuticals medical devices agency mk0431 developed commercialization japan collaboration astellas pharma inc astellas ipragliflozin sglt2 inhibitor codeveloped astellas kotobuki pharmaceutical co ltd kotobuki approved use japan copromoted merck kotobuki mk1439 doravirine investigational nonnucleoside reverse transcriptase inhibitor treatment hiv1 infection january 2018 merck announced fda accepted review two ndas doravirine ndas include data doravirine oncedaily tablet use combination antiretroviral agents use doravirine lamivudine tenofovir disoproxil fumarate oncedaily fixeddose combination single tablet complete regimen mk1439a pdufa action date applications october 23 2018 v419 investigational pediatric hexavalent combination vaccine dtap5ipvhibhepb review fda developed approved commercialized joint venture merck sanofi vaccine designed help protect six important diseases diphtheria tetanus pertussis whooping cough polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hib hepatitis b 2015 fda issued crl respect bla v419 companies working provide additional data requested fda v419 marketed vaxelis eu addition candidates regulatory review company several drug candidates phase 3 clinical development addition keytruda programs discussed mk7655a combination relebactam investigational betalactamase inhibitor imipenemcilastatin approved carbapenem antibiotic fda designated combination qualified infectious disease product designated fast track status treatment hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia complicated intraabdominal infections complicated urinary tract infections mk7339 lynparza olaparib oral parp inhibitor currently approved certain types ovarian breast cancer july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types see note 4 consolidated financial statements mk5618 selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple cancer types additionally february 2018 fda granted orphan drug designation selumetinib treatment neurofibromatosis type 1 development selumetinib part global strategic oncology collaboration merck astrazeneca reference v920 investigational rvsvzebov ebola vaccine candidate studied large scale phase 23 clinical trials november 2014 merck newlink genetics announced exclusive licensing collaboration agreement investigational ebola vaccine december 2015 merck announced application emergency use assessment listing eual v920 accepted review world health organization according eual process designed expedite availability vaccines needed public health emergencies another outbreak ebola decision grant v920 eual status based data regarding quality safety efficacyeffectiveness well riskbenefit analysis emergency use eual designation allows emergency use vaccine remains investigational yet licensed commercial distribution july 2016 merck announced fda granted v920 breakthrough therapy designation ema granted vaccine candidate prime priority medicines status december 2016 end study results ring vaccination trial reported lancet supporting july 2015 interim assessment v920 offers substantial protection ebola virus disease reported cases among vaccinated individuals 10 days vaccination randomized nonrandomized clusters results ongoing studies included first regulatory filing anticipated first half 2018 mk1242 vericiguat investigational treatment heart failure studied patients suffering chronic heart failure development vericiguat part worldwide strategic collaboration merck bayer see note 4 consolidated financial statements v212 inactivated varicella zoster virus vaccine development prevention herpes zoster company completed phase 3 trial autologous hematopoietic cell transplant patients another phase 3 trial patients solid tumor malignancies undergoing chemotherapy hematological malignancies study autologous hematopoietic cell transplant patients met primary endpoints merck presented results study american society blood marrow transplantation meetings february 2017 study patients solid tumor malignancies undergoing chemotherapy met primary endpoints primary efficacy endpoint met patients hematologic malignancies merck present results study upcoming scientific meeting due competitive environment development v212 currently hold mk7264 selective nonnarcotic orallyadministered p2x3receptor agonist developed treatment refractory chronic cough merck plans initiate phase 3 clinical trial first half 2018 mk7264 originally developed afferent pharmaceuticals afferent acquired company 2016 see note 3 consolidated financial statements upon initiation phase 3 clinical trial merck make 175 million milestone payment accrued estimated fair value time acquisition company also discontinued certain drug candidates february 2018 merck announced stopping protocol 019 also known apecs study phase 3 study evaluating verubecestat mk8931 investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 people prodromal alzheimer’s disease decision stop study follows recommendation external data monitoring committee edmc assessed overall benefitrisk recent interim safety analysis edmc concluded unlikely positive benefitrisk could established trial continued result company recorded iprd impairment charge discussed 2017 merck announced submit applications regulatory approval mk0859 anacetrapib company’s investigational cholesteryl ester transfer protein cetp inhibitor decision followed thorough review clinical profile anacetrapib including discussions external experts also 2017 merck made strategic decision discontinue development investigational combination regimens mk3682b grazoprevirruzasviruprifosbuvir mk3682c ruzasviruprifosbuvir treatment chronic hcv infection decision made based review available phase 2 efficacy data consideration evolving marketplace growing number treatment options available patients chronic hcv infection including zepatier currently marketed company treatment adult patients chronic hcv infection result decision company recorded iprd impairment charge discussed company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities company committed ensuring externally sourced programs remain important component pipeline strategy focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company continues evaluate certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including cancer cardiovascular diseases diabetes infectious diseases neurosciences obesity pain respiratory diseases vaccines acquired inprocess research development connection business acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2017 balance iprd 12 billion 2017 2016 2015 14 million 8 million 280 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop programs circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2017 company recorded 483 million iprd impairment charges within research development expenses amount 240 million resulted strategic decision discontinue development investigational combination regimens mk3682b grazoprevirruzasviruprifosbuvir mk3682c ruzasviruprifosbuvir treatment chronic hcv infection decision made based review available phase 2 efficacy data consideration evolving marketplace growing number treatment options available patients chronic hcv infection including zepatier currently marketed company treatment adult patients chronic hcv infection result decision company recorded iprd impairment charge writeoff remaining intangible asset related uprifosbuvir company previously recorded impairment charge uprifosbuvir 2016 described iprd impairment charges 2017 also include charge 226 million writeoff intangible asset related verubecestat investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 resulting decision february 2018 stop phase 3 study evaluating verubecestat people prodromal alzheimer’s disease decision stop study followed recommendation edmc assessed overall benefitrisk interim safety analysis edmc concluded unlikely positive benefitrisk could established trial continued 2016 company recorded 36 billion iprd impairment charges amount 29 billion relates clinical development program uprifosbuvir nucleotide prodrug evaluated treatment hcv company determined changes product profile well changes merck’s expectations pricing market opportunity taken together constituted triggering event required company evaluate uprifosbuvir intangible asset impairment utilizing market participant assumptions considering different scenarios company concluded best estimate fair value intangible asset related uprifosbuvir 240 million resulting recognition pretax impairment charge noted iprd impairment charges 2016 also include charges 180 million 143 million related discontinuation programs obtained connection acquisitions ccam biotherapeutics ltd oncoethix respectively resulting unfavorable efficacy data additional 72 million relates programs obtained connection smartcells acquisition following decision terminate lead compound due lack efficacy pursue backup compound reduced projected future cash flows iprd impairment charges 2016 also include 112 million related inlicensed program house dust mite allergies business reasons returned licensor remaining iprd impairment charges 2016 primarily relate deprioritized pipeline programs deemed alternative use period including 79 million impairment charge investigational candidate contraception discontinuation delay certain clinical development programs resulted reduction related liabilities contingent consideration see note 6 consolidated financial statements 2015 company recorded 63 million iprd impairment charges 50 million related surotomycin clinical development program 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent transactions described merck actively monitoring landscape growth opportunities meet company’s strategic criteria february 2018 merck viralytics limited viralytics announced definitive agreement pursuant merck acquire viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 175 per share proposed acquisition values total issued shares viralytics approximately aud 502 million 394 million upon completion transaction merck gain full rights cavatax cva21 viralytics’s investigational oncolytic immunotherapy cavatax based viralytics’s proprietary formulation oncolytic virus coxsackievirus type a21 shown preferentially infect kill cancer cells cavatax currently evaluated multiple phase 1 phase 2 clinical trials intratumoral intravenous agent including combination keytruda previous agreement merck viralytics study investigating use keytruda cavatax combination melanoma prostate lung bladder cancers transaction remains subject viralytics’s shareholder vote customary regulatory approvals merck anticipates transaction close second quarter 2018 october 2017 merck acquired rigontec leader accessing retinoic acidinducible gene pathway part innate immune system novel distinct approach cancer immunotherapy induce immediate longterm antitumor immunity rigontec’s lead candidate rgt100 currently phase development evaluating treatment patients various tumors terms agreement merck made upfront cash payment €119 million 140 million may make additional contingent payments €349 million €184 million related achievement research milestones regulatory approvals €165 million related achievement commercial targets transaction accounted acquisition asset upfront payment reflected within research development expenses 2017 july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza olaparib multiple cancer types lynparza oral parp inhibitor currently approved certain types ovarian breast cancer companies jointly developing commercializing lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines keytruda pembrolizumab imfinzi durvalumab companies also jointly develop commercialize astrazeneca’s selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple indications including thyroid cancer terms agreement astrazeneca merck share development commercialization costs lynparza selumetinib monotherapy nonpdl1pd1 combination therapy opportunities gross profits lynparza selumetinib product sales generated monotherapies combination therapies shared equally merck fund development commercialization costs keytruda combination lynparza selumetinib astrazeneca fund development commercialization costs imfinzi combination lynparza selumetinib part agreement merck made upfront payment astrazeneca 16 billion making payments 750 million multiyear period certain license options 250 million paid december 2017 400 million paid 2018 100 million paid 2019 company recorded aggregate charge 235 billion research development expenses 2017 related upfront payment future license options payments addition merck pay astrazeneca additional 615 billion contingent upon successful achievement future regulatory salesbased milestones total aggregate consideration 85 billion capital expenditures capital expenditures 19 billion 2017 16 billion 2016 13 billion 2015 expenditures united states 12 billion 2017 10 billion 2016 879 million 2015 merck plans invest approximately 120 billion five years capital projects including approximately 80 billion united states depreciation expense 15 billion 2017 16 billion 2016 16 billion 2015 10 billion 10 billion 11 billion respectively applied locations united states total depreciation expense 2017 2016 2015 included accelerated depreciation 60 million 227 million 174 million respectively associated restructuring activities see note 5 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders decline working capital 2017 compared 2016 primarily reflects reclassification 30 billion notes due first half 2018 longterm debt shortterm debt 185 billion upfront option payments related formation astrazeneca collaboration discussed well 810 million paid redeem debt connection tender offers discussed cash provided operating activities 64 billion 2017 104 billion 2016 125 billion 2015 decline cash provided operating activities 2017 reflects 28 billion payment related settlement certain federal income tax issues see note 16 consolidated financial statements payments 185 billion related formation collaboration astrazeneca see note 4 consolidated financial statements 625 million payment made company related settlement worldwide keytruda patent litigation see note 11 consolidated financial statements cash provided operating activities 2016 reflects net payment approximately 680 million fund vioxx shareholder class action litigation settlement covered insurance proceeds cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders cash provided investing activities 27 billion 2017 compared use cash investing activities 32 billion 2016 change driven primarily lower purchases securities investments higher proceeds sales securities investments lower use cash acquisitions businesses cash used investing activities 32 billion 2016 compared 48 billion 2015 lower use cash 2016 driven primarily cash used 2015 acquisition cubist well lower purchases securities investments 2016 partially offset lower proceeds sales securities investments 2016 use cash 2016 acquisitions afferent staywell company llc cash used financing activities 100 billion 2017 compared 90 billion 2016 increase cash used financing activities driven primarily proceeds issuance debt 2016 well higher purchases treasury stock lower proceeds exercise stock options 2017 partially offset lower payments debt 2017 cash used financing activities 90 billion 2016 compared 54 billion 2015 driven primarily lower proceeds issuance debt partially offset decrease shortterm borrowings 2015 lower payments debt lower purchases treasury stock higher proceeds exercise stock options 2015 company recorded charges 876 million related devaluation net monetary assets venezuela large majority cash see note 15 consolidated financial statements december 31 2017 total worldwide cash investments 206 billion including 85 billion cash equivalents shortterm investments 121 billion longterm investments substantial majority cash investments held foreign subsidiaries prior enactment tcja would subject significant tax payments cash investments repatriated form dividends accordance tcja company recorded provisional amount taxes unremitted earnings december 31 2017 previously deemed indefinitely reinvested outside united states see note 16 consolidated financial statements result tcja repatriation foreign earnings future little incremental us tax consequences company’s contractual obligations december 31 2017 follows 1 includes future inventory purchases company committed connection certain divestitures 2 january 2018 10 billion notes matured repaid 3 december 31 2017 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 21 billion including 67 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2018 cannot made 4 connection enactment tcja company required pay onetime transition tax company elected pay period eight years permitted tcja see note 16 consolidated financial statements purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments related collaborative arrangements acquisitions contingent milestone payments considered contractual obligations contingent upon successful achievement developmental regulatory approval commercial milestones december 31 2017 company 635 million accrued milestone payments related collaborations pfizer bayer astrazeneca see note 4 consolidated financial statements well connection certain licensing arrangements payable 2018 addition december 31 2017 company 315 million current liabilities contingent consideration related business acquisitions expected paid 2018 see note 6 consolidated financial statements also excluded research development obligations potential future funding commitments approximately 60 million investments research venture capital funds loans payable current portion longterm debt reflects 73 million longdated notes subject repayment option holders required funding obligations 2018 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 60 million us pension plans 150 million international pension plans 25 million postretirement benefit plans 2018 november 2017 company launched tender offers certain outstanding notes debentures company paid 810 million aggregate consideration applicable purchase price together accrued interest redeem 585 million principal amount debt validly tendered connection tender offers november 2016 company issued €10 billion principal amount senior unsecured notes consisting €500 million principal amount 050 notes due 2024 €500 million principal amount 1375 notes due 2036 company used net proceeds offering 11 billion general corporate purposes company 60 billion fiveyear credit facility matures june 2022 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility december 2015 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes company used portion net proceeds offering 79 billion repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including repurchases company’s common stock repayment outstanding commercial paper borrowings debt maturities also february 2015 company redeemed 19 billion legacy cubist debt acquired acquisition see note 3 consolidated financial statements effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2017 board directors declared quarterly dividend 048 per share company’s common stock paid january 2018 january 2018 board directors declared quarterly dividend 048 per share company’s common stock second quarter 2018 payable april 2018 november 2017 merck’s board directors authorized additional purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions company purchased 40 billion common stock 67 million shares treasury 2017 december 31 2017 company’s share repurchase authorization 110 billion includes 10 billion authorized repurchases remaining program announced march 2015 company purchased 34 billion 42 billion common stock 2016 2015 respectively authorized share repurchase programs financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options merck principally sells foreign currency revenue hedging program uniform weakening us dollar would yield largest overall potential loss market value hedge instruments market value merck’s hedges would declined estimated 400 million 538 million december 31 2017 2016 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statements cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2017 2016 income taxes would declined approximately 92 million 26 million 2017 2016 respectively company net short payable position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations 2015 upon evaluation evolving economic conditions venezuela volatility country combined decline transactions settled official cencoex rate company determined unlikely outstanding net monetary assets would settled cencoex rate accordingly 2015 company recorded charges 876 million within income expense net devalue net monetary assets venezuela amount represented company’s estimate us dollar amount would ultimately collected recorded additional exchange losses 138 million aggregate reflecting ongoing effect translating transactions net monetary assets consistent rates company may also use forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates recorded income expense net effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income oci remains accumulated comprehensive income aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2017 company party 26 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2017 2016 would positively affected net aggregate market value instruments 13 billion one percentage point decrease december 31 2017 2016 would negatively affected net aggregate market value 15 billion 16 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions dispositions determine whether transactions accounted acquisitions disposals assets businesses company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset generally determined period substantial majority cash flows expected generated begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd also determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate company determines transaction accounted acquisition business transaction accounted asset acquisition rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense contingent consideration recognized acquisition date revenue recognition revenues sales products recognized title risk loss passes customer typically time delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate customer discounts material adjustments estimates associated aggregate customer discount provision 2017 2016 2015 summarized information changes aggregate customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 198 million 24 billion respectively december 31 2017 196 million 27 billion respectively december 31 2016 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 21 2017 14 2016 15 2015 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2017 2016 80 million contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters see note 11 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2017 2016 approximately 160 million 185 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 11 million 2017 estimated 56 million aggregate years 2018 2022 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 82 million 83 million december 31 2017 2016 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 63 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 312 million 2017 300 million 2016 299 million 2015 december 31 2017 469 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension plans totaled 201 million 2017 144 million 2016 277 million 2015 net periodic benefit credit postretirement benefit plans 60 million 2017 88 million 2016 24 million 2015 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net loss amortization increase net periodic benefit credit postretirement benefit plans 2017 2016 compared 2015 largely attributable changes retiree medical benefits approved company december 2015 partially offset lower returns plan assets company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due discount rates company’s us pension postretirement benefit plans ranged 320 380 december 31 2017 compared range 340 430 december 31 2016 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data current market conditions actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate 2018 expected rate return company’s us pension postretirement benefit plans range 770 830 compared range 800 875 2017 decrease primarily due modest shift asset allocation company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 35 55 us equities 20 35 international equities 20 35 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 77 million favorable unfavorable impact company’s net periodic benefit cost 2017 reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 44 million favorable unfavorable impact merck’s net periodic benefit cost 2017 required funding obligations 2018 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component accumulated comprehensive income aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed streamline company’s cost structure result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangible assets excluding iprd initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 16 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements recently issued accounting standards discussion recently issued accounting standards see note 2 consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning negative variations foregoing one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities december 31 2016 merck sanofi pasteur sa sanofi terminated equallyowned joint venture sanofi pasteur msd spmsd developed marketed vaccines europe 2017 merck began recording vaccine sales incurring costs result operating vaccines business european markets previously part spmsd joint venture accounted equity method affiliate animal health segment discovers develops manufactures markets animal health products including pharmaceutical vaccine products prevention treatment control disease major livestock companion animal species company sells veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 see note 9 consolidated financial statements overview company’s performance 2018 demonstrates execution innovation strategy revenue growth oncology vaccines hospital acute care animal health focused investment research development pipeline disciplined allocation resources additionally merck completed several business development transactions expanded capital expenditures program primarily increase future manufacturing capacity returned capital shareholders worldwide sales 423 billion 2018 increase 5 compared 2017 strong growth oncology franchise reflects performance keytruda well alliance revenue related lynparza lenvima resulting merck’s business development activities also contributing revenue growth higher sales vaccines driven primarily gardasilgardasil 9 growth hospital acute care franchise largely attributable bridion noxafil higher sales animal health products reflecting increases companion animal livestock products inline recently launched products also contributed revenue growth areas partially offset competitive pressures zepatier zostavax well ongoing effects generic biosimilar competition resulted sales declines products including zetia vytorin remicade augmenting merck’s portfolio pipeline external innovation remains important component company’s overall strategy 2018 merck continued executing strategy entering strategic collaboration eisai co ltd eisai worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai approved certain types thyroid cancer hepatocellular carcinoma combination certain patients renal cell carcinoma agreement merck eisai develop commercialize lenvima jointly monotherapy combination keytruda addition merck acquired viralytics limited viralytics company focused oncolytic immunotherapy treatments range cancers also company announced agreement acquire antelliq group antelliq leader digital animal identification traceability monitoring solutions 2018 company advanced leadership oncology focused commercial execution achievement important regulatory milestones presentation clinical data keytruda continues global launch multiple new indications across several tumor types including approval us food drug administration fda treatment certain patients cervical cancer primary mediastinal large bcell lymphoma pmbcl type nonhodgkin lymphoma hepatocellular carcinoma merkel cell carcinoma combination chemotherapy treatment certain patients squamous nonsmallcell lung cancer nsclc also 2018 european commission ec approved keytruda treatment certain patients head neck squamous cell carcinoma hnscc adjuvant treatment melanoma combination chemotherapy firstline treatment certain patients nonsquamous nsclc first approval europe antipd1 therapy combination chemotherapy also 2018 keytruda approved china treatment certain patients melanoma additionally merck recently announced receipt five new approvals keytruda japan including three expanded uses advanced nsclc one adjuvant melanoma well new indication advanced microsatellite instabilityhigh msih tumors keytruda also continues launch many international markets 2018 lynparza developed collaboration astrazeneca plc astrazeneca received fda approval use certain patients metastatic breast cancer previously treated chemotherapy use maintenance treatment adult patients certain types advanced ovarian fallopian tube primary peritoneal cancer complete partial response chemotherapy additionally lenvima approved united states european union eu japan china treatment certain patients hepatocellular carcinoma fda ec also approved two new hiv1 medicines delstrigo oncedaily fixeddose combination tablet doravirine lamivudine tenofovir disoproxil fumarate pifeltro doravirine new nonnucleoside reverse transcriptase inhibitor administered combination antiretroviral medicines merck continues invest pipeline emphasis leader immunooncology expanding areas vaccines hospital acute care addition recent regulatory approvals discussed company continued advance latestage pipeline several regulatory submissions keytruda review united states combination axitinib tyrosine kinase inhibitor firstline treatment patients advanced renal cell carcinoma granted priority review fda eu firstline treatment certain patients metastatic squamous nsclc united states eu monotherapy firstline treatment certain patients locally advanced metastatic nsclc united states monotherapy treatment certain patients advanced smallcell lung cancer sclc united states monotherapy combination chemotherapy firstline treatment certain patients recurrent metastatic hnscc granted priority review fda additionally mk7655a combination relebactam imipenemcilastatin accepted priority review fda treatment complicated urinary tract infections complicated intraabdominal infections caused certain susceptible gramnegative bacteria adults limited alternative therapies available merck also started submission rolling biologics license application bla fda v920 investigational ebola zaire disease vaccine candidate company’s phase 3 oncology programs include keytruda therapeutic areas breast cervical colorectal esophageal gastric hepatocellular mesothelioma nasopharyngeal ovarian renal smallcell lung cancers lynparza pancreatic prostate cancer lenvima combination keytruda endometrial cancer additionally company candidates phase 3 clinical development several therapeutic areas including v114 investigational polyvalent conjugate vaccine prevention pneumococcal disease received breakthrough therapy designation fda prevention invasive pneumococcal disease caused vaccine serotypes pediatric patients 6 weeks 18 years age mk7264 gefapixant selective nonnarcotic orallyadministered p2x3receptor agonist developed treatment refractory chronic cough mk1242 vericiguat investigational treatment heart failure developed collaboration see “research development” company allocating resources effectively support commercial opportunities near term making necessary investments support longterm growth research development expenses 2018 reflect higher clinical development spending investment discovery early drug development october 2018 merck’s board directors approved 15 increase company’s quarterly dividend raising 055 per share 048 per share company’s outstanding common stock also october 2018 merck’s board directors approved 10 billion share repurchase program company entered 5 billion accelerated share repurchase asr agreements 2018 company returned 143 billion shareholders dividends share repurchases earnings per common share assuming dilution attributable common shareholders eps 2018 232 compared 087 2017 eps years reflect impact acquisition divestiturerelated costs well restructuring costs certain items certain items 2018 include charge related formation collaboration eisai 2017 include provisional net tax charge related enactment us tax legislation charge related formation collaboration astrazeneca nongaap eps exclude items 434 2018 398 2017 see “nongaap income nongaap eps” pricing global efforts toward health care cost containment continue exert pressure product pricing market access worldwide united states pricing pressure continues many company’s products changes us health care system part health care reform well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries contributed pricing pressure several international markets governmentmandated pricing actions reduced prices generic patented drugs addition company’s revenue performance 2018 negatively affected costreduction measures taken governments thirdparties lower health care costs company anticipates actions continue negatively affect revenue performance 2019 cyberattack june 27 2017 company experienced network cyberattack led disruption worldwide operations including manufacturing research sales operations due backlog orders certain products result cyberattack company unable fulfill orders certain products certain markets unfavorable effect sales 2018 2017 approximately 150 million 260 million respectively addition company recorded manufacturingrelated expenses primarily unfavorable manufacturing variances cost sales well expenses related remediation efforts selling general administrative expenses research development expenses aggregated approximately 285 million 2017 net insurance recoveries approximately 45 million costs 2018 immaterial referenced company insurance coverage insuring costs resulting cyberattacks received insurance proceeds however disputes certain insurers availability insurance coverage claims related incident operating results sales worldwide sales 423 billion 2018 increase 5 compared 2017 sales growth driven primarily higher sales oncology franchise reflecting strong growth keytruda well alliance revenue related lynparza lenvima also contributing revenue growth higher sales vaccines driven primarily human papillomavirus hpv vaccine gardasilgardasil 9 well higher sales hospital acute care franchise largely attributable bridion noxafil higher sales animal health products also drove revenue growth 2018 sales growth 2018 partially offset declines virology franchise driven primarily lower sales hepatitis c virus hcv treatment zepatier well lower sales shingles herpes zoster vaccine zostavax ongoing effects generic biosimilar competition cardiovascular products zetia vytorin immunology product remicade well lower sales products within diversified brands franchise also partially offset revenue growth 2018 diversified brands franchise includes certain products approaching expiration marketing exclusivity longer protected patents developed markets sales united states 182 billion 2018 growth 5 compared 2017 increase driven primarily higher sales keytruda gardasilgardasil 9 nuvaring bridion well alliance revenue lynparza lenvima higher sales animal health products growth partially offset lower sales zepatier zetia vytorin zostavax januvia janumet invanz products within diversified brands franchise international sales 241 billion 2018 increase 6 compared 2017 increase primarily reflects growth keytruda gardasilgardasil 9 januvia janumet atozet well higher sales animal health products sales growth partially offset lower sales zepatier remicade zetia vytorin products within diversified brands franchise international sales represented 57 total sales 2018 2017 worldwide sales 401 billion 2017 increase 1 compared 2016 sales growth 2017 driven primarily higher sales keytruda zepatier bridion additionally sales 2017 benefited december 31 2016 termination spmsd marketed vaccines major european markets 2017 merck began recording vaccine sales markets previously part spmsd joint venture resulting incremental vaccine sales approximately 400 million 2017 higher sales pneumovax 23 adempas animal health products also contributed revenue growth 2017 increases largely offset effects generic competition certain products including zetia lost us market exclusivity december 2016 vytorin lost us market exclusivity april 2017 cubicin due us patent expiration june 2016 cancidas lost eu patent protection april 2017 revenue growth also offset continued biosimilar competition remicade ongoing generic erosion products including singulair nasonex collectively sales decline attributable products affected generic biosimilar competition 33 billion 2017 lower sales products within diversified brands franchise well lower combined sales diabetes franchise januvia janumet declines sales isentressisentress hd also partially offset revenue growth additionally sales 2017 reduced 125 million due borrowing company made us centers disease control prevention cdc pediatric vaccine stockpile doses gardasil 9 discussed also company unable fulfill orders certain products certain markets due cyberattack unfavorable effect sales 2017 approximately 260 million see note 19 consolidated financial statements details sales company’s products pharmaceutical segment oncology keytruda approved united states eu monotherapy treatment certain patients nsclc melanoma classical hodgkin lymphoma chl hnscc urothelial carcinoma type bladder cancer combination chemotherapy certain patients nonsquamous nsclc keytruda also approved united states monotherapy treatment certain patients gastric gastroesophageal junction adenocarcinoma msih mismatch repair deficient cancer addition fda recently approved keytruda treatment certain patients cervical cancer pmbcl hepatocellular carcinoma merkel cell carcinoma combination chemotherapy patients squamous nsclc see keytruda approved japan treatment certain patients nsclc monotherapy combination chemotherapy melanoma chl msih tumors urothelial carcinoma additionally keytruda approved china treatment certain patients melanoma keytruda also approved many international markets keytruda clinical development program includes studies across broad range cancer types see “research development” august 2018 fda approved expanded label keytruda combination pemetrexed platinum chemotherapy firstline treatment patients metastatic nonsquamous nsclc egfr alk genomic tumor aberrations based results keynote189 trial keytruda combination pemetrexed carboplatin first approved 2017 fda’s accelerated approval process firstline treatment patients metastatic nonsquamous nsclc based tumor response rates progressionfree survival pfs data phase 2 study keynote021 cohort g1 accordance accelerated approval process continued approval contingent upon verification description clinical benefit demonstrated keynote189 resulted fda converting accelerated approval full regular approval also september 2018 ec approved keytruda combination pemetrexed platinum chemotherapy firstline treatment metastatic nonsquamous nsclc adults whose tumors egfr alk positive mutations june 2018 fda approved keytruda treatment patients recurrent metastatic cervical cancer disease progression chemotherapy whose tumors express pdl1 determined fda approved test also june 2018 fda approved keytruda treatment adult pediatric patients refractory pmbcl relapsed two prior lines therapy september 2018 ec approved keytruda monotherapy treatment recurrent metastatic hnscc adults whose tumors express pdl1 tumor proportion score tps ≥50 progressed platinumcontaining chemotherapy based data phase 3 keynote040 trial october 2018 fda approved keytruda combination carboplatin either paclitaxel nabpaclitaxel firstline treatment patients metastatic squamous nsclc based results keynote407 trial approval marks first time antipd1 regimen approved firstline treatment squamous nsclc regardless tumor pdl1 expression status november 2018 fda approved keytruda treatment patients hepatocellular carcinoma previously treated sorafenib based data keynote224 trial december 2018 fda approved keytruda treatment adult pediatric patients recurrent locally advanced metastatic merkel cell carcinoma based results cancer immunotherapy trials network’s citn09keynote017 trial also december 2018 ec approved keytruda adjuvant treatment adults stage iii melanoma lymph node involvement undergone complete resection keytruda approved indication fda february 2019 approvals based data pivotal phase 3 eortc1325keynote054 trial conducted collaboration european organisation research treatment cancer global sales keytruda 72 billion 2018 38 billion 2017 14 billion 2016 yearoveryear increases driven volume growth company continues launch keytruda multiple new indications globally sales united states continue build across multiple approved indications particular treatment nsclc reflecting continued adoption keytruda firstline setting monotherapy patients metastatic nsclc whose tumors high pdl1 expression well uptake keytruda combination pemetrexed carboplatin commonly used chemotherapy regimen firstline treatment metastatic nonsquamous nsclc without pdl1 expression indications contributing sales growth include hnscc bladder melanoma recently approved indications including squamous nsclc msih cancer also contributed growth 2018 sales growth international markets reflects continued uptake treatment nsclc company secured reimbursement major markets sales growth international markets 2018 also includes contributions recently approved indications described including treatment hnscc bladder cancer combination chemotherapy treatment nsclc eu multiple new indications japan treatment melanoma china january 2017 merck entered settlement license agreement resolve worldwide patent infringement litigation related keytruda pursuant settlement company pay royalties 65 net sales keytruda 2017 2023 25 net sales keytruda 2024 2026 global sales emend prevention chemotherapyinduced postoperative nausea vomiting 522 million 2018 decline 6 compared 2017 including 1 favorable effect foreign exchange decline primarily reflects lower demand united states due competition worldwide sales emend 556 million 2017 increase 1 compared 2016 patent provided us market exclusivity emend expired 2015 patent provides market exclusivity major european markets expire may 2019 patent provides us market exclusivity emend injection expires september 2019 patent provides market exclusivity major european markets expires february 2020 although sixmonth pediatric exclusivity may extend date company anticipates sales emend markets decline significantly patent expiries lynparza oral poly adpribose polymerase parp inhibitor developed part collaboration astrazeneca entered july 2017 see note 4 consolidated financial statements currently approved certain types ovarian breast cancer merck recorded alliance revenue 187 million 2018 20 million 2017 related lynparza revenue increase reflects approval new indications well full year activity 2018 january 2018 fda approved lynparza use patients brcamutated human epidermal growth factor receptor 2 her2negative metastatic breast cancer previously treated chemotherapy triggering 70 million capitalized milestone payment merck astrazeneca lynparza also approved japan july 2018 use patients unresectable recurrent brcamutated her2negative breast cancer received prior chemotherapy additionally lynparza approved use maintenance therapy patients platinumsensitive relapsed ovarian cancer regardless brca mutation status japan january 2018 eu may 2018 december 2018 fda approved lynparza use maintenance treatment adult patients deleterious suspected deleterious germline somatic brcamutated advanced epithelial ovarian fallopian tube primary peritoneal cancer complete partial response firstline platinumbased chemotherapy based results solo1 clinical trial triggering 70 million capitalized milestone payment merck astrazeneca lenvima oral receptor tyrosine kinase inhibitor developed part collaboration eisai entered march 2018 see note 4 consolidated financial statements approved certain types thyroid cancer hepatocellular carcinoma combination certain patients renal cell carcinoma merck recorded alliance revenue 149 million 2018 related lenvima 2018 lenvima approved treatment certain patients hepatocellular carcinoma united states eu japan china triggering capitalized milestone payments 250 million aggregate merck eisai vaccines december 31 2016 merck sanofi terminated equallyowned joint venture spmsd developed marketed vaccines europe accordingly vaccine sales 2018 2017 include sales merck vaccines european markets previously part spmsd joint venture whereas sales periods prior 2017 prior 2017 vaccine sales european markets sold spmsd joint venture results reflected equity income affiliates included income expense net supply sales spmsd however included vaccine sales periods prior 2017 incremental vaccine sales resulting termination spmsd joint venture approximately 400 million 2017 approximately 215 million relate gardasilgardasil 9 worldwide sales gardasilgardasil 9 vaccines help prevent certain cancers diseases caused certain types hpv 32 billion 2018 growth 37 compared 2017 including 1 favorable effect foreign exchange sales growth driven primarily higher sales asia pacific region particularly china reflecting continued uptake since launch well higher demand certain european markets sales increase also attributable replenishment 2018 doses borrowed cdc pediatric vaccine stockpile 2017 discussed april 2018 china’s food drug administration approved gardasil 9 use girls women ages 16 26 october 2018 fda approved expanded age indication use women men ages 27 45 prevention certain cancers diseases caused nine hpv types covered vaccine 2017 company made request borrow doses gardasil 9 cdc pediatric vaccine stockpile cdc granted company’s decision borrow doses cdc driven part temporary shutdown resulting cyberattack occurred june 2017 well overall higher demand expected result borrowing company reversed sales related borrowed doses recognized corresponding liability company subsequently replenished portion doses borrowed stockpile net effect borrowing subsequent partial replenishment reduction sales 125 million 2017 company replenished remaining borrowed doses 2018 resulting recognition sales 125 million 2018 reversal related liability global sales gardasilgardasil 9 23 billion 2017 growth 6 compared 2016 sales growth driven primarily higher sales europe resulting termination spmsd joint venture noted well higher demand asia pacific region due part launch china partially offset lower sales united states lower sales united states reflect timing public sector purchases cdc stockpile borrowing described company party certain thirdparty license agreements respect gardasilgardasil 9 pursuant company pays royalties worldwide gardasilgardasil 9 sales royalties vary country range 7 13 included cost sales global sales proquad pediatric combination vaccine help protect measles mumps rubella varicella 593 million 2018 increase 12 compared 2017 driven primarily higher volumes pricing united states volume growth certain european markets worldwide sales proquad 528 million 2017 increase 7 compared 495 million 2016 sales growth 2017 driven primarily higher pricing volumes united states well volume growth international markets particularly europe foreign exchange favorably affected global sales performance 1 2017 worldwide sales mmr ii vaccine help protect measles mumps rubella 430 million 2018 increase 13 compared 2017 driven primarily volume growth latin america global sales mmr ii 382 million 2017 increase 8 compared 353 million 2016 sales growth 2017 largely attributable higher sales europe resulting termination spmsd joint venture foreign exchange favorably affected global sales performance 1 2018 unfavorably affected global sales performance 1 2017 global sales varivax vaccine help prevent chickenpox varicella 774 million 2018 increase 1 compared 2017 reflecting volume growth latin america asia pacific region along higher pricing united states largely offset volume declines turkey loss government tender due competition worldwide sales varivax 767 million 2017 decline 3 compared 792 million 2016 sales decline 2017 driven primarily lower volumes brazil due loss government tender well lower sales united states reflecting lower demand partially offset higher pricing higher sales europe resulting termination spmsd joint venture partially offset sales decline 2017 worldwide sales pneumovax 23 vaccine help prevent pneumococcal disease 907 million 2018 increase 10 compared 2017 sales growth driven primarily higher pricing united states volume growth europe global sales pneumovax 23 821 million 2017 increase 28 compared 2016 driven primarily higher demand pricing united states well higher sales europe resulting termination spmsd joint venture foreign exchange unfavorably affected sales performance 1 2017 global sales rotateq vaccine help protect rotavirus gastroenteritis infants children 728 million 2018 increase 6 compared 2017 driven primarily launch china worldwide sales rotateq 686 million 2017 increase 5 compared 2016 driven primarily higher sales europe resulting termination spmsd joint venture worldwide sales zostavax vaccine help prevent shingles herpes zoster adults 50 years age older 217 million 2018 decline 68 compared 2017 driven lower volumes markets particularly united states lower demand united states reflects launch competing vaccine received preferential recommendation cdc’s advisory committee immunization practices october 2017 prevention shingles zostavax declines partially offset higher demand certain european markets company anticipates competition continue adverse effect sales zostavax future periods global sales zostavax 668 million 2017 decline 2 compared 2016 including 1 favorable effect foreign exchange sales decline driven primarily lower demand united states reflecting approval competing vaccine noted partially offset growth europe resulting termination spmsd joint venture volume growth asia pacific region 2018 fda approved vaxelis diphtheria tetanus toxoids acellular pertussis adsorbed inactivated poliovirus haemophilus b conjugate meningococcal protein conjugate hepatitis b recombinant vaccine use children 6 weeks 4 years age prior 5th birthday vaxelis currently marketed europe developed part jointpartnership merck sanofi merck sanofi working maximize production vaxelis allow sustainable supply meet anticipated us demand commercial supply available prior 2020 hospital acute care global sales bridion reversal two types neuromuscular blocking agents used surgery 917 million 2018 growth 30 compared 2017 driven primarily volume growth united states certain european markets worldwide sales bridion 704 million 2017 growth 46 compared 2016 driven strong global demand particularly united states worldwide sales noxafil prevention invasive fungal infections 742 million 2018 increase 17 compared 2017 including 2 favorable effect foreign exchange sales growth primarily reflects higher demand united states certain european markets china global sales noxafil 636 million 2017 increase 7 compared 2016 primarily reflecting higher demand pricing united states well volume growth europe patent provides us market exclusivity noxafil expires july 2019 additionally patent noxafil expire number major european markets december 2019 company anticipates sales noxafil markets decline significantly thereafter global sales invanz treatment certain infections 496 million 2018 decline 18 compared 2017 including 1 unfavorable effect foreign exchange sales decline driven lower volumes united states patent provided us market exclusivity invanz expired november 2017 generic competition began second half 2018 company experiencing significant decline us invanz sales result generic competition expects decline continue worldwide sales invanz 602 million 2017 increase 7 compared 2016 driven primarily higher sales united states reflecting higher pricing partially offset lower demand well higher demand brazil global sales cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms 367 million 2018 decline 4 compared 2017 including 1 favorable effect foreign exchange worldwide sales cubicin 382 million 2017 decline 65 compared 2016 resulting generic competition united states following expiration us composition patent cubicin june 2016 global sales cancidas antifungal product sold primarily outside united states 326 million 2018 decline 23 compared 2017 422 million 2017 decline 24 compared 2016 foreign exchange favorably affected global sales performance 2 2018 sales declines driven primarily generic competition certain european markets eu compound patent cancidas expired april 2017 accordingly company experiencing significant decline cancidas sales european markets expects decline continue immunology sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey 893 million 2018 growth 9 compared 2017 including 4 favorable effect foreign exchange sales simponi 819 million 2017 growth 7 compared 2016 including 1 favorable effect foreign exchange sales growth years driven higher demand europe company anticipates sales simponi unfavorably affected future periods recent launch biosimilars competing product sales remicade treatment inflammatory diseases marketed company europe russia turkey 582 million 2018 decline 31 compared 2017 837 million 2017 decline 34 compared 2016 foreign exchange favorably affected sales performance 2 2018 company lost market exclusivity remicade major european markets 2015 longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition expects declines continue virology worldwide sales isentressisentress hd hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection 11 billion 2018 decline 5 compared 2017 12 billion 2017 decline 13 compared 2016 foreign exchange favorably affected global sales performance 1 2017 sales declines primarily reflect competitive pressure united states europe august 2018 fda approved two new hiv1 medicines delstrigo oncedaily fixeddose combination tablet doravirine lamivudine tenofovir disoproxil fumarate pifeltro doravirine new nonnucleoside reverse transcriptase inhibitor administered combination antiretroviral medicines delstrigo pifeltro indicated treatment hiv1 infection adult patients prior antiretroviral treatment experience delstrigo pifeltro also approved ec november 2018 january 2019 fda accepted review supplemental new drug applications nda pifeltro delstrigo seeking approval use patients living hiv1 switching stable antiretroviral regimen whose virus suppressed prescription drug user fee act pdufa date supplemental ndas september 20 2019 global sales zepatier treatment adult patients certain types chronic hepatitis c virus hcv infection 455 million 2018 decline 73 compared 2017 sales decline driven primarily unfavorable effects increasing competition declining patient volumes particularly united states europe japan company anticipates sales zepatier future continue adversely affected competition lower patient volumes worldwide sales zepatier 17 billion 2017 compared 555 million 2016 sales growth 2017 driven primarily higher sales europe united states japan following product launch 2016 cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy well atozet rosuzet marketed certain countries outside united states medicines lowering ldl cholesterol 18 billion 2018 decline 26 compared 2017 including 3 favorable effect foreign exchange sales decline driven primarily lower demand united states europe zetia vytorin lost market exclusivity united states december 2016 april 2017 respectively accordingly company experienced rapid substantial decline us zetia vytorin sales result generic competition lost nearly us sales products addition company lost market exclusivity major european markets ezetrol april 2018 also lost market exclusivity certain european markets inegy see note 11 consolidated financial statements accordingly company experiencing significant sales declines markets result generic competition expects declines continue declines partially offset higher sales japan due part launch atozet combined worldwide sales ezetimibe family 24 billion 2017 decline 39 compared 2016 sales decline driven lower volumes pricing zetia vytorin united states result generic competition due loss us market exclusivity described pursuant collaboration bayer ag bayer see note 4 consolidated financial statements merck lead commercial rights adempas cardiovascular drug treatment pulmonary arterial hypertension countries outside americas bayer lead rights americas including united states companies share profits equally collaboration 2016 merck began promoting distributing adempas europe transition bayer merck territories including japan continued 2017 revenue adempas includes sales merck’s marketing territories well merck’s share profits sale adempas bayer’s marketing territories merck recorded revenue related adempas 329 million 2018 increase 10 compared 2017 reflecting higher sales merck’s marketing territories partially offset lower profit sharing bayer due part lower pricing united states revenue related adempas 300 million 2017 increase 78 compared 2016 reflecting higher sales merck’s marketing territories well recognition higher profit sharing bayer foreign exchange favorably affected global sales performance 3 2018 1 2017 diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes 59 billion 2018 essentially flat compared 2017 global combined sales januvia janumet 59 billion 2017 decline 3 compared 2016 foreign exchange favorably affected sales performance 1 2018 2017 sales performance periods driven primarily ongoing pricing pressure particularly united states partially offset higher demand international markets company expects pricing pressure continue women’s health worldwide sales nuvaring vaginal contraceptive product 902 million 2018 increase 19 compared 2017 including 1 favorable effect foreign exchange sales growth driven primarily higher pricing united states patent provided us market exclusivity nuvaring expired april 2018 company anticipates significant decline us nuvaring sales future periods result generic competition global sales nuvaring 761 million 2017 decline 2 compared 2016 including 1 favorable effect foreign exchange sales decline driven primarily lower sales united states reflecting lower volumes partially offset higher pricing lower demand europe animal health segment global sales animal health products 42 billion 2018 increase 9 compared 2017 reflecting growth inline recently launched companion animal livestock products higher sales companion animal products reflect growth bravecto line products kill fleas ticks dogs cats 12 weeks well higher sales companion animal vaccines growth livestock products reflects higher sales ruminant poultry swine products worldwide sales animal health products 39 billion 2017 increase 11 compared 2016 primarily reflecting higher sales companion animal products largely driven growth bravecto reflecting growth oral formulation continued uptake topical formulation launched 2016 animal health sales growth 2017 also driven higher sales ruminant poultry swine products december 2018 company signed agreement acquire antelliq leader digital animal identification traceability monitoring solutions see note 3 consolidated financial statements costs expenses greater 100 cost sales cost sales 135 billion 2018 129 billion 2017 140 billion 2016 costs 2018 include 423 million charge related termination collaboration agreement samsung bioepis co ltd samsung insulin glargine see note 3 consolidated financial statements also 2018 company recorded 188 million cumulative amortization expense amounts capitalized connection recognition liabilities potential future milestone payments related collaborations see note 4 consolidated financial statements cost sales includes expenses amortization intangible assets recorded connection business acquisitions totaled 27 billion 2018 31 billion 2017 37 billion 2016 costs 2017 2016 also include intangible asset impairment charges 58 million 347 million respectively related marketed products intangibles recorded connection business acquisitions see note 8 consolidated financial statements costs 2017 also include 76 million intangible asset impairment charge related licensing agreement company may recognize additional noncash impairment charges future related intangible assets measured fair value capitalized connection business acquisitions charges could material also included cost sales expenses associated restructuring activities amounted 21 million 138 million 181 million 2018 2017 2016 respectively primarily reflecting accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 681 2018 compared 678 2017 645 2016 yearoveryear improvements gross margin reflect lower net impact amortization intangible assets intangible asset impairment charges related business acquisitions well restructuring costs noted reduced gross margin 63 percentage points 2018 83 percentage points 2017 106 percentage points 2016 gross margin improvement 2018 compared 2017 also reflects favorable effects product mix amortization unfavorable manufacturing variances recorded 2017 resulting part june 2017 cyberattack gross margin improvement 2018 partially offset charge associated termination collaboration agreement samsung well unfavorable effects pricing pressure cumulative amortization expense potential future milestone payments related collaborations noted gross margin improvement 2017 compared 2016 also reflects favorable effects product mix manufacturingrelated costs associated cyberattack partially offset gross margin improvement 2017 selling general administrative selling general administrative sga expenses 101 billion 2018 essentially flat compared 2017 reflecting higher administrative costs unfavorable effect foreign exchange offset lower selling promotional expenses sga expenses 101 billion 2017 increase 1 compared 2016 higher administrative costs including costs associated company operating vaccines business european markets previously part spmsd joint venture remediation costs related cyberattack higher promotional expenses related product launches partially offset lower restructuring acquisition divestiturerelated costs lower selling expenses favorable effect foreign exchange sga expenses 2016 include restructuring costs 95 million related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed sga expenses also include acquisition divestiturerelated costs 32 million 44 million 78 million 2018 2017 2016 respectively consisting integration transaction certain costs related business acquisitions divestitures research development research development rd expenses 98 billion 2018 decline 6 compared 2017 decrease primarily reflects lower expenses 2018 upfront license option payments related formation oncology collaborations lower inprocess research development iprd impairment charges reduction expenses associated decrease estimated fair value measurement liabilities contingent consideration partially offset higher clinical development spending investment discovery early drug development well higher expenses related business development activities including charge 2018 acquisition viralytics rd expenses 103 billion 2017 increase 1 compared 2016 increase driven primarily charge 2017 related formation collaboration astrazeneca unfavorable effect changes estimated fair value measurement liabilities contingent consideration higher clinical development spending largely offset lower iprd impairment charges lower restructuring costs rd expenses comprised costs directly incurred merck research laboratories mrl company’s research development division focuses human healthrelated activities 51 billion 2018 46 billion 2017 44 billion 2016 also included rd expenses costs incurred divisions support rd activities including depreciation production general administrative well licensing activity certain costs operating segments including pharmaceutical animal health segments aggregate 28 billion 29 billion 26 billion 2018 2017 2016 respectively additionally rd expenses 2018 include 14 billion charge related formation collaboration eisai see note 4 consolidated financial statements well 344 million charge acquisition viralytics see note 3 consolidated financial statements rd expenses 2017 include 235 billion charge related formation collaboration astrazeneca see note 4 consolidated financial statements rd expenses also include iprd impairment charges 152 million 483 million 36 billion 2018 2017 2016 respectively see note 8 consolidated financial statements company may recognize additional noncash impairment charges future related cancellation delay pipeline programs measured fair value capitalized connection business acquisitions charges could material addition rd expenses include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection acquisitions 2018 2016 company recorded net reduction expenses 54 million 402 million respectively decrease estimated fair value liabilities contingent consideration related discontinuation delay certain programs see note 6 consolidated financial statements 2017 company recorded charges 27 million increase estimated fair value liabilities contingent consideration rd expenses 2016 also reflect 142 million accelerated depreciation asset abandonment costs associated restructuring activities restructuring costs 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network restructuring costs primarily representing separation related costs associated restructuring activities 632 million 776 million 651 million 2018 2017 2016 respectively 2018 2017 2016 separation costs 473 million 552 million 216 million respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated approximately 2160 positions 2018 2450 positions 2017 2625 positions 2016 related restructuring activities also included restructuring costs asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included cost sales selling general administrative research development discussed company recorded aggregate pretax costs 658 million 2018 927 million 2017 11 billion 2016 related restructuring program activities see note 5 consolidated financial statements company substantially completed actions programs income expense net income expense net 402 million income 2018 500 million income 2017 189 million expense 2016 details components income expense net see note 15 consolidated financial statements pharmaceutical segment profits comprised segment sales less standard costs well sga rd expenses directly incurred segment animal health segment profits comprised segment sales less cost sales well sga rd expenses directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred mrl general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits acquisition divestiturerelated costs amortization purchase accounting adjustments intangible asset impairment charges expense income related changes estimated fair value measurement liabilities contingent consideration restructuring costs portion equity income additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items including charge related termination collaboration agreement samsung insulin glargine 2018 loss extinguishment debt 2017 charge related settlement worldwide keytruda patent litigation gains divestitures 2016 reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales first quarter 2018 company adopted new accounting standard related classification certain defined benefit plan costs resulted change measurement segment profits see note 19 consolidated financial statements prior period amounts recast conform new presentation pharmaceutical segment profits grew 8 2018 compared 2017 primarily reflecting higher sales lower selling promotional costs pharmaceutical segment profits grew 2 2017 compared 2016 primarily reflecting higher sales favorable effects product mix animal health segment profits grew 7 2018 14 2017 driven primarily higher sales partially offset increased selling promotional costs taxes income effective income tax rates 288 2018 629 2017 154 2016 reflect impacts acquisition divestiturerelated costs restructuring costs beneficial impact foreign earnings effective income tax rate 2018 includes measurementperiod adjustments provisional amounts recorded 2017 associated enactment us tax legislation known tax cuts jobs act tcja including 124 million related transition tax see note 16 consolidated financial statements addition effective income tax rate 2018 reflects unfavorable impacts 14 billion pretax charge recorded connection formation collaboration eisai 423 million pretax charge related termination collaboration agreement samsung tax benefits recognized effective income tax rate 2017 includes provisional net charge 26 billion related enactment tcja effective income tax rate 2017 also reflects unfavorable impact 235 billion pretax charge recorded connection formation collaboration astrazeneca tax benefit recognized partially offset favorable impact net tax benefit 234 million related settlement certain federal income tax issues see note 16 consolidated financial statements benefit 88 million related settlement state income tax issue net loss income attributable noncontrolling interests net loss income attributable noncontrolling interests 27 million 2018 compared 24 million 2017 21 million 2016 loss 2018 primarily reflects portion goodwill impairment charges related certain business healthcare services segment attributable noncontrolling interests net income earnings per common share net income attributable merck co inc 62 billion 2018 24 billion 2017 39 billion 2016 eps 232 2018 087 2017 141 2016 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance merck providing management believes information enhances investors’ understanding company’s results permits investors understand management assesses performance nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items considered nonrecurring consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap eps management uses measures internally planning forecasting purposes measure performance company along metrics senior management’s annual compensation derived part using nongaap income nongaap eps since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies information nongaap income nongaap eps considered addition substitute superior net income eps prepared accordance generally accepted accounting principles united states gaap reconciliation gaap financial measures nongaap financial measures follows 1 estimated tax impact excluded items determined applying statutory rate originating territory nongaap adjustments 2 amount 2017 provisional see note 16 consolidated financial statements 3 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection business acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement liabilities contingent consideration also excluded integration transaction certain costs associated business acquisitions divestitures restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 5 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs certain items nongaap income nongaap eps exclude certain items adjusted evaluating individual basis considering quantitative qualitative aspects typically consist items unusual nature significant results particular period indicative future operating results excluded nongaap income nongaap eps 2018 charge related formation collaboration eisai see note 4 consolidated financial statements charge related termination collaboration agreement samsung insulin glargine see note 3 consolidated financial statements charge acquisition viralytics see note 3 consolidated financial statements measurementperiod adjustments related provisional amounts recorded tcja see note 16 consolidated financial statements excluded nongaap income nongaap eps 2017 charge related formation collaboration astrazeneca see note 4 consolidated financial statements well provisional net tax charge related enactment tcja net tax benefit related settlement certain federal income tax issues tax benefit related settlement state income tax issue see note 16 consolidated financial statements excluded nongaap income nongaap eps 2016 charge settle worldwide patent litigation related keytruda research development chart reflecting company’s current research pipeline february 22 2019 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally keytruda approved antipd1 therapy clinical development expanded indications different cancer types february 2019 fda accepted granted priority review supplemental bla keytruda combination inlyta axitinib tyrosine kinase inhibitor firstline treatment patients advanced renal cell carcinoma supplemental bla based findings phase 3 keynote426 trial demonstrated keytruda combination axitinib compared sunitinib significantly improved overall survival os pfs firstline treatment advanced renal cell carcinoma data presented american society clinical oncology asco genitourinary cancers symposium february 2019 supplemental bla also included supporting data phase 1b keynote035 trial fda set pdufa date june 20 2019 merck filed data keynote426 regulatory authorities worldwide february 2019 committee medicinal products human use european medicines agency ema adopted positive opinion recommending keytruda combination carboplatin either paclitaxel nabpaclitaxel firstline treatment metastatic squamous nsclc adults recommendation based results pivotal phase 3 keynote407 trial enrolled patients regardless pdl1 tumor expression status trial showed significant improvement os pfs patients taking keytruda combination chemotherapy carboplatin either paclitaxel nabpaclitaxel compared chemotherapy alone approved would mark first approval europe antipd1 therapy combination chemotherapy adults metastatic squamous nsclc october 2018 fda approved keytruda combination carboplatinpaclitaxel nabpaclitaxel firstline treatment metastatic squamous nsclc regardless pdl1 expression december 2018 fda extended action date supplemental bla seeking approval keytruda monotherapy firstline treatment locally advanced metastatic nsclc patients whose tumors express pdl1 tps ≥1 without egfr alk genomic tumor aberrations supplemental bla based results phase 3 keynote042 trial keytruda monotherapy demonstrated significant improvement os compared chemotherapy patient population company submitted additional data analyses fda constituted major amendment extended pdufa date three months april 11 2019 merck continues work closely fda review supplemental bla february 2019 fda accepted granted priority review supplemental bla keytruda monotherapy treatment patients advanced sclc whose disease progressed two lines prior therapy supplemental bla seeking accelerated approval new indication based data sclc cohorts phase 2 keynote158 phase 1b keynote028 trials fda set pdufa date june 17 2019 keytruda also studied combination chemotherapy ongoing phase 3 keynote604 study patients newly diagnosed extensive stage sclc february 2019 fda accepted supplemental bla keytruda monotherapy combination platinum 5fluorouracil chemotherapy firstline treatment patients recurrent metastatic hnscc supplemental bla based part data pivotal phase 3 keynote048 trial keytruda demonstrated significant improvement os compared standard care monotherapy patients whose tumors expressed pdl1 combined positive score cps≥20 cps≥1 combination chemotherapy total patient population data presented european society medical oncology esmo 2018 congress fda granted priority review supplemental bla set pdufa date june 10 2019 keynote048 also serves confirmatory trial keynote012 phase 1b study supported previous accelerated approval keytruda monotherapy treatment patients recurrent metastatic hnscc disease progression platinumcontaining chemotherapy november 2018 merck announced phase 3 keynote181 trial investigating keytruda monotherapy secondline treatment advanced metastatic esophageal esophagogastric junction carcinoma met primary endpoint os patients whose tumors expressed pdl1 cps ≥10 pivotal study treatment keytruda resulted statistically significant improvement os compared chemotherapy paclitaxel docetaxel irinotecan patients cps ≥10 regardless histology primary endpoint os also evaluated patients squamous cell histology entire intentiontotreat study population directionally favorable statistical significance os met two patient groups per statistical analysis plan key secondary endpoints pfs objective response rate orr formally tested os reached full intentiontotreat study population results presented january 2019 asco gastrointestinal cancers symposium submitted regulatory review additionally keytruda received breakthrough therapy designation fda treatment highrisk earlystage triplenegative breast cancer combination neoadjuvant chemotherapy fda’s breakthrough therapy designation intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints october 2018 merck announced first presentation results interim analysis keynote057 phase 2 trial evaluating keytruda previously treated patients highrisk nonmuscle invasive bladder cancer interim analysis study’s primary endpoint showed complete response rate nearly 40 three months keytruda patients whose disease unresponsive bacillus calmetteguérin therapy current standard care disease ineligible refused undergo radical cystectomy results well study findings presented esmo 2018 congress february 2019 merck announced pivotal phase 3 keynote240 trial evaluating keytruda plus best supportive care treatment patients advanced hepatocellular carcinoma previously treated systemic therapy meet coprimary endpoints os pfs compared placebo plus best supportive care final analysis study improvement os patients treated keytruda compared placebo however os results meet statistical significance per prespecified statistical plan results pfs also directionally favorable keytruda arm compared placebo reach statistical significance key secondary endpoint orr formally tested since superiority reached os pfs results presented upcoming medical meeting shared fda discussion keytruda clinical development program consists 900 clinical trials including 600 trials combine keytruda cancer treatments studies encompass 30 cancer types including bladder cervical colorectal esophageal gastric head neck hepatocellular hodgkin lymphoma nonhodgkin lymphoma melanoma mesothelioma nasopharyngeal nsclc ovarian pmbcl prostate renal smallcell lung triplenegative breast many currently phase 3 clinical development trials planned cancers lynparza oral parp inhibitor currently approved certain types ovarian breast cancer july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types see note 4 consolidated financial statements april 2018 merck astrazeneca announced ema validated review marketing authorization application lynparza use patients deleterious suspected deleterious brcamutated her2negative metastatic breast cancer previously treated chemotherapy neoadjuvant adjuvant metastatic setting first regulatory submission parp inhibitor breast cancer europe lynparza tablets also review eu maintenance treatment patients newlydiagnosed brcamutated advanced ovarian cancer complete partial response following firstline standard platinumbased chemotherapy submission based positive results pivotal phase 3 solo1 trial showed statisticallysignificant clinicallymeaningful improvement pfs lynparza compared placebo reducing risk disease progression death 70 patients newlydiagnosed brcamutated advanced ovarian cancer complete partial response platinumbased chemotherapy december 2018 merck astrazeneca announced positive results randomized openlabel controlled phase 3 solo3 trial lynparza tablets patients relapsed ovarian cancer two lines treatment trial conducted postapproval commitment agreement fda results trial showed brcamutated advanced ovarian cancer patients treated lynparza following two prior lines chemotherapy demonstrated statistically significant clinically meaningful improvement primary endpoint orr key secondary endpoint pfs compared chemotherapy merck astrazeneca plan discuss results fda mk7655a combination relebactam investigational betalactamase inhibitor imipenemcilastatin approved carbapenem antibiotic february 2019 merck announced fda accepted priority review nda mk7655a treatment complicated urinary tract infections complicated intraabdominal infections caused certain susceptible gramnegative bacteria adults limited alternative therapies available pdufa date july 16 2019 april 2018 merck announced pivotal phase 3 study mk7655a demonstrated favorable overall response treatment certain imipenemnonsusceptible bacterial infections primary endpoint lower treatmentemergent nephrotoxicity kidney toxicity secondary endpoint compared colistin colistimethate sodium plus imipenemcilastatin regimen fda previously designated combination qualified infectious disease product designated fast track status treatment hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia complicated intraabdominal infections complicated urinary tract infections v920 rvsv∆gzebovgp live attenuated investigational ebola zaire disease vaccine candidate studied large scale phase 23 clinical trials december 2015 merck announced application emergency use assessment listing eual v920 accepted review world health organization according eual process designed expedite availability vaccines needed public health emergencies another outbreak ebola decision grant v920 eual status based data regarding quality safety efficacyeffectiveness well riskbenefit analysis emergency use eual designation allows emergency use vaccine remains investigational yet licensed commercial distribution july 2016 merck announced fda granted v920 breakthrough therapy designation ema granted vaccine candidate prime priority medicines status november 2018 merck announced started submission rolling bla fda v920 rolling submission made pursuant fda’s breakthrough therapy designation merck expects rolling submission bla completed 2019 company also intends file v920 ema 2019 february 2019 merck announced fda accepted priority review supplemental nda zerbaxa treat adult patients nosocomial pneumonia including ventilatorassociated pneumonia caused certain susceptible gramnegative microorganisms pdufa date june 3 2019 zerbaxa also review indication ema zerbaxa currently approved united states treatment adult patients complicated urinary tract infections caused certain susceptible gramnegative microorganisms also indicated combination metronidazole treatment adult patients complicated intraabdominal infections caused certain susceptible gramnegative grampositive microorganisms addition candidates regulatory review company several drug candidates phase 3 clinical development addition keytruda programs discussed mk7264 gefapixant selective nonnarcotic orallyadministered p2x3receptor agonist investigated phase 3 trials treatment refractory chronic cough phase 2 trial treatment women endometriosisrelated pain lenvima orally available tyrosine kinase inhibitor currently approved certain types thyroid cancer hepatocellular carcinoma combination certain patients renal cell carcinoma march 2018 merck eisai entered strategic collaboration worldwide codevelopment cocommercialization lenvima see note 4 consolidated financial statements agreement merck eisai develop commercialize lenvima jointly monotherapy combination keytruda per agreement companies jointly initiate clinical studies evaluating keytrudalenvima combination support 11 potential indications six types cancer endometrial cancer nsclc hepatocellular carcinoma head neck cancer bladder cancer melanoma well basket trial targeting multiple cancer types fda granted breakthrough therapy designation keytruda combination lenvima potential treatment patients advanced andor metastatic renal cell carcinoma potential treatment certain patients advanced andor metastatic nonmicrosatellite instability highproficient mismatch repair endometrial carcinoma mk1242 vericiguat investigational treatment heart failure studied patients suffering chronic heart failure reduced ejection fracture phase 3 clinical trial chronic heart failure preserved ejection fracture phase 2 clinical trial development vericiguat part worldwide strategic collaboration merck bayer see note 4 consolidated financial statements v114 investigational polyvalent conjugate vaccine prevention pneumococcal disease june 2018 merck initiated first phase 3 study adult population prevention invasive pneumococcal disease currently five phase 3 adult studies ongoing including studies healthy adults 50 years age older adults risk factors pneumococcal disease infected hiv recipients allogeneic hematopoietic stem cell transplant october 2018 merck began first phase 3 study pediatric population currently three studies ongoing including studies healthy infants children afflicted sickle cell disease january 2019 merck announced v114 received breakthrough therapy designation fda prevention invasive pneumococcal disease caused vaccine serotypes pediatric patients 6 weeks 18 years age result changes herpes zoster vaccine environment merck ending development v212 investigational vaccine prevention shingles immunocompromised patients company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities company committed ensuring externally sourced programs remain important component pipeline strategy focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company also reviews pipeline examine candidates may provide value outlicensing company continues evaluate certain latestage clinical development platform technology assets determine outlicensing sale potential company’s clinical pipeline includes candidates multiple disease areas including cancer cardiovascular diseases diabetes infectious diseases neurosciences obesity pain respiratory diseases vaccines acquired inprocess research development connection business acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2018 balance iprd 11 billion iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date company may also recover research development expenditures made since acquisition develop programs circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2018 2017 2016 company recorded iprd impairment charges within research development expenses 152 million 483 million 36 billion respectively see note 8 consolidated financial statements additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent transactions described merck actively monitoring landscape growth opportunities meet company’s strategic criteria march 2018 merck eisai announced strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai agreement merck eisai develop commercialize lenvima jointly monotherapy combination merck’s antipd1 therapy keytruda agreement merck made upfront payment eisai 750 million make payments 650 million certain option rights 2021 325 million paid march 2019 200 million expected paid 2020 125 million expected paid 2021 company recorded charge 14 billion research development expenses 2018 related upfront payment future option payments addition agreement provides eisai receive 385 million associated achievement certain clinical regulatory milestones 397 billion achievement milestones associated sales lenvima see note 4 consolidated financial statements june 2018 merck acquired viralytics limited viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 502 million 378 million transaction provided merck full rights cavatak v937 formerly cva21 viralytics’s investigational oncolytic immunotherapy cavatak based viralytics’s proprietary formulation oncolytic virus coxsackievirus type a21 shown preferentially infect kill cancer cells cavatak currently evaluated multiple phase 1 phase 2 clinical trials intratumoral intravenous agent including combination keytruda previous agreement merck viralytics study investigating use keytruda cavatak combination melanoma prostate lung bladder cancers transaction accounted acquisition asset merck recorded net assets 34 million primarily cash acquisition date research development expenses 344 million 2018 related transaction future contingent payments associated acquisition february 2019 merck immune design entered definitive agreement merck acquire immune design 585 per share cash approximate value 300 million immune design latestage immunotherapy company employing nextgeneration vivo approaches enable body’s immune system fight disease immune design’s proprietary technologies glaas zvex engineered activate immune system’s natural ability generate andor expand antigenspecific cytotoxic immune cells fight cancer chronic diseases terms acquisition agreement merck subsidiary initiate tender offer acquire outstanding shares immune design closing tender offer subject certain conditions including tender shares representing least majority total number immune design’s outstanding shares expiration waiting period hartscottrodino antitrust improvements act customary conditions transaction expected close early second quarter 2019 capital expenditures capital expenditures 26 billion 2018 19 billion 2017 16 billion 2016 expenditures united states 15 billion 2018 12 billion 2017 10 billion 2016 october 2018 company announced plans invest approximately 16 billion new capital projects 20182022 focus investment primarily increasing manufacturing capacity across merck’s key businesses depreciation expense 14 billion 2018 15 billion 2017 16 billion 2016 years 10 billion depreciation expense applied locations united states total depreciation expense 2017 2016 included accelerated depreciation 60 million 227 million respectively associated restructuring activities see note 5 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders decline working capital 2018 compared 2017 reflects utilization cash shortterm borrowings fund 50 billion asr agreements 125 billion payment redeem debt connection exercise makewhole provision discussed well 750 million upfront payment related formation collaboration eisai discussed decline working capital 2017 compared 2016 primarily reflects reclassification 30 billion notes due first half 2018 longterm debt shortterm debt 185 billion upfront option payments related formation astrazeneca collaboration discussed well 810 million paid redeem debt connection tender offers discussed cash provided operating activities 109 billion 2018 65 billion 2017 104 billion 2016 lower cash provided operating activities 2017 reflects 28 billion payment related settlement certain federal income tax issues see note 16 consolidated financial statements payments 185 billion related formation collaboration astrazeneca see note 4 consolidated financial statements 625 million payment made company related previously disclosed settlement worldwide keytruda patent litigation cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders cash provided investing activities 43 billion 2018 compared 27 billion 2017 increase cash provided investing activities driven primarily lower purchases securities investments partially offset higher capital expenditures lower proceeds sales securities investments 350 million milestone payment 2018 related collaboration bayer see note 4 consolidated financial statements cash provided investing activities 27 billion 2017 compared use cash investing activities 32 billion 2016 change driven primarily lower purchases securities investments higher proceeds sales securities investments lower use cash acquisitions businesses cash used financing activities 132 billion 2018 compared 100 billion 2017 increase cash used financing activities driven primarily higher purchases treasury stock largely asr agreements discussed higher payments debt payment contingent consideration related prior year business acquisition partially offset increase shortterm borrowings cash used financing activities 100 billion 2017 compared 90 billion 2016 increase cash used financing activities driven primarily proceeds issuance debt 2016 well higher purchases treasury stock lower proceeds exercise stock options 2017 partially offset lower payments debt 2017 company’s contractual obligations december 31 2018 follows 1 includes future inventory purchases company committed connection certain divestitures 2 december 31 2018 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 23 billion including 44 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2019 cannot made 3 connection enactment tcja company required pay onetime transition tax company elected pay period eight years permitted tcja see note 16 consolidated financial statements purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments related collaborative arrangements acquisitions contingent milestone payments considered contractual obligations contingent upon successful achievement developmental regulatory approval commercial milestones december 31 2018 company liabilities milestone payments related collaborations astrazeneca eisai bayer see note 4 consolidated financial statements also excluded research development obligations potential future funding commitments approximately 40 million investments research venture capital funds loans payable current portion longterm debt reflects 149 million longdated notes subject repayment option holders required funding obligations 2019 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 50 million us pension plans 150 million international pension plans 15 million postretirement benefit plans 2019 december 2018 company exercised makewhole provision 125 billion 500 notes due 2019 repaid debt november 2017 company launched tender offers certain outstanding notes debentures company paid 810 million aggregate consideration applicable purchase price together accrued interest redeem 585 million principal amount debt validly tendered connection tender offers november 2016 company issued €10 billion principal amount senior unsecured notes consisting €500 million principal amount 050 notes due 2024 €500 million principal amount 1375 notes due 2036 company used net proceeds offering 11 billion general corporate purposes company 60 billion credit facility matures june 2023 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility march 2018 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations october 2018 merck announced board directors approved 15 increase company’s quarterly dividend raising 055 per share 048 per share company’s outstanding common stock payment made january 2019 january 2019 board directors declared quarterly dividend 055 per share company’s common stock second quarter 2019 payable april 2019 november 2017 merck’s board directors authorized purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions october 2018 merck’s board directors authorized additional 10 billion treasury stock purchases time limit completion company entered asr agreements 5 billion discussed company spent 91 billion purchase shares common stock treasury 2018 december 31 2018 company’s remaining share repurchase authorization 119 billion company purchased 40 billion 34 billion common stock 2017 2016 respectively authorized share repurchase programs october 25 2018 company entered asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers october 29 2018 funded existing cash investments well shortterm borrowings number shares merck’s common stock merck may receive may required remit upon final settlement asr agreements based upon average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount final settlement transaction asr agreements expected occur first half 2019 may occur earlier option dealers later certain circumstances merck obligated make adjustment payments dealers asr agreements merck may elect satisfy obligations cash shares merck’s common stock financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options merck principally sells foreign currency revenue hedging program uniform weakening us dollar would yield largest overall potential loss market value hedge instruments market value merck’s hedges would declined estimated 441 million 400 million december 31 2018 2017 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2018 2017 income taxes would declined approximately 134 million 92 million 2018 2017 respectively company net short payable position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows economy argentina determined hyperinflationary 2018 consequently accordance us gaap company began remeasuring monetary assets liabilities operations earnings impact company’s results immaterial company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income loss oci remain accumulated comprehensive income loss aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded component changes fair value excluded components recognized oci accordance new guidance adopted january 1 2018 see note 2 consolidated financial statements company elected recognize earnings initial value excluded component straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk may 2018 four interest rate swaps notional amounts aggregating 10 billion matured swaps effectively converted company’s 10 billion 130 fixedrate notes due 2018 variable rate debt december 2018 connection early repayment debt company settled three interest rate swaps notional amounts aggregating 550 million swaps effectively converted portion company’s 125 billion 500 notes due 2019 variable rate debt december 31 2018 company party 19 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2018 2017 would positively affected net aggregate market value instruments 12 billion 13 billion respectively one percentage point decrease december 31 2018 2017 would negatively affected net aggregate market value 14 billion 15 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions dispositions determine whether transactions accounted acquisitions disposals assets businesses company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination thenuseful life asset generally determined period substantial majority cash flows expected generated begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd also determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate company determines transaction accounted acquisition business transaction accounted asset acquisition rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense contingent consideration recognized acquisition date revenue recognition january 1 2018 company adopted new standard revenue recognition see note 2 consolidated financial statements changes company’s revenue recognition policy result adopting new guidance described recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment certain merck entities including us entities contract terms control goods passes customer upon shipment however either pursuant terms contract business practice merck retains responsibility goods lost damaged transit prior adoption new standard merck would recognize revenue entities upon delivery goods new guidance company recognizing revenue time shipment entities businesses within company’s healthcare services segment certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued company continually monitors provision aggregate customer discounts material adjustments estimates associated aggregate customer discount provision 2018 2017 2016 summarized information changes aggregate customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 245 million 24 billion respectively december 31 2018 198 million 24 billion respectively december 31 2017 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 16 2018 21 2017 14 2016 outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically net 36 days receipt invoice us animal health customers typically net 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide abovementioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2018 2017 7 million 80 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters see note 11 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2018 2017 approximately 245 million 160 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 16 million 2018 estimated 57 million aggregate years 2019 2023 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 71 million 82 million december 31 2018 2017 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 60 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 348 million 2018 312 million 2017 300 million 2016 december 31 2018 560 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension plans totaled 195 million 2018 201 million 2017 144 million 2016 net periodic benefit credit postretirement benefit plans 45 million 2018 60 million 2017 88 million 2016 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net loss amortization company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due discount rates company’s us pension postretirement benefit plans ranged 400 440 december 31 2018 compared range 320 380 december 31 2017 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data current market conditions actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate 2019 expected rate return company’s us pension postretirement benefit plans range 770 810 compared range 770 830 2018 decrease primarily due modest shift asset allocation company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 50 us equities 15 30 international equities 30 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 11 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 80 million favorable unfavorable impact company’s net periodic benefit cost 2018 reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 50 million favorable unfavorable impact merck’s net periodic benefit cost 2018 required funding obligations 2019 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed streamline company’s cost structure result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing termination costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within cost sales selling general administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangible assets excluding iprd initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments marketable debt securities impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost changes fair value considered temporary reported net tax oci otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 16 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements recently issued accounting standards discussion recently issued accounting standards see note 2 consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning negative variations foregoing one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7management’s discussion analysis financial condition results operations following section form 10k generally discusses 2020 2019 results yeartoyear comparisons 2020 2019 discussion 2018 results yeartoyear comparisons 2019 2018 included form 10k found “management’s discussion analysis financial condition results operations” part ii item 7 company’s annual report form 10k fiscal year ended december 31 2019 filed february 26 2020 description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include two operating segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers company previously healthcare services segment provided services solutions focused engagement health analytics clinical services improve value care delivered patients company divested remaining businesses segment first quarter 2020 company previously alliances segment primarily included activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 planned spinoff women’s health biosimilars established brands new company february 2020 merck announced intention spinoff products women’s health biosimilars established brands businesses new independent publicly traded company named organon co organon distribution organon’s publicly traded stock company shareholders distribution expected qualify taxfree company shareholders us federal income tax purposes established brands included transaction consist dermatology nonopioid pain management respiratory select cardiovascular products including zetia vytorin well rest merck’s diversified brands franchise merck’s existing research pipeline programs continue owned developed within merck planned organon development capabilities initially focused latestage development lifecycle management expected time develop research capabilities selected therapeutic areas spinoff expected completed late second quarter 2021 subject market certain conditions overview financial highlights 1 nongaap net income nongaap earnings per share eps exclude acquisition divestiturerelated costs restructuring costs certain items discussion reconciliation gaap nongaap net income eps see “nongaap income nongaap eps” executive summary worldwide sales 480 billion 2020 increase 2 compared 2019 4 excluding unfavorable effect foreign exchange sales increase driven primarily oncology certain hospital acute care products animal health growth areas largely offset negative effects coronavirus disease 2019 covid19 pandemic discussed effects generic competition particularly diversified brands women’s health franchises competitive pressure virology franchise pricing pressure diabetes franchise 2020 merck continued executing strategic priorities reporting yearoveryear sales growth despite business challenges posed covid19 pandemic roughly twothirds merck’s pharmaceutical segment revenue comprised physicianadministered products sales negatively affected 2020 patients’ inability access health care providers fewer well visits social distancing measures however latter part year company experienced partial recovery underlying demand products across key growth pillars despite pandemic merck employees across organization continued important work enrolling maintaining clinical studies progressing pipeline ensuring supply patient access company’s portfolio medically important medicines vaccines company also executed merck’s capital allocation priorities completing business development transactions investing pipeline additionally company remains track complete spinoff organon late second quarter 2021 thereby creating two companies focused strengths portfolios allowing pursue respective market opportunities business strategies 2020 products comprise organon total sales 65 billion merck actively monitors business development landscape growth opportunities meet company’s strategic criteria expand oncology presence merck completed acquisitions arqule inc arqule biopharmaceutical company focused kinase inhibitor discovery development treatment cancer diseases velosbio inc velosbio clinicalstage biopharmaceutical company committed developing firstinclass cancer therapies targeting receptor tyrosine kinaselike orphan receptor 1 ror1 currently evaluated treatment patients hematologic malignancies solid tumors additionally merck entered strategic collaboration agreements seagen gain access ladiratuzumab vedotin investigational antibodydrug conjugate targeting liv1 tukysa tucatinib small molecule tyrosine kinase inhibitor treatment human epidermal growth factor receptor 2 her2positive cancers augment merck’s animal health business company acquired us rights sentinel flavor tabs sentinel spectrum chews part industrywide efforts develop solutions pandemic company acquired oncoimmune company developing therapeutic candidate treatment patients hospitalized covid19 themis bioscience gmbh themis company focused vaccines immunemodulation therapies infectious diseases including covid19 vaccine candidate additionally merck entered strategic collaborations ridgeback biotherapeutics lp ridgeback bio develop orally available antiviral candidate clinical development treatment patients covid19 international aids vaccine initiative inc iavi develop investigational vaccine sarscov2 studied prevention covid19 january 2021 company announced discontinuing development covid19 vaccine candidates see note 3 consolidated financial statements 2020 company received numerous regulatory approvals within oncology keytruda received approval united states monotherapy therapeutic areas cutaneous squamous cell carcinoma cscc metastatic microsatellite instabilityhigh msih mismatch repair deficient dmmr colorectal cancer nonmuscle invasive bladder cancer nmibc tumor mutational burdenhigh tmbh solid tumors well combination chemotherapy treatment triplenegative breast cancer tnbc merck also received approval united states every six weeks q6w dosing regimen across adult indications additionally keytruda received approval china treatment certain patients head neck squamous cell carcinoma hnscc china japan treatment certain patients esophageal squamous cell carcinoma escc lynparza developed collaboration astrazeneca plc astrazeneca received approval united states combination bevacizumab firstline maintenance treatment certain adult patients advanced epithelial ovarian fallopian tube primary peritoneal cancer complete partial response firstline platinumbased chemotherapy treatment certain adult patients metastatic castrationresistant prostate cancer mcrpc following progression prior treatment additionally lynparza approved european union eu monotherapy treatment adult patients mcrpc brca12 mutations progressed following prior therapy maintenance treatment certain adult patients metastatic adenocarcinoma pancreas lynparza also approved japan treatment three types advanced cancer ovarian prostate pancreatic cancer lenvima developed collaboration eisai co ltd eisai received approval china monotherapy treatment differentiated thyroid cancer also 2020 gardasil 9 approved use women girls japan marketed silgard 9 additionally 2020 us food drug administration fda granted accelerated approval expanded indication gardasil 9 prevention oropharyngeal head neck cancers caused certain hpv types january 2021 company received fda approval verquvo vericiguat reduce risk cardiovascular death heart failure hospitalization following hospitalization heart failure need outpatient intravenous diuretics adults verquvo jointly developed bayer ag bayer addition recent regulatory approvals discussed company advanced latestage pipeline several regulatory submissions keytruda review united states andor internationally treatment certain patients tnbc classical hodgkin lymphoma chl colorectal cancer cscc esophageal gastric cancer lenvima review japan monotherapy treatment thymic cancer v114 investigational 15valent pneumococcal conjugate vaccine priority review fda prevention invasive pneumococcal disease adults 18 years age older european medicines agency ema also reviewing application licensure v114 adults company involved litigation challenging validity several pfizer inc patents relate pneumococcal vaccine technology united states several foreign jurisdictions company’s phase 3 oncology programs include keytruda therapeutic areas biliary tract cervical cutaneous squamous cell endometrial gastric hepatocellular mesothelioma ovarian prostate smallcell lung cancers lynparza monotherapy colorectal cancer combination keytruda nonsmallcell lung smallcell lung cancers lenvima combination keytruda bladder endometrial gastric head neck melanoma nonsmallcell lung cancers also within oncology mk6482 belzutifan investigational hypoxiainducible factor2 alpha hif2α inhibitor evaluated treatment patients von hippellindau diseaseassociated renal cell carcinoma rcc received breakthrough therapy designation fda additionally company candidates phase 3 clinical development several therapeutic areas including mk7264 gefapixant selective nonnarcotic orallyadministered investigational p2x3receptor antagonist developed treatment refractory chronic cough mk7110 investigational treatment patients hospitalized covid19 mk8591a islatravir investigational nucleoside reverse transcriptase translocation inhibitor nrtti combination doravirine treatment hiv1 infection v114 evaluated prevention pneumococcal disease pediatric patients company allocating resources support commercial opportunities near term making necessary investments support longterm growth research development expenses 2020 reflect higher costs related business development activity higher clinical development spending increased investment discovery research early drug development november 2020 merck’s board directors approved increase company’s quarterly dividend raising 065 per share 061 per share company’s outstanding common stock 2020 company returned 75 billion shareholders dividends share repurchases management february 2021 merck announced kenneth c frazier chairman chief executive officer retire chief executive officer effective june 30 2021 mr frazier continue serve merck’s board directors executive chairman transition period determined board merck board directors unanimously elected robert davis merck’s current executive vice president global services chief financial officer chief executive officer well member board effective july 1 2021 mr davis become president merck effective april 1 2021 time company’s operating divisionshuman health animal health manufacturing merck research laboratories mrlwill begin reporting mr davis covid19 overall response covid19 pandemic merck remains focused protecting safety employees ensuring supply medicines vaccines reaches patients contributing scientific expertise development antiviral approaches supporting health care providers merck’s communities although covid19related disruptions patients’ ability access health care providers negatively affected results 2020 merck remains confident fundamental underlying demand products prospects longterm growth 2020 estimated negative impact covid19 pandemic merck’s sales approximately 25 billion largely attributable pharmaceutical segment approximately 50 million attributable animal health segment roughly twothirds merck’s pharmaceutical segment revenue comprised physicianadministered products despite strong underlying demand affected social distancing measures fewer well visits delays elective surgeries due covid19 pandemic impacts well prioritization covid19 patients health care providers resulted reduced administration many company’s human health products particular vaccines including gardasil 9 well keytruda implanonnexplanon addition declines elective surgeries negatively affected demand bridion however sales pneumovax 23 increased due heightened awareness pneumococcal vaccination operating expenses positively affected 2020 approximately 600 million primarily due lower promotional selling costs well lower research development expenses net investments covid19related antiviral vaccine research programs merck believes global health systems patients largely adapted impacts covid19 company’s assumption ongoing residual negative impacts persist particularly first half 2021 notably respect vaccine sales impact expected acute united states full year 2021 merck assumes unfavorable impact revenue approximately 2 due covid19 pandemic relates pharmaceutical segment sales addition full year 2021 respect covid19 pandemic merck expects net negative impact operating expenses spending development covid19 antiviral programs expected exceed favorable impact lower spending areas due covid19 pandemic pricing global efforts toward health care cost containment continue exert pressure product pricing market access worldwide changes us health care system part health care reform well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries contributed pricing pressure several international markets governmentmandated pricing actions reduced prices generic patented drugs addition company’s revenue performance 2020 negatively affected costreduction measures taken governments thirdparties lower health care costs company anticipates actions additional actions future continue negatively affect revenue performance operating results sales us plus international may equal total due rounding worldwide sales grew 2 2020 due higher sales oncology franchise reflecting strong growth keytruda well increased alliance revenue lynparza lenvima also contributing revenue growth higher sales certain vaccines including gardasilgardasil 9 pneumovax 23 well increased sales certain hospital acute care products including prevymis bridion higher sales animal health products also drove revenue growth 2020 sales growth 2020 partially offset effects generic competition certain products including women’s health product nuvaring hospital acute care products noxafil cubicin oncology products emendemend injection cardiovascular products zetia vytorin products within diversified brands franchise particularly singulair diversified brands franchise includes certain products approaching expiration marketing exclusivity longer protected patents developed markets lower sales pediatric vaccines including proquad mmr ii varivax well lower sales diabetes products januvia janumet virology products zepatier isentressisentress hd also partially offset revenue growth 2020 discussed covid19 pandemic negatively affected sales 2020 sales united states grew 2 2020 primarily driven higher sales keytruda increased alliance revenue lynparza lenvima higher sales animal health products revenue growth largely offset lower sales nuvaring januvia noxafil emendemend injection mmr ii janumet varivax implanonnexplanon international sales grew 2 2020 increase international sales primarily reflects growth keytruda gardasilgardasil 9 increased alliance revenue lynparza well higher sales pneumovax 23 prevymis januvia animal health products sales growth partially offset lower sales zepatier vytorin noxafil zetia remicade emendemend injection products within diversified brands franchise particularly singulair nasonex international sales represented 56 total sales 2020 2019 see note 18 consolidated financial statements details sales company’s products discussion performance select products franchises follows pharmaceutical segment oncology 1 alliance revenue represents merck’s share profits product sales net cost sales commercialization costs see note 4 consolidated financial statements keytruda antipd1 programmed death receptor1 therapy approved monotherapy treatment certain patients cervical cancer chl cscc escc gastric gastroesophageal junction adenocarcinoma hnscc hepatocellular carcinoma hcc nonsmallcell lung cancer nsclc smallcell lung cancer sclc melanoma merkel cell carcinoma msih dmmr cancer including msihdmmr colorectal cancer primary mediastinal large bcell lymphoma pmbcl tmbh cancer urothelial carcinoma including nmibc keytruda also approved treatment certain patients combination chemotherapy metastatic squamous nonsquamous nsclc combination chemotherapy hnscc combination chemotherapy tnbc combination axitinib rcc combination lenvima endometrial carcinoma keytruda clinical development program includes studies across broad range cancer types global sales keytruda grew 30 2020 driven higher demand company continues launch keytruda multiple new indications globally although covid19 pandemic dampening effect growing demand sales united states continue build across multiple approved indications particular treatment advanced nsclc monotherapy combination chemotherapy nonsquamous squamous metastatic nsclc along uptake rcc adjuvant melanoma hnscc bladder cancer endometrial carcinoma indications uptake every six weeks q6w adult dosing regimen united states benefited sales 2020 keytruda sales growth international markets driven continued uptake approved indications particularly eu sales growth partially offset declines japan due pricing pursuant repricing rule japanese government reduced price keytruda 175 effective february 2020 additionally keytruda subject another price reduction 209 april 2020 provision japanese pricing rules january 2020 fda approved keytruda monotherapy treatment certain patients bacillus calmetteguerin bcgunresponsive highrisk nmibc based results keynote057 trial april 2020 fda granted accelerated approval additional recommended dosage 400 mg every six weeks q6w keytruda across adult indications including monotherapy combination therapy new dosage option available addition current dose 200 mg every three weeks q3w june 2020 fda granted accelerated approval keytruda monotherapy treatment adult pediatric patients unresectable metastatic tmbh solid tumors determined fdaapproved test progressed following prior treatment satisfactory alternative treatment options based part results keynote158 trial also june 2020 fda approved keytruda monotherapy treatment patients recurrent metastatic cscc curable surgery radiation based data keynote629 trial additionally june 2020 fda approved keytruda monotherapy firstline treatment patients unresectable metastatic msih dmmr colorectal cancer based results keynote177 trial october 2020 fda approved expanded label keytruda monotherapy treatment adult patients relapsed refractory chl based results keynote204 trial fda also approved updated pediatric indication keytruda treatment pediatric patients refractory chl relapsed two lines therapy keytruda previously approved fda’s accelerated approval process treatment adult pediatric patients refractory chl relapsed three prior lines therapy based data keynote087 trial accordance accelerated approval regulations continued approval contingent upon verification description clinical benefit accelerated approval requirements fulfilled data keynote204 november 2020 fda granted accelerated approval keytruda combination chemotherapy treatment patients locally recurrent unresectable metastatic tnbc whose tumors express pdl1 combined positive score cps ≥10 determined fdaapproved test approval based results keynote355 trial june 2020 keytruda approved national medical products administration nmpa china monotherapy secondline treatment patients locally advanced metastatic escc whose tumors express pdl1 cps ≥10 indication granted based keynote181 trial including data extension global study chinese patients december 2020 china’s nmpa approved keytruda monotherapy firstline treatment patients metastatic unresectable recurrent hnscc whose tumors express pdl1 cps ≥20 determined fully validated test august 2020 keytruda approved japan’s pharmaceuticals medical devices agency pmda monotherapy treatment patients whose tumors pdl1positive radically unresectable advanced recurrent escc progressed chemotherapy approval based results keynote181 trial additionally keytruda approved japan’s pmda use additional recommended dosage 400 mg q6w including monotherapy combination therapy new dosage option available addition current dose 200 mg q3w january 2021 keytruda approved european commission ec firstline treatment adult patients msih dmmr colorectal cancer based results keynote177 study company party certain thirdparty license agreements pursuant company pays royalties sales keytruda terms significant agreements merck pays royalty 65 worldwide sales keytruda 2023 one third party royalty decline 25 2024 2026 terminate thereafter company pays additional 2 royalty worldwide sales keytruda another third party termination date varies country royalty expire united states 2024 major european markets 2025 royalties included cost sales lynparza oral poly adpribose polymerase parp inhibitor developed part collaboration astrazeneca see note 4 consolidated financial statements approved treatment certain types advanced ovarian breast pancreatic prostate cancers alliance revenue related lynparza grew 63 2020 due continued uptake across multiple approved indications united states eu china japan may 2020 fda approved lynparza combination bevacizumab firstline maintenance treatment certain adult patients advanced epithelial ovarian fallopian tube primary peritoneal cancer complete partial response firstline platinumbased chemotherapy november 2020 lynparza approved eu maintenance treatment adult patients advanced highgrade epithelial ovarian fallopian tube primary peritoneal cancer complete partial response following completion firstline platinumbased chemotherapy combination bevacizumab whose cancer associated homologous recombination deficiency hrdpositive status approvals based results paola1 trial also may 2020 fda approved lynparza treatment adult patients deleterious suspected deleterious germline somatic homologous recombination repair hrr genemutated mcrpc progressed following prior treatment november 2020 lynparza approved eu monotherapy treatment adult patients mcrpc brca12 mutations germline andor somatic progressed following prior therapy approvals based results profound trial july 2020 lynparza approved eu monotherapy maintenance treatment adult patients germline brca12 mutations metastatic adenocarcinoma pancreas progressed firstline chemotherapy regimen approval based results polo trial december 2020 lynparza approved japan treatment three types advanced cancer ovarian prostate pancreatic cancer three approvals authorize lynparza use maintenance treatment firstline chemotherapy containing bevacizumab genetical recombination patients hrd ovarian cancer treatment patients brca genemutated brcam mcrpc maintenance treatment platinumbased chemotherapy patients brcam curatively unresectable pancreas cancer concurrent approvals japanese ministry health labor welfare based results paola1 profound polo trials lenvima oral receptor tyrosine kinase inhibitor developed part collaboration eisai see note 4 consolidated financial statements approved treatment certain types thyroid cancer hcc combination everolimus certain patients rcc combination keytruda treatment certain patients endometrial carcinoma alliance revenue related lenvima grew 44 2020 due higher demand united states china eu november 2020 china’s nmpa approved lenvima monotherapy treatment differentiated thyroid cancer global sales emend prevention certain chemotherapyinduced nausea vomiting declined 63 2020 primarily due lower demand pricing united states due generic competition emend injection following us patent expiry september 2019 also contributing emend sales decline lower demand eu japan result generic competition oral formulation emend following loss market exclusivity may 2019 december 2019 respectively us market exclusivity oral formulation emend previously expired 2015 april 2020 fda approved koselugo selumetinib treatment pediatric patients two years age older neurofibromatosis type 1 nf1 symptomatic inoperable plexiform neurofibromas pn fda approval based positive results national cancer institute nci cancer therapy evaluation program ctepsponsored phase 2 sprint stratum 1 trial coordinated nci’s center cancer research pediatric oncology branch first regulatory approval medicine treatment nf1 pn rare debilitating genetic condition koselugo jointly developed commercialized astrazeneca globally see note 4 consolidated financial statements vaccines worldwide sales gardasilgardasil 9 vaccines help prevent certain cancers diseases caused certain types hpv grew 5 2020 primarily due higher volumes china replenishment 2020 doses borrowed us centers disease control prevention cdc pediatric vaccine stockpile 2019 replenishment resulted recognition sales 120 million 2020 combined reduction sales 120 million 2019 due borrowing resulted favorable impact sales 240 million 2020 lower demand united states hong kong sar prc attributable covid19 pandemic partially offset increase sales gardasilgardasil 9 june 2020 fda approved expanded indication gardasil 9 prevention oropharyngeal head neck cancers caused hpv types 16 18 31 33 45 52 58 oropharyngeal head neck cancer indication approved accelerated approval based effectiveness preventing hpvrelated anogenital disease july 2020 gardasil 9 approved pmda japan use women girls nine years older prevention cervical cancer certain cervical vaginal vulvar precancers genital warts caused hpv types covered vaccine december 2020 silgard 9 also approved japan prevention anal cancer precursor lesions caused hpv types 6 11 16 18 individuals nine years older genital warts men nine years older gardasil 9 marketed japan silgard 9 company party certain thirdparty license agreements pursuant company pays royalties sales gardasilgardasil 9 terms significant agreements merck pays 7 royalty worldwide sales gardasilgardasil 9 one third party royalty obligations agreement expire december 2023 additional 7 royalty sales gardasilgardasil 9 united states another third party royalty obligations expire december 2028 royalties included cost sales global sales proquad pediatric combination vaccine help protect measles mumps rubella varicella declined 10 2020 driven primarily lower demand united states resulting fewer measles outbreaks 2020 compared 2019 coupled unfavorable impact covid19 pandemic partially offset higher pricing worldwide sales mmr ii vaccine help protect measles mumps rubella declined 31 2020 driven primarily lower demand united states resulting fewer measles outbreaks 2020 compared 2019 coupled unfavorable impact covid19 pandemic lower demand brazil also contributed mmr ii sales decline 2020 global sales varivax vaccine help prevent chickenpox varicella declined 15 2020 driven primarily lower demand united states resulting covid19 pandemic partially offset higher pricing varivax sales decline also attributable lower government tenders brazil worldwide sales pneumovax 23 vaccine help prevent pneumococcal disease grew 17 2020 primarily due higher volumes eu united states attributable part heightened awareness pneumococcal vaccination higher pricing united states also contributed pneumovax 23 sales growth 2020 hospital acute care global sales bridion reversal two types neuromuscular blocking agents used surgery grew 6 2020 due higher demand globally particularly united states however fewer elective surgeries result covid19 pandemic unfavorably affected demand 2020 worldwide sales noxafil antifungal agent prevention certain invasive fungal infections declined 50 2020 due generic competition united states eu patent provided us market exclusivity certain forms noxafil representing majority us noxafil sales expired july 2019 additionally patent noxafil expired number major european markets december 2019 result company experiencing volume pricing declines noxafil sales markets result generic competition expects declines continue worldwide sales prevymis medicine prophylaxis prevention cytomegalovirus cmv infection disease adult cmvseropositive recipients allogenic hematopoietic stem cell transplant grew 70 2020 due continued uptake since launch eu united states prevymis approved ec january 2018 fda november 2017 global sales cubicin injection antibiotic treatment certain bacterial infections declined 41 2020 primarily due ongoing generic competition eu united states december 2020 company temporarily suspended sales zerbaxa combination antibacterial betalactamase inhibitor treatment certain bacterial infections subsequently issued product recall following identification product sterility issues result company recorded intangible asset impairment charge related zerbaxa see note 8 consolidated financial statements company anticipate zerbaxa return market 2022 june 2020 fda approved supplemental new drug application nda recarbrio imipenem cilastatin relebactam treatment patients 18 years age older hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia caused certain susceptible gramnegative microorganisms immunology sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey nearly flat 2020 sales simponi unfavorably affected launch biosimilars competing product company expects competition continue unfavorably affect sales simponi sales remicade treatment inflammatory diseases marketed company europe russia turkey declined 20 2020 driven ongoing biosimilar competition company’s marketing territories europe company lost market exclusivity remicade major european markets 2015 longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition expects declines continue company’s marketing rights respect products revert janssen pharmaceuticals inc second half 2024 virology worldwide sales isentressisentress hd hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection declined 12 2020 primarily due competitive pressure united states eu company expects competitive pressures isentressisentress hd continue global sales zepatier treatment adult patients chronic hepatitis c virus genotype gt 1 gt4 infection declined 55 2020 driven lower demand globally due competition declining patient volumes coupled impact covid19 pandemic cardiovascular 1 alliance revenue represents merck’s share profits sales bayer’s marketing territories product sales net cost sales commercialization costs see note 4 consolidated financial statements combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy medicines lowering ldl cholesterol declined 24 2020 driven primarily lower sales ezetrol japan ezetrol inegy eu patent provided market exclusivity ezetrol japan expired september 2019 generic competition began june 2020 eu patents ezetrol inegy expired april 2018 april 2019 respectively accordingly company experiencing sales declines markets result generic competition expects declines continue sales decline 2020 also attributable lower pricing following loss exclusivity australia higher demand ezetrol china partially offset sales decline 2020 merck lost market exclusivity united states zetia 2016 vytorin 2017 subsequently lost nearly us sales products result generic competition sales atozet marketed outside united states medicine lowering ldl cholesterol grew 16 2020 primarily driven higher demand markets particularly eu japan countries asia pacific region zetia vytorin atozet rosuzet contributed organon connection spinoff see note 1 consolidated financial statements adempas cardiovascular drug treatment pulmonary arterial hypertension part worldwide collaboration bayer market develop soluble guanylate cyclase sgc modulators including adempas see note 4 consolidated financial statements revenue adempas includes merck’s share profits sale adempas bayer’s marketing territories grew 38 2020 well sales merck’s marketing territories grew 3 2020 january 2021 fda approved verquvo vericiguat sgc stimulator reduce risk cardiovascular death heart failure hospitalization following hospitalization heart failure need outpatient intravenous diuretics adults symptomatic chronic heart failure reduced ejection fraction approval based results pivotal phase 3 victoria trial follows priority regulatory review verquvo part worldwide clinical development collaboration bayer includes adempas referenced diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes declined 4 2020 result continued pricing pressure united states partially offset higher demand certain international markets particularly china company expects us pricing pressure continue januvia janumet lose market exclusivity united states january 2023 supplementary patent certificates provide market exclusivity januvia janumet eu expire september 2022 april 2023 respectively company anticipates sales januvia janumet markets decline substantially loss market exclusivity women’s health worldwide sales implanonnexplanon singlerod subdermal contraceptive implant declined 14 2020 primarily driven lower demand united states eu resulting covid19 pandemic worldwide sales nuvaring vaginal contraceptive product declined 73 2020 due generic competition united states patent provided us market exclusivity nuvaring expired april 2018 generic competition began december 2019 accordingly company experiencing rapid substantial decline us nuvaring sales expects decline continue implanonnexplanon nuvaring contributed organon connection spinoff see note 1 consolidated financial statements biosimilars calculation meaningful biosimilar products marketed company pursuant agreement samsung bioepis co ltd samsung develop commercialize multiple prespecified biosimilar candidates currently company markets renflexis infliximababda biosimilar remicade infliximab treatment certain inflammatory diseases ontruzant trastuzumabdttb biosimilar herceptin trastuzumab treatment her2positive breast cancer her2 overexpressing gastric cancer brenzys etanercept biosimilar enbrel treatment certain inflammatory diseases aybintio bevacizumab treatment certain types cancer merck’s commercialization territories agreement vary product sales growth biosimilars 2020 primarily due continued postlaunch uptake renflexis united states canada launch ontruzant brazil 2020 august 2020 ec granted marketing authorization aybintio treatment metastatic carcinoma colon rectum metastatic breast cancer nsclc advanced andor metastatic rcc epithelial ovarian fallopian tube primary peritoneal cancer cervical cancer application seeking approval aybintio united states filed september 2019 biosimilar products contributed organon connection spinoff see note 1 consolidated financial statements animal health segment sales livestock products grew 6 2020 predominantly due additional five months sales 2020 related april 2019 acquisition antelliq leader digital animal identification traceability monitoring solutions see note 3 consolidated financial statements sales companion animal products grew 10 2020 driven primarily higher demand bravecto line products parasitic control well higher demand companion animal vaccines costs expenses calculation meaningful cost sales cost sales 155 billion 2020 compared 141 billion 2019 cost sales includes amortization intangible assets recorded connection acquisitions collaborations licensing arrangements totaled 18 billion 2020 compared 20 billion 2019 respectively additionally costs 2020 2019 include intangible asset impairment charges 16 billion 705 million related marketed products intangibles see note 8 consolidated financial statements company may recognize additional impairment charges future related intangible assets measured fair value capitalized connection business acquisitions charges could material costs 2020 also include charge 260 million connection discontinuation covid19 vaccine development programs see note 3 consolidated financial statements inventory writeoffs 120 million related recall zerbaxa see note 8 consolidated financial statements also included cost sales expenses associated restructuring activities amounted 175 million 2020 compared 251 million 2019 primarily reflecting accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 677 2020 compared 699 2019 gross margin decline 2020 reflects unfavorable effects higher impairment charges noted pricing pressure charge related discontinuation covid19 vaccine development programs higher inventory writeoffs related recall zerbaxa noted partially offset favorable effects product mix lower amortization intangible assets lower restructuring costs selling general administrative selling general administrative sga expenses 105 billion 2020 decline 1 compared 2019 decline driven primarily lower administrative selling promotional costs including lower travel meeting expenses due part covid19 pandemic favorable effect foreign exchange partially offset higher costs related spinoff organon contribution merck foundation sga expenses 2020 include 710 million costs related spinoff organon sga expenses 2020 2019 include restructuring costs 47 million 34 million respectively related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed research development research development rd expenses 136 billion 2020 increase 37 compared 2019 increase driven primarily higher upfront payments related acquisitions collaborations including 27 billion charge 2020 related acquisition velosbio see note 3 consolidated financial statements well higher expenses related clinical development increased investment discovery research early drug development higher restructuring costs also contributed increase rd expenses 2020 increase rd expenses 2020 partially offset lower inprocess research development iprd impairment charges lower costs resulting covid19 pandemic net spending covid19related vaccine antiviral research programs rd expenses comprised costs directly incurred mrl company’s research development division focuses human healthrelated activities 66 billion 2020 compared 61 billion 2019 also included rd expenses animal health research costs licensing costs incurred divisions support rd activities including depreciation production general administrative aggregate 27 billion 2020 26 billion 2019 additionally rd expenses 2020 include 27 billion charge acquisition velosbio noted 462 million charge acquisition oncoimmune charges 826 million related transactions seagen rd expenses 2019 include 993 million charge acquisition peloton see note 3 consolidated financial statements information transactions rd expenses also include iprd impairment charges 90 million 172 million 2020 2019 respectively see note 8 consolidated financial statements company may recognize additional impairment charges future related cancellation delay pipeline programs measured fair value capitalized connection business acquisitions charges could material addition rd expenses 2020 include 83 million costs associated restructuring activities primarily relating accelerated depreciation rd expenses also include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection business acquisitions 2020 2019 company recorded net reduction expenses 95 million 39 million respectively related changes estimates restructuring costs early 2019 merck approved new global restructuring program restructuring program part worldwide initiative focused optimizing company’s manufacturing supply network well reducing global real estate footprint program continuation company’s plant rationalization builds prior restructuring programs include actions associated planned spinoff organon company continues evaluate global footprint overall operating model subsequently identified additional actions restructuring program could identify actions time actions currently contemplated restructuring program expected substantially completed end 2023 cumulative pretax costs incurred company implement program estimated approximately 30 billion company expects record charges approximately 700 million 2021 related restructuring program company anticipates actions restructuring program result annual net cost savings approximately 900 million end 2023 actions previous global restructuring programs substantially completed restructuring costs primarily representing separation related costs associated restructuring activities 578 million 2020 638 million 2019 separation costs incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated also included restructuring costs asset abandonment facility shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included cost sales selling general administrative expenses research development costs company recorded aggregate pretax costs 883 million 2020 927 million 2019 related restructuring program activities see note 5 consolidated financial statements income expense net income expense net 886 million income 2020 compared 139 million expense 2019 primarily due higher income investments equity securities net largely related moderna inc details components income expense net see note 14 consolidated financial statements pharmaceutical segment profits comprised segment sales less standard costs well sga expenses directly incurred segment animal health segment profits comprised segment sales less cost sales well sga rd expenses directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred mrl general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits costs related restructuring activities acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges changes estimated fair value measurement liabilities contingent consideration additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales pharmaceutical segment profits grew 5 2020 compared 2019 driven primarily higher sales well lower selling promotional costs animal health segment profits grew 3 2020 driven primarily higher sales lower promotional selling costs partially offset higher rd costs unfavorable effect foreign exchange taxes income effective income tax rates 194 2020 147 2019 reflect impacts acquisition divestiturerelated costs restructuring costs partially offset beneficial impact foreign earnings including product mix effective income tax rate 2020 reflects unfavorable impact charge acquisition velosbio tax benefit recognized effective income tax rate 2019 reflects favorable impact 364 million net tax benefit related settlement certain federal income tax matters see note 15 consolidated financial statements reversal tax reserves established connection 2014 divestiture merck’s consumer care mcc business due lapse statute limitations addition effective income tax rate 2019 reflects unfavorable impacts charge acquisition peloton tax benefit recognized charges 117 million related finalization treasury regulations transition tax associated 2017 enactment us tax legislation known tax cuts jobs act tcja see note 15 consolidated financial statements net income loss attributable noncontrolling interests net income loss attributable noncontrolling interests 15 million 2020 compared 66 million 2019 loss 2019 driven primarily portion goodwill impairment charges related certain businesses healthcare services segment attributable noncontrolling interests net income earnings per common share net income attributable merck co inc 71 billion 2020 98 billion 2019 eps 278 2020 381 2019 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance merck providing management believes information enhances investors’ understanding company’s results permits investors understand management assesses performance nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items considered nonrecurring consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap eps management uses measures internally planning forecasting purposes measure performance company along metrics addition senior management’s annual compensation derived part using nongaap pretax income since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies information nongaap income nongaap eps considered addition substitute superior net income eps prepared accordance generally accepted accounting principles united states gaap reconciliation gaap financial measures nongaap financial measures follows 1amount 2020 includes 16 billion intangible asset impairment charge related zerbaxa amount 2019 includes 612 million intangible asset impairment charge related sivextro see note 8 consolidated financial statements 2amount 2020 includes 826 million related transactions seagen see note 3 consolidated financial statements amount 2018 represents charge formation collaboration eisai see note 4 consolidated financial statements 3 estimated tax impact excluded items determined applying statutory rate originating territory nongaap adjustments acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection business acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement liabilities contingent consideration also excluded integration transaction certain costs associated business acquisitions divestitures restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 5 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment facility shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs certain items adjusted evaluating individual basis considering quantitative qualitative aspects typically consist items unusual nature significant results particular period indicative future operating results excluded nongaap income nongaap eps 2020 charges acquisitions velosbio oncoimmune charges related collaborations including transactions seagen see note 3 consolidated financial statements charge discontinuation covid19 vaccine development programs adjustment tax benefits recorded conjunction 2015 cubist pharmaceuticals inc acquisition excluded nongaap income nongaap eps 2019 charge acquisition peloton see note 3 consolidated financial statements tax charges related finalization us treasury regulations related tcja net tax benefit related settlement certain federal income tax matters tax benefit related reversal tax reserves established connection 2014 divestiture mcc see note 15 consolidated financial statements excluded nongaap income nongaap eps 2018 charge related formation collaboration eisai see note 4 consolidated financial statements charge related termination collaboration agreement samsung insulin glargine see note 3 consolidated financial statements charge acquisition viralytics see note 3 consolidated financial statements measurementperiod adjustments related provisional amounts recorded tcja see note 15 consolidated financial statements beginning 2021 company changing treatment certain items purposes nongaap reporting historically merck’s nongaap results excluded amortization intangible assets recognized connection business acquisitions reflected part acquisition divestiturerelated costs exclude amortization intangibles originating collaborations asset acquisitions licensing arrangements beginning 2021 merck’s nongaap results longer differentiate nature intangible assets amortized exclude amortization intangible assets also beginning 2021 merck’s nongaap results exclude gains losses investments equity securities prior period amounts recast conform new presentation research development research pipeline company currently several candidates regulatory review united states internationally well latestage clinical development chart reflecting company’s current research pipeline february 22 2021 related discussion set forth item 1 “business research development” acquired inprocess research development connection business acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2020 balance iprd 32 billion see note 8 consolidated financial statements iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2020 2019 2018 company recorded iprd impairment charges within research development expenses 90 million 172 million 152 million respectively see note 8 consolidated financial statements additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent transactions summarized additional details included note 3 consolidated financial statements merck actively monitoring landscape growth opportunities meet company’s strategic criteria january 2020 merck acquired arqule publicly traded biopharmaceutical company focused kinase inhibitor discovery development treatment patients cancer diseases 27 billion arqule’s lead investigational candidate mk1026 formerly arq 531 novel oral bruton’s tyrosine kinase btk inhibitor currently evaluated treatment bcell malignancies transaction accounted acquisition business company recorded iprd 23 billion related mk1026 goodwill 512 million net liabilities 102 million july 2020 merck ridgeback bio closely held biotechnology company closed collaboration agreement develop molnupiravir mk4482 also known eidd2801 orally available antiviral candidate clinical development treatment patients covid19 merck gained exclusive worldwide rights develop commercialize molnupiravir related molecules terms agreement ridgeback bio received upfront payment also eligible receive future contingent payments dependent upon achievement certain developmental regulatory approval milestones well share net profits molnupiravir related molecules approved molnupiravir currently evaluated phase 23 clinical trials hospital outpatient settings primary completion date phase 23 studies june 2021 company anticipates interim efficacy data first quarter 2021 september 2020 merck seagen announced oncology collaboration globally develop commercialize seagen’s ladiratuzumab vedotin mk6440 investigational antibodydrug conjugate targeting liv1 currently phase 2 clinical trials breast cancer solid tumors terms agreement merck made upfront payment 600 million 10 billion equity investment 5 million shares seagen common stock price 200 per share merck recorded 616 million research development expenses 2020 related transaction seagen also eligible receive future contingent milestone payments dependent upon achievement certain developmental salesbased milestones concurrent transaction seagen granted merck exclusive license commercialize tukysa tucatinib small molecule tyrosine kinase inhibitor treatment her2positive cancers asia middle east latin america regions outside united states canada europe terms agreement merck made upfront payments aggregating 210 million recorded research development expenses 2020 seagen also eligible receive future contingent regulatory approval milestones tiered royalties based annual sales levels tukysa merck’s territories december 2020 merck acquired oncoimmune privately held clinicalstage biopharmaceutical company upfront payment 423 million addition oncoimmune shareholders eligible receive future contingent regulatory approval milestone payments tiered royalties oncoimmune’s lead therapeutic candidate mk7110 also known cd24fc evaluated treatment patients hospitalized covid19 topline results preplanned interim efficacy analysis phase 3 study mk7110 released september 2020 full results phase 3 study consistent topline results received february 2021 submitted publication future transaction accounted acquisition asset agreement prior completion acquisition oncoimmune spunout certain rights assets unrelated mk7110 program new entity owned existing shareholders oncoimmune connection closing acquisition merck invested 50 million 20 ownership interest new entity valued 33 million resulting 17 million premium merck also recognized net liabilities 22 million company recorded research development expenses 462 million 2020 related transaction december 2020 merck announced entered agreement us government support development manufacture initial distribution mk7110 upon approval emergency use authorization eua fda june 30 2021 agreement merck receive approximately 356 million manufacturing supply approximately 60000100000 doses mk7110 us government june 30 2021 help meet government’s pandemic response goals following execution agreement merck received feedback fda additional data beyond study conducted oncoimmune would needed support potential eua application based fda feedback merck longer expects supply us government mk7110 first half 2021 merck actively working fda address agency’s comments december 2020 merck acquired velosbio privately held clinicalstage biopharmaceutical company 28 billion velosbio’s lead investigational candidate mk2140 formerly known vls101 antibodydrug conjugate targeting receptor tyrosine kinaselike orphan receptor 1 ror1 currently evaluated treatment patients hematologic malignancies solid tumors transaction accounted acquisition asset merck recorded net assets 180 million primarily cash research development expenses 27 billion 2020 related transaction february 2021 merck pandion therapeutics inc pandion entered definitive agreement merck acquire pandion clinicalstage biotechnology company developing novel therapeutics designed address unmet needs patients living autoimmune diseases 60 per share cash representing approximate total equity value 185 billion pandion advancing pipeline precision immune modulators targeting critical immune control nodes terms acquisition agreement merck subsidiary initiate tender offer acquire outstanding shares pandion closing tender offer subject certain conditions including tender shares representing least majority total number pandion’s shares fullydiluted common stock expiration waiting period hartscottrodino antitrust improvements act customary conditions transaction expected close first half 2021 capital expenditures capital expenditures 47 billion 2020 35 billion 2019 26 billion 2018 expenditures united states 27 billion 2020 19 billion 2019 15 billion 2018 increased capital expenditures 2020 2019 reflect investment new capital projects focused primarily increasing manufacturing capacity merck’s key products increased capital expenditures 2020 also reflect purchase manufacturing facility dunboyne ireland support upcoming product launches see note 3 consolidated financial statements company plans invest 20 billion new capital projects 20202024 depreciation expense 17 billion 2020 17 billion 2019 14 billion 2018 12 billion 2020 12 billion 2019 10 billion 2018 related locations united states total depreciation expense 2020 2019 included accelerated depreciation 268 million 233 million respectively associated restructuring activities see note 5 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders decline working capital 2020 compared 2019 primarily related increased shortterm debt supporting funding business development activities capital expenditures cash provided operating activities 103 billion 2020 compared 134 billion 2019 reflecting higher payments related collaborations 29 billion 2020 compared 805 million 2019 cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders cash used investing activities 94 billion 2020 compared 26 billion 2019 increase driven primarily lower proceeds sales securities investments higher use cash acquisitions higher capital expenditures partially offset lower purchases securities investments cash used financing activities 28 billion 2020 compared 89 billion 2019 lower use cash financing activities driven primarily net increase shortterm borrowings 2020 compared net decrease shortterm borrowing 2019 well lower purchases treasury stock partially offset higher payments debt see lower proceeds issuance debt see higher dividends paid shareholders lower proceeds exercise stock options company accounts receivable factoring agreements financial institutions certain countries sell accounts receivable see note 6 consolidated financial statements company factored 23 billion 27 billion accounts receivable fourth quarter 2020 2019 respectively factoring arrangements reduced outstanding accounts receivable cash received financial institutions reported within operating activities consolidated statement cash flows certain factoring arrangements ease administration company collect customer payments related factored receivables remits financial institutions december 31 2020 2019 company collected 102 million 256 million respectively behalf financial institutions remitted january 2021 2020 respectively net cash flows collections reported financing activities consolidated statement cash flows company’s contractual obligations december 31 2020 follows 1 includes future inventory purchases company committed connection certain divestitures 2 december 31 2020 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits including interest penalties 18 billion including 305 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2021 cannot made 3 connection enactment tcja company required pay onetime transition tax company elected pay period eight years 2025 permitted tcja see note 15 consolidated financial statements 4 reflects payments collaborative agreements salesbased milestones achieved 2020 therefore deemed contractual obligations paid 2021 see note 4 consolidated financial statements 5 amounts exclude reasonably certain lease renewals yet executed see note 9 consolidated financial statements purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts include contingent milestone payments related collaborative arrangements acquisitions considered contractual obligations successful achievement developmental regulatory approval commercial milestones december 31 2020 company recognized liabilities contingent salesbased milestone payments related collaborations astrazeneca eisai payment remains subject achievement related sales milestone aggregating 10 billion see note 4 consolidated financial statements excluded research development obligations potential future funding commitments approximately 52 million investments research venture capital funds loans payable current portion longterm debt reflects 73 million longdated notes subject repayment option holders required funding obligations 2021 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 300 million us pension plans 170 million international pension plans 35 million postretirement benefit plans 2021 june 2020 company issued 45 billion principal amount senior unsecured notes consisting 10 billion 075 notes due 2026 125 billion 145 notes due 2030 10 billion 235 notes due 2040 125 billion 245 notes due 2050 merck used net proceeds offering general corporate purposes including without limitation repayment outstanding commercial paper borrowings indebtedness upcoming maturities march 2019 company issued 50 billion principal amount senior unsecured notes consisting 750 million 290 notes due 2024 175 billion 340 notes due 2029 10 billion 390 notes due 2039 15 billion 400 notes due 2049 company used net proceeds offering general corporate purposes including repayment outstanding commercial paper borrowings company 60 billion credit facility matures june 2024 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility march 2018 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2020 merck’s board directors declared quarterly dividend 065 per share company’s outstanding common stock paid january 2021 january 2021 board directors declared quarterly dividend 065 per share company’s common stock second quarter 2021 payable april 2021 october 2018 merck’s board directors authorized purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions company spent 13 billion purchase 16 million shares common stock treasury 2020 program march 2020 company temporarily suspended share repurchase program december 31 2020 company’s remaining share repurchase authorization 59 billion company purchased 48 billion 91 billion common stock 2019 2018 respectively authorized share repurchase programs 2018 company entered accelerated share repurchase asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers 2018 funded existing cash investments well shortterm borrowings upon settlement asr agreements 2019 merck received additional 77 million shares determined average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount bringing total shares received merck program 644 million financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused changes foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen chinese renminbi achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings comprehensive income loss oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges unrealized gains losses contracts recorded accumulated comprehensive income loss aoci reclassified sales hedged anticipated revenue recognized derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes merck principally sells foreign currency revenue hedging program uniform weakening us dollar would yield largest overall potential loss market value hedge instruments market value merck’s hedges would declined estimated 593 million 456 million december 31 2020 2019 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2020 2019 income taxes would declined approximately 99 million 110 million 2020 2019 respectively company net short payable position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows economy argentina determined hyperinflationary 2018 consequently accordance us gaap company began remeasuring monetary assets liabilities operations earnings impact company’s results immaterial company also uses forward exchange contracts hedge portion net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation unrealized gains losses contracts recorded foreign currency translation adjustment within oci remain aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded components changes fair value excluded components recognized oci company recognizes earnings initial value excluded components straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2020 company party 14 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table 1 interest rate swaps matured january 2021 interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2020 2019 would positively affected net aggregate market value instruments 26 billion 20 billion respectively one percentage point decrease december 31 2020 2019 would negatively affected net aggregate market value 31 billion 22 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting estimates company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions dispositions determine whether transactions accounted acquisitions disposals assets businesses company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination thenuseful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingency resolved contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd also determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate company determines transaction accounted acquisition business transaction accounted asset acquisition rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense contingent consideration recognized acquisition date instances product development milestones recognized upon achievement salesbased milestones recognized milestone deemed probable company achieved revenue recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued company continually monitors provision aggregate customer discounts material adjustments estimates associated aggregate customer discount provision 2020 2019 2018 summarized information changes aggregate customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 249 million 29 billion respectively december 31 2020 233 million 22 billion respectively december 31 2019 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 06 2020 11 2019 16 2018 outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically 36 days receipt invoice us animal health customers typically 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide abovementioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2020 2019 279 million 168 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2020 2019 approximately 250 million 240 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 11 million 2020 estimated 46 million aggregate years 2021 2025 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 67 million december 31 2020 2019 liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed approximately 65 million aggregate management also believe expenditures result material adverse effect company’s financial condition results operations liquidity year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 475 million 2020 417 million 2019 348 million 2018 december 31 2020 678 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weightedaverage period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension plans totaled 454 million 2020 137 million 2019 195 million 2018 net periodic benefit credit postretirement benefit plans 59 million 2020 49 million 2019 45 million 2018 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net loss amortization company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due discount rates company’s us pension postretirement benefit plans ranged 210 280 december 31 2020 compared range 320 350 december 31 2019 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data current market conditions actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate 2021 expected rate return company’s us pension postretirement benefit plans range 650 670 compared range 700 730 2020 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 45 us equities 15 30 international equities 35 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 11 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 80 million favorable unfavorable impact company’s net periodic benefit cost 2020 reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 40 million favorable unfavorable impact merck’s net periodic benefit cost 2020 required funding obligations 2021 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts primarily reflect differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed streamline company’s cost structure result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing termination costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within cost sales selling general administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangible assets excluding iprd initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires conjunction acquisition business represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects company evaluates iprd impairment least annually frequently impairment indicators exist performing quantitative test compares fair value iprd intangible asset carrying value impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments marketable debt securities impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost changes fair value considered temporary reported net tax oci otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements recently issued accounting standards discussion recently issued accounting standards see note 2 consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning negative variations foregoing one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product approvals product potential development programs include statements related expected impact covid19 pandemic one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis operations financial condition set forth companys 2000 annual report shareholders incorporated herein reference item 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition companys 2000 annual report shareholders incorporated herein reference item 8item 7 management’s discussion analysis financial condition results operations description merck’s business merck co inc “merck” “the company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets november 3 2009 legacy merck co inc scheringplough corporation “scheringplough” merged “merger” results scheringplough’s business included merck’s financial statements periods subsequent completion merger therefore merck’s financial results 2009 reflect full year scheringplough operations overview 2011 company focused accelerating revenue growth reducing costs drive efficiencies allocating resources drive future growth making strategic investments product launches well emerging markets advancing augmenting research development pipeline worldwide sales totaled 480 billion 2011 increase 4 compared 460 billion 2010 foreign exchange favorably affected global sales performance 2 revenue increase driven largely growth januvia janumet treatments type 2 diabetes singulair medicine chronic treatment asthma relief symptoms allergic rhinitis isentress antiretroviral therapy use combination therapy treatment hiv1 infection gardasil vaccine help prevent certain diseases caused four types human papillomavirus “hpv” simponi treatment inflammatory diseases rotateq vaccine help protect rotavirus gastroenteritis infants children zetia cholesterol absorption inhibitor pneumovax vaccine help prevent pneumococcal disease bridion reversal certain muscle relaxants used surgery addition revenue 2011 benefited higher sales company’s animal health products launch victrelis treatment chronic hepatitis c increases partially offset lower sales cozaar hyzaar treatments hypertension lost patent protection united states april 2010 number major european markets march 2010 well lower sales caelyx subutex suboxone company longer marketing rights products revenue also negatively affected lower sales vytorin cholesterol modifying medicine temodar treatment certain types brain tumors proquad pediatric combination vaccine help protect measles mumps rubella varicella varivax vaccine help prevent chickenpox varicella addition discussed ongoing implementation certain provisions us health care reform legislation 2011 resulted increases medicaid rebates impacts reduced revenues additionally many countries european union “eu” undertaken austerity measures aimed reducing costs health care implemented pricing actions negatively impacted sales 2011 april 2011 merck johnson “jj” reached agreement amend agreement governing distribution rights remicade simponi agreement concluded arbitration proceeding jj initiated may 2009 terms amended distribution agreement merck relinquished marketing rights remicade simponi jj territories including canada central south america middle east africa asia pacific effective july 1 2011 merck retained exclusive marketing rights throughout europe russia turkey “retained territories” retained territories represented approximately 70 merck’s 2010 revenue 28 billion remicade simponi addition beginning july 1 2011 profits derived merck’s exclusive distribution two products retained territories equally divided merck jj also received onetime payment merck 500 million april 2011 company continued advancement drug candidates pipeline victrelis company’s innovative oral medicine treatment chronic hepatitis c approved us food drug administration “fda” european commission “ec” fda also approved juvisync new treatment type 2 diabetes combines active ingredient glucoselowering medication januvia cholesterollowering medication zocor addition ec approved zoely monophasic combined oral contraceptive tablet use women prevent pregnancy cubicin antibacterial agent activity methicillinresistant staphylococcus aureus “mrsa” company licensed development distribution rights japan approved use country february 2012 fda approved janumet xr new treatment type 2 diabetes combines sitagliptin active component januvia extendedrelease metformin oncedaily formulation cosopt pf merck’s preservativefree formulation cosopt ophthalmic solution indicated reduction elevated intraocular pressure appropriate patients openangle glaucoma ocular hypertension zioptan preservativefree prostaglandin analogue ophthalmic solution company also received additional indications several existing products 2011 fda approved expanded age indication zostavax vaccine help prevent shingles herpes zoster include adults ages 50 59 addition fda approved sylatron adjuvant treatment melanoma patients microscopic gross nodal involvement also simponi received indication eu use combination methotrexate adults severe active progressive rheumatoid arthritis previously treated methotrexate shown reduce rate progression joint damage measured xray improve physical function january 2012 fda approved use isentress combination antiretroviral medicines treatment hiv1 infection pediatric patients two years age older weighing least 10 kg company currently two candidates review fda mk8669 ridaforolimus treatment metastatic softtissue bone sarcomas patients favorable response chemotherapy mk0653c zetia ezetimibe combined atorvastatin treatment primary mixed hyperlipidemia mk8669 also review eu company currently 19 candidates phase iii development anticipates filing new drug application “nda” fda respect certain candidates 2012 including mk4305 suvorexant investigational treatment insomnia mk8616 bridion medication reversal certain muscle relaxants used surgery v503 ninevalent hpv vaccine company also anticipates filings 2013 among others mk0822 odanacatib investigational treatment osteoporosis mk0524a tredaptive development treatment atherosclerosis merck continues pursue opportunities potential drive near longterm growth 2011 company completed variety transactions including acquisition inspire pharmaceuticals inc specialty pharmaceutical company focused developing commercializing ophthalmic products additionally company entered transactions designed strengthen presence emerging markets longer term merck continues realize cost savings across areas company savings result various actions including merger restructuring program discussed previously announced ongoing cost reduction activities well nonrestructuringrelated activities end 2011 company realized approximately 29 billion annual net cost savings activities since merger july 2011 company announced latest phase global restructuring program “merger restructuring program” initiated conjunction integration legacy merck legacy scheringplough businesses merger restructuring program intended optimize cost structure combined company part latest phase company expects reduce workforce measured time merger additional 12 13 across company worldwide majority workforce reductions phase merger restructuring program relate manufacturing including animal health administrative headquarters organizations previously announced workforce reductions approximately 17 earlier phases program primarily reflect elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company continue hire employees strategic growth areas business necessary company continue pursue productivity efficiencies evaluate manufacturing supply chain capabilities ongoing basis may result future restructuring actions company recorded total pretax restructuring costs 18 billion 2011 18 billion 2010 15 billion 2009 related program restructuring actions merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated expected substantially completed 2015 total cumulative pretax costs estimated approximately 58 billion 66 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company expects merger restructuring program yield annual savings end 2013 approximately 35 billion 40 billion annual savings upon completion program approximately 40 billion 46 billion 2011 company continued affected us health care reform legislation enacted 2010 additional provisions went effect beginning 2011 law requires pharmaceutical manufacturers pay 50 discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” approximately 150 million recorded reduction revenue 2011 related estimated impact provision health care reform also company recorded 162 million expenses annual health care reform fee company required pay beginning 2011 law also increased mandated medicaid rebates reduced revenues approximately 179 million 170 million 2011 2010 respectively effective december 1 2011 richard clark chairman retired company merck board directors kenneth c frazier merck’s president chief executive officer elected board serve chairman following mr clark’s retirement november 2011 merck’s board directors raised company’s quarterly dividend 042 per share 038 per share earnings per common share assuming dilution attributable common shareholders “eps” 2011 202 reflect net unfavorable impact resulting acquisitionrelated costs restructuring costs well charge related settlement arbitration proceeding jj discussed partially offset favorable impact certain tax items gains disposition company’s interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture sale certain manufacturing facilities related assets nongaap eps 2011 377 excluding items see “nongaap income nongaap eps” competition health care environment competition markets company conducts business pharmaceutical industry highly competitive highly regulated company’s competitors include worldwide researchbased pharmaceutical companies smaller research companies limited therapeutic focus generic drug consumer health care manufacturers company’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors generic availability competitors’ branded products new information clinical trials marketed products postmarketing surveillance generic competition company’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products could result recognition impairment charge respect certain products competitive pressures intensified pressures industry grown effect operations competitive factors patent disputes cannot predicted pharmaceutical competition involves rigorous search technological innovations ability market innovations effectively longstanding emphasis research development company well positioned compete search technological innovations additional resources required meet market challenges include quality control flexibility meet customer specifications efficient distribution system strong technical information service company active acquiring marketing products external alliances joint ventures licenses refining sales marketing efforts address changing industry conditions however introduction new products processes competitors may result price reductions product displacements even products protected patents example number compounds available treat particular disease typically increases time result slowed sales growth company’s products therapeutic category highly competitive animal health business affected several factors including regulatory legislative issues scientific technological advances product innovation quality price company’s products effective promotional efforts frequent introduction generic products competitors company’s consumer care operations face competition consumer health care businesses well retailers carry private label brands company’s competitive position affected several factors including regulatory legislative issues scientific technological advances quality price company’s products promotional efforts growth lower cost private label brands health care environment global efforts toward health care cost containment continue exert pressure product pricing market access united states federal state governments many years also pursued methods reduce cost drugs vaccines pay example federal laws require company pay specified rebates medicines reimbursed medicaid provide discounts outpatient medicines purchased certain public health service entities “disproportionate share” hospitals meeting certain criteria federal vaccines children entitlement program us centers disease control prevention “cdc” funds purchases recommended pediatric vaccines public sector price immunization medicaideligible uninsured native american certain underinsured children merck contracted provide pediatric vaccines program backdrop united states enacted major health care reform legislation 2010 began implemented 2011 various insurance market reforms advanced 2011 continue full implementation 2014 new law expected expand access health care 32 million americans end decade previously regular access health care respect effect law pharmaceutical industry law increased mandated medicaid rebate 151 231 expanded rebate medicaid managed care utilization increased types entities eligible federal 340b drug discount program law also requires pharmaceutical manufacturers pay 50 discount medicare part beneficiaries medicare part coverage gap ie socalled “donut hole” also pharmaceutical manufacturers required pay annual health care reform fee total annual industry fee 25 billion 2011 28 billion 2012 fee assessed company proportion share sales certain government programs medicare medicaid company also faces increasing pricing pressure globally managed care organizations government agencies programs could negatively affect company’s sales profit margins united states include practices managed care groups institutional governmental purchasers ii us federal laws regulations related medicare medicaid including medicare prescription drug improvement modernization act 2003 patient protection affordable care act changes health care system enacted part health care reform united states well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries could result pricing pressures addition effort contain us federal deficit pharmaceutical industry could considered potential source savings via legislative proposals debated enacted prior years types revenue generating cost saving proposals include direct price controls medicare prescription drug program part addition congress may consider proposals allow certain conditions importation medicines countries remains uncertain proposals may included part future federal budget deficit reduction proposals would directly indirectly affect company 2011 2010 global efforts toward health care cost containment intense several european countries many countries announced austerity measures include implementation pricing actions reduce prices generic patented drugs company taking steps mitigate impact eu austerity measures negatively affected company’s revenue performance 2011 2010 company anticipates austerity measures continue negatively affect revenue performance 2012 additionally global economic downturn sovereign debt issues certain european countries among factors adversely impacted foreign receivables certain european countries company continues receive payment receivables conditions resulted increase average length time takes collect accounts receivable outstanding thereby adversely affecting cash flows full impact us health care reform well continuing budget pressures governments around world cannot predicted time addressing cost containment pressures company continues attempt demonstrate medicines provide value patients pay health care markets historically low rates government health care spending company encourages governments increase investments order improve citizens’ access appropriate health care including medicines operating conditions become challenging global pressures competition industry regulation cost containment efforts although one predict effect factors company’s business company continually takes measures evaluate adapt improve organization business practices better meet customer needs believes well positioned respond evolving health care environment market forces government regulation pharmaceutical industry subject regulation regional country state local agencies around world governmental regulation legislation tend focus standards processes determining drug safety effectiveness well conditions sale reimbursement especially related pricing products particular importance fda united states administers requirements covering testing approval safety effectiveness manufacturing labeling marketing prescription pharmaceuticals many cases fda requirements practices increased amount time resources necessary develop new products bring market united states eu adopted directives legislation concerning classification labeling advertising wholesale distribution integrity supply chain enhanced pharmacovigilance monitoring approval marketing medicinal products human use provide mandatory standards throughout eu may supplemented implemented additional regulations eu member states company’s policies procedures already consistent substance directives consequently believed material effect company’s business company believes continue able conduct operations including launching new drugs market regulatory environment access medicines global health care company merck’s primary role discover develop innovative medicines vaccines company also recognizes important role play helping improve access products around world company’s efforts regard wideranging example company recognized pricing many products differential pricing framework taking consideration factors country’s level economic development public health need addition merck patient assistance program provides medicines adult vaccines free people prescription drug health insurance coverage without company’s assistance cannot afford merck medicine vaccines building company’s efforts merck undertaken collaborations many stakeholders improve access medicines enhance quality life people around world example 2011 merck announced would launch “merck mothers” longterm effort global health partners create world woman die preventable complications pregnancy childbirth launch includes 10year 500 million initiative applies merck’s scientific business expertise making proven solutions widely available developing new technologies improving public awareness policy efforts private sector engagement maternal mortality merck also past provided funds merck company foundation independent organization partnered variety organizations dedicated improving global health one partnerships african comprehensive hivaids partnership botswana collaboration government botswana bill melinda gates foundation renewed 2010 supports botswana’s response hivaids comprehensive sustainable approach hiv prevention care treatment support privacy data protection company subject number privacy data protection laws regulations globally legislative regulatory landscape privacy data protection continues evolve increased attention privacy data protection issues developed emerging markets potential affect directly company’s business including recently enacted laws regulations united states europe asia latin america increased enforcement activity united states developed markets operating results segment composition reflects certain managerial changes implemented consumer care product sales outside united states canada previously included pharmaceutical segment included consumer care segment disclosures prior years recast comparable basis 2011 sales worldwide sales totaled 480 billion 2011 increase 4 compared 460 billion 2010 foreign exchange favorably affected global sales performance 2 revenue increase driven largely growth januvia janumet singulair isentress gardasil simponi rotateq zetia pneumovax bridion addition revenue 2011 benefited higher sales company’s animal health products launch victrelis increases partially offset lower sales cozaar hyzaar lost patent protection united states april 2010 number major european markets march 2010 well lower sales caelyx subutex suboxone company longer marketing rights products revenue also negatively affected lower sales vytorin temodar proquad varivax addition discussed ongoing implementation certain provisions us health care reform legislation 2011 resulted increases medicaid rebates impacts reduced revenues domestic sales 205 billion 2011 increase 1 compared 202 billion 2010 domestic sales increase driven higher sales singulair januvia gardasil janumet isentress well launch victrelis increases partially offset lower sales cozaar hyzaar vytorin varivax proquad foreign sales 276 billion 2011 increase 7 compared 258 billion 2010 driven growth japan emerging markets foreign exchange favorably affected foreign sales performance 4 2011 foreign sales growth reflects strong performance januvia janumet singulair simponi isentress zetia nasonex well higher sales animal health products partially offset lower sales cozaar hyzaar temodar foreign sales represented 57 total sales 2011 56 total sales 2010 many company’s brands experienced positive growth trends eu 2011 environment eu continues challenging many countries announced austerity measures include implementation pricing actions reduce prices generic patented drugs company taking steps mitigate impact eu austerity measures negatively affected company’s revenue performance 2011 company anticipates midsingle digit pricing pressures 2012 across europe well biennial price reductions japan worldwide sales totaled 460 billion 2010 compared 274 billion 2009 foreign exchange favorably affected global sales performance 1 revenue increase 2009 driven largely incremental sales resulting inclusion full year results 2010 legacy scheringplough products remicade nasonex temodar pegintron clarinex well inclusion full year results merckscheringplough partnership “msp partnership” products zetia vytorin prior merger substantially sales zetia vytorin recognized msp partnership results merck’s interest msp partnership recorded equity income affiliates result merger msp partnership became wholly owned company therefore revenues products reflected sales additionally company recognized full year sales 2010 legacy scheringplough animal health consumer care products sales 2009 include revenue legacy scheringplough msp partnership products postmerger period december 31 2009 also contributing sales increase growth januvia janumet isentress singulair increases partially offset lower sales cozaar hyzaar fosamax plus lower revenue company’s relationship azlp products experienced declines include gardasil zocor addition implementation certain provisions us health care reform legislation 2010 resulted increased medicaid rebates impacts reduced revenues sales1 company’s products follows 1 sales legacy scheringplough products 2009 included postmerger period addition prior merger substantially sales zetia vytorin recognized msp partnership results merck’s interest msp partnership recorded equity income affiliates result merger msp partnership became wholly owned company accordingly sales msp partnership products merger reflected table sales zetia vytorin 2009 reflect merck’s sales products latin america part msp partnership well sales products postmerger period 2009 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 reflects nonreportable segments including animal health consumer care revenue company’s relationship azlp primarily relating sales nexium well prilosec revenue azlp 12 billion 13 billion 14 billion 2011 2010 2009 respectively 5 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results pharmaceutical segment sales cardiovascular worldwide sales zetia also marketed ezetrol outside united states cholesterol absorption inhibitor increased 6 2011 24 billion reflecting higher sales international markets particularly japan due part positive impact foreign exchange partially offset volume declines united states global sales vytorin marketed outside united states inegy combination product containing active ingredients zetia zocor declined 7 2011 19 billion reflecting volume declines united states partially offset increases international markets sales zetia vytorin 403 million 441 million respectively postmerger period 2009 prior merger substantially sales products recognized msp partnership results merck’s interest msp partnership recorded equity income affiliates result merger msp partnership became wholly owned company therefore revenues products reflected sales total sales zetia vytorin 2009 including sales recognized msp partnership 22 billion 21 billion respectively january 2012 fda approved updated label vytorin includes results sharp study heart renal protection clinical trial sharp vytorin 1020 mg lowered ldl lowdensity lipoprotein cholesterol patients moderate severe chronic kidney disease major vascular events reduced treatment group compared placebo trial therefore demonstrated treatment vytorin 1020 mg versus placebo reduced risk major vascular events chronic kidney disease population sharp studied combination simvastatin ezetimibe compared placebo designed assess independent contributions drug observed effect reason fda approve new indication vytorin zetia study’s efficacy results incorporated label zetia previously disclosed data safety monitoring board “dsmb” improveit large cardiovascular outcomes study evaluating zetiavytorin patients acute coronary syndrome plans conduct second interim analysis efficacy approximately 75 prespecified 5250 primary clinical endpoints occurred september 2011 merck advised improveit executive committee decided schedule study’s second interim analysis first quarter 2012 rather previously anticipated late 2011 products contained cardiovascular franchise include among others integrilin injection treatment patients acute coronary syndrome sold company united states canada diabetes obesity global sales januvia merck’s dipeptidyl peptidase4 “dpp4” inhibitor treatment type 2 diabetes rose 39 2011 33 billion reflecting volume growth united states well international markets particularly japan across europe sales januvia grew 24 2010 24 billion reflecting continued growth united states internationally dpp4 inhibitors represent class prescription medications improve blood sugar control patients type 2 diabetes enhancing natural body system called incretin system helps regulate glucose affecting beta cells alpha cells pancreas worldwide sales janumet merck’s oral antihyperglycemic agent combines sitagliptin januvia metformin single tablet target three key defects type 2 diabetes 14 billion 2011 954 million 2010 658 million 2009 reflecting growth internationally due part ongoing launches certain markets well growth united states october 2011 fda approved juvisync new treatment type 2 diabetes combines glucoselowering medication sitagliptin active component januvia cholesterollowering medication zocor juvisync first treatment option health care providers help patients need blood sugarlowering benefits dpp4 inhibitor cholesterollowering benefits simvastatin convenience single tablet daily february 2012 fda approved janumet xr new treatment type 2 diabetes combines sitagliptin extendedrelease metformin janumet xr provides convenient oncedaily treatment option health care providers patients need help control blood sugar february 17 2012 fda sent warning letter company relating januvia janumet stating company fulfill postmarketing requirement 3month pancreatic safety study diabetic rodent model treated sitagliptin merck communication fda regarding study merck’s efforts complete timely satisfactory manner terms warning letter within 30 days date letter company must submit fda final study protocol new 3month rodent study satisfy fda’s requirements proposed revised timetable completion study within 6 months date letter fda expects company obtained agreement fda adequate study protocol initiated study letter states failure correct violation may result regulatory actions fda including limited civil money penalties merck remains fully committed fulfilling fda’s requirements diversified brands merck’s diversified brands human health pharmaceutical products approaching expiration marketing exclusivity longer protected patents developed markets continue core part company’s offering markets around world global sales cozaar companion agent hyzaar combination cozaar hydrochlorothiazide treatment hypertension declined 21 2011 17 billion fell 41 2010 21 billion patents provided us market exclusivity cozaar hyzaar expired april 2010 addition cozaar hyzaar lost patent protection number major european markets march 2010 accordingly company experienced significant declines cozaar hyzaar sales company expects declines continue products contained diversified brands franchise include among others zocor statin modifying cholesterol propecia product treatment male pattern hair loss prescription claritin treatment seasonal outdoor allergies yearround indoor allergies remeron antidepressant vasotec vaseretic hypertension andor heart failure proscar urology product treatment symptomatic benign prostate enlargement remeron lost market exclusivity united states january 2010 also lost market exclusivity major european markets formulationuse patent provides us market exclusivity propecia expires october 2013 however previously disclosed agreement one generic manufacturer given right enter market january 2013 another given right enter july 2013 infectious disease worldwide sales isentress hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection treatmentnaïve treatmentexperienced adults grew 25 2011 14 billion reflecting volume growth united states internationally partially offset unfavorable pricing european markets sales isentress increased 45 2010 11 billion primarily due positive performance united states well internationally resulting continued uptake since launch isentress works inhibiting insertion hiv dna human dna integrase enzyme inhibiting integrase performing essential function helps limit ability virus replicate infect new cells january 2012 fda approved use isentress combination antiretroviral medicines treatment hiv1 infection pediatric patients two years age older weighing least 10 kg worldwide sales pegintron treatment chronic hepatitis c 657 million 2011 decline 11 compared 737 million sales 2010 reflecting competitive pressures addition company believes sales decline attributable part patient treatment delayed health care providers anticipation new therapeutic options becoming available september 2010 company initiated voluntary recall pegintron single dose redipen injection united states consultation fda well recalls globally resulting reduction revenue 2010 approximately 20 million representing estimated sales returns addition company recognized charge approximately 40 million materials production primarily inventory discard costs recall conducted precautionary measure due thirdparty manufacturing issue could affected small number redipens recall specific pegintron redipen affect pegintron vial products sales pegintron 149 million postmerger period 2009 may 2011 fda approved victrelis company’s innovative oral medicine treatment chronic hepatitis c victrelis approved treatment chronic hepatitis c genotype 1 infection combination peginterferon alfa ribavirin adult patients 18 years age older compensated liver disease including cirrhosis previously untreated failed previous interferon ribavirin therapy victrelis antiviral agent designed interfere ability hepatitis c virus replicate inhibiting key viral enzyme july 2011 ec approved victrelis ec’s decision grants single marketing authorization valid 27 countries members eu well unified labeling applicable iceland liechtenstein norway addition united states victrelis launched 19 markets including france germany canada brazil sales victrelis 140 million 2011 sales primaxin antibacterial product declined 16 2011 515 million decreased 11 2010 610 million results primarily reflect lower volumes unfavorable pricing due competitive pressures patents primaxin expired worldwide multiple generics launched europe accordingly company experiencing decline sales primaxin company expects decline continue products contained infectious disease franchise include among others cancidas antifungal product invanz treatment certain infections avelox fluoroquinolone antibiotic treatment certain respiratory skin infections noxafil prevention certain invasive fungal infections crixivan stocrin antiretroviral therapies treatment hiv infection rebetol use combination pegintron treating chronic hepatitis c compound patent provides us market exclusivity cancidas expires september 2013 neurosciences ophthalmology global sales maxalt merck’s tablet acute treatment migraine increased 16 2011 639 million reflecting higher inventory level favorable pricing united states sales maxalt declined 4 2010 550 million reflecting generic availability competing product patent provides us market exclusivity maxalt expire december 2012 us sales maxalt 451 million 2011 addition patent provides market exclusivity maxalt expire number major european markets february 2013 company anticipates sales united states european markets decline significantly patent expiries worldwide sales ophthalmic products cosopt trusopt declined 1 2011 477 million reflecting unfavorable pricing volume declines europe mitigated part positive impact foreign exchange partially offset higher cosopt sales japan sales cosopt trusopt decreased 4 2010 484 million patent provided us market exclusivity cosopt trusopt expired trusopt also lost market exclusivity number major european markets patent cosopt expire number major european markets march 2013 company expects sales markets decline significantly thereafter february 2012 fda approved cosopt pf merck’s preservativefree formulation cosopt ophthalmic solution indicated reduction elevated intraocular pressure appropriate patients openangle glaucoma ocular hypertension company plans launch cosopt pf end 2012 bridion reversal certain muscle relaxants used surgery currently approved launched many countries outside united states sales bridion 201 million 2011 103 million 2010 bridion phase iii development united states 2009 fda approved saphris asenapine antipsychotic treatment schizophrenia adults acute treatment monotherapy adjunctive therapy lithium valproate manic mixed episodes associated bipolar disorder adults 2010 asenapine sold brand name sycrest received marketing approval eu treatment moderate severe manic episodes associated bipolar disorder adults 2010 merck h lundbeck “lundbeck” announced worldwide commercialization agreement sycrest sublingual tablets 5 mg 10 mg terms agreement lundbeck paid fee makes product supply payments exchange exclusive commercial rights sycrest markets outside united states china japan merck’s sales saphris 120 million 2011 merck continues focus building brand awareness saphris united states company continues monitor assess saphrissycrest related intangible asset increasing brand awareness lundbeck’s launch product eu successful company may take noncash impairment charge respect saphrissycrest charge could material neurosciences ophthalmology franchise also included products subutexsuboxone treatment opiate addiction march 2010 merck sold rights subutexsuboxone nearly markets back reckitt benckiser group plc “reckitt” rights products major markets reverted reckitt july 1 2010 remainder reverted reckitt 2011 exception small markets sales subutexsuboxone 111 million 2010 february 2012 fda approved zioptan tafluprost preservativefree prostaglandin analog ophthalmic solution reducing elevated intraocular pressure patients openangle glaucoma ocular hypertension merck exclusive commercial rights tafluprost western europe excluding germany north america south america africa middle east india australia zioptan marketed saflutan certain markets outside united states oncology sales temodar marketed temodal outside united states treatment certain types brain tumors declined 12 2011 935 million 11 billion 2010 primarily reflecting generic competition europe sales temodar 188 million postmerger period 2009 temodar lost patent exclusivity eu 2009 previously disclosed agreement one generic manufacturer given right enter us market august 2013 us patent exclusivity periods otherwise expire february 2014 global sales emend treatment chemotherapyinduced nausea vomiting increased 11 2011 419 million primarily reflecting growth international markets sales emend increased 19 2010 378 million driven increases united states due launch japan products oncology franchise include among others intron adjuvant treatment melanoma marketing rights caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma transitioned jj december 31 2010 sales caelyx 284 million 2010 march 2011 fda approved sylatron onceweekly subcutaneous injection indicated adjuvant treatment melanoma microscopic gross nodal involvement within 84 days definitive surgical resection including complete lymphadenectomy respiratory immunology worldwide sales singulair onceaday oral medicine chronic treatment asthma relief symptoms allergic rhinitis grew 10 2011 reaching 55 billion driven favorable pricing united states volume growth japan emerging markets well beneficial impact foreign exchange global sales singulair rose 7 50 billion 2010 reflecting price increases positive performance japan patent provides us market exclusivity singulair expires august 2012 company expects within two years following patent expiration lose substantially us sales singulair declines coming first full year following patent expiration us sales singulair 35 billion 2011 addition patent provides market exclusivity singulair expire number major european markets february 2013 company expects sales singulair markets decline significantly thereafter patent provides market exclusivity singulair japan expire 2016 sales remicade treatment inflammatory diseases 27 billion 2011 decline 2 compared 2010 foreign exchange favorably affected sales performance 5 2011 prior july 1 2011 remicade marketed company outside united states except japan certain asian markets result agreement reached april 2011 amend agreement governing distribution rights remicade simponi discussed effective july 1 2011 merck relinquished marketing rights products certain territories including canada central south america middle east africa asia pacific sales performance 2011 reflects changes retained territories remicade sales grew 13 2011 reflect 6 favorable impact foreign exchange sales remicade 431 million postmerger period 2009 simponi oncemonthly subcutaneous treatment certain inflammatory diseases approved ec october 2009 january 2011 simponi approved eu use combination methotrexate adults severe active progressive rheumatoid arthritis previously treated methotrexate shown reduce rate progression joint damage measured xray improve physical function sales simponi 264 million 2011 97 million 2010 revenue increase driven growth retained territories due part ongoing launches global sales nasonex inhaled nasal corticosteroid treatment nasal allergy symptoms 13 billion 2011 increase 5 compared sales 12 billion 2010 driven largely volume growth japan latin america positive effect foreign exchange partially offset volume declines united states sales nasonex 165 million postmerger period 2009 global sales clarinex marketed aerius many countries outside united states nonsedating antihistamine 621 million 2011 compared sales 623 million 2010 sales clarinex 101 million postmerger period 2009 products included respiratory immunology franchise include among others arcoxia treatment arthritis pain asmanex inhaled corticosteroid asthma proventil inhalation aerosol relief bronchospasm dulera inhalation aerosol combination medicine treatment asthma january 2012 merck received complete response letter fda supplemental new drug application “snda” dulera treatment chronic obstructive pulmonary disease company plans discussions fda regard complete response letter vaccines following discussion vaccines include sales vaccines sold major european markets sanofi pasteur msd “spmsd” company’s joint venture sanofi pasteur results reflected equity income affiliates see “selected joint venture affiliate information” supply sales spmsd however included worldwide sales gardasil recorded merck grew 22 2011 12 billion driven increased vaccination males 9 26 years age united states higher sales conjunction launch japan growth emerging markets partially offset lower government orders canada sales gardasil declined 12 988 million 2010 driven largely declines united states australia sales 2009 include 51 million result government purchases cdc’s strategic national stockpile gardasil world’s topselling hpv vaccine indicated girls women 9 26 years age prevention cervical vulvar vaginal anal cancer caused hpv types 16 18 certain precancerous dysplastic lesions caused hpv types 6 11 16 18 genital warts caused hpv types 6 11 gardasil also approved united states use boys men 9 26 years age prevention anal cancer caused hpv types 16 18 anal dysplasias precancerous lesions caused hpv types 6 11 16 18 genital warts caused hpv types 6 11 company party certain thirdparty license agreements respect gardasil including crosslicense settlement agreement glaxosmithkline result agreements company pays royalties worldwide gardasil sales 21 27 vary country included materials production costs recent years company experienced difficulties producing varicella zoster virus “vzv”containing vaccines difficulties resulted supply constraints proquad varivax zostavax company manufacturing bulk varicella producing doses varivax zostavax limited quantity proquad pediatric combination vaccine help protect measles mumps rubella varicella one vzvcontaining vaccines became available united states ordering second quarter 2010 supply exhausted proquad longer available ordering merck’s sales proquad 34 million 2011 134 million 2010 proquad available ordering 2009 due supply constraints merck’s sales varivax vaccine help prevent chickenpox varicella 831 million 2011 929 million 2010 10 billion 2009 sales 2010 2009 reflect 48 million 64 million respectively revenue result government purchases cdc’s strategic national stockpile merck’s sales mmr ii vaccine help protect measles mumps rubella 337 million 2011 315 million 2010 331 million 2009 sales varivax mmr ii affected unavailability proquad noted merck’s sales rotateq vaccine help protect rotavirus gastroenteritis infants children grew 25 2011 651 million reflecting favorable public sector inventory fluctuations growth emerging markets sales rotateq declined 1 2010 519 million sales 2010 benefited modestly temporary competitor supply issue sales pneumovax vaccine help prevent pneumococcal disease 498 million 2011 376 million 2010 346 million 2009 increase 2011 compared 2010 primarily due positive performance united states due part favorable pricing japan merck’s sales zostavax vaccine help prevent shingles herpes zoster 332 million 2011 243 million 2010 277 million 2009 sales years affected supply issues company filled backorders resumed normal supply schedule united states zostavax company increasing promotional efforts zostavax united states broad international launches immunization programs currently planned 2012 march 2011 fda approved expanded age indication zostavax prevention shingles include adults ages 50 59 zostavax indicated prevention herpes zoster individuals 50 years age older merck’s adult formulation vaqta vaccine hepatitis currently unavailable women’s health endocrine worldwide sales fosamax plus marketed fosavance throughout eu fosamac japan treatment case fosamax prevention osteoporosis declined 8 2011 855 million decreased 16 2010 926 million medicines lost market exclusivity united states also lost market exclusivity major european markets accordingly company experiencing sales declines within fosamax product franchise company expects declines continue worldwide sales nuvaring contraceptive product grew 12 623 million 2011 559 million 2010 driven positive performance united states internationally including beneficial impact foreign exchange sales nuvaring 88 million postmerger period 2009 global sales follistim aq marketed countries outside united states puregon biological fertility treatment 530 million 2011 compared 528 million 2010 reflecting growth emerging markets offset declines europe due primarily supply constraints sales follistim aq 96 million postmerger period 2009 puregon lost market exclusivity eu august 2009 products contained women’s health endocrine franchise include among others implanon singlerod subdermal contraceptive implant cerazette progestin oral contraceptive company currently experiencing difficulty manufacturing certain women’s health products company working resolve issues august 2011 zoely oral contraceptive granted marketing authorization ec use women prevent pregnancy zoely combined oral contraceptive tablet containing unique monophasic combination two hormones nomegestrol acetate highly selective progesteronederived progestin 17beta estradiol estrogen similar one naturally present woman’s body marketing authorization zoely applies 27 eu member states plus iceland liechtenstein norway teva pharmaceutical industries ltd holds exclusive marketing rights zoely france italy belgium spain november 2011 merck received complete response letter fda nomace2 mk8175a marketed zoely eu company planning conduct additional clinical study requested fda update application future animal health animal health includes pharmaceutical vaccine products prevention treatment control disease major farm companion animal species animal health sales affected intense competition frequent introduction generic products global sales animal health products grew 11 2011 33 billion 29 billion 2010 foreign exchange favorably affected global sales performance 3 2011 increase sales driven positive performance among cattle swine poultry companion animal products global sales animal health products 494 million postmerger period 2009 consumer care consumer care products include overthecounter foot care sun care products claritin nondrowsy antihistamines dr scholl’s foot care products coppertone sun care products miralax treatment occasional constipation global sales consumer care products increased 1 2011 18 billion reflecting strong performance coppertone offset declines dr scholl’s claritin consumer care product sales 149 million postmerger period 2009 consumer care product sales affected competition consumer spending patterns alliances astrazeneca option buy merck’s interest subsidiary merck’s interest nexium prilosec exercisable 2012 company believes likely astrazeneca exercise option see “selected joint venture affiliate information” astrazeneca exercises option company longer record equity income azlp supply sales azlp decline substantially costs expenses 100 greater 1 amounts 2010 include reclassification 120 million expenses marketing administrative research development 2 includes 587 million 24 billion iprd impairment charges 2011 2010 respectively materials production materials production costs 169 billion 2011 184 billion 2010 90 billion 2009 materials production costs 2009 include expenses related sale legacy scheringplough msp partnership products postmerger period costs unfavorably affected 49 billion 46 billion 08 billion 2011 2010 2009 respectively expenses amortization intangible assets recorded connection mergers acquisitions additionally expenses 2010 2009 include 20 billion 15 billion respectively amortization purchase accounting adjustments scheringplough’s inventories recognized result merger costs 2011 include intangible asset impairment charge 118 million company may recognize additional noncash impairment charges future related product intangibles measured fair value capitalized connection mergers acquisitions charges could material also included materials production costs associated restructuring activities amounted 348 million 429 million 115 million 2011 2010 2009 respectively including accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 649 2011 compared 600 2010 671 2009 amortization intangible assets purchase accounting adjustments inventories well restructuring impairment charges noted unfavorable impact gross margin 114 percentage points 2011 152 percentage points 2010 88 percentage points 2009 gross margin improvement 2011 compared 2010 reflects changes product mix manufacturing efficiencies well benefit foreign exchange marketing administrative marketing administrative expenses 137 billion 2011 131 billion 2010 85 billion 2009 increase 2011 compared 2010 due part unfavorable effect foreign exchange strategic investments made emerging markets additionally marketing administrative expenses 2011 include 162 million expenses annual health care reform fee required part us health care reform legislation expenses 2011 2010 include restructuring costs 119 million 144 million respectively primarily related accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed expenses also include 278 million 379 million acquisitionrelated costs 2011 2010 respectively consisting largely integration costs related merger 2011 also consist severance costs associated acquisition inspire pharmaceuticals inc part company’s formal restructuring programs marketing administrative expenses 2009 include expenses related scheringplough activities postmerger period include acquisitionrelated costs 371 million largely comprised transaction costs directly related merger including advisory legal fees integration costs research development research development expenses 85 billion 2011 111 billion 2010 58 billion 2009 expenses 2009 include expenses related scheringplough activities postmerger period research development expenses comprised costs directly incurred merck research labs “mrl” company’s research development division focuses human healthrelated activities approximately 45 billion 49 billion 2011 2010 respectively also included research development expenses costs incurred divisions support research development activities including depreciation production general administrative well certain costs operating segments including pharmaceutical animal health consumer care 32 billion 34 billion aggregate 2011 2010 respectively research development expenses 2011 favorably affected cost savings resulting restructuring activities research development expenses also include inprocess research development “iprd” impairment charges research development related restructuring charges 2011 company recorded iprd impairment charges 587 million primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges amount 17 billion related writedown intangible asset vorapaxar resulting developments clinical program compound see “research development” remaining 763 million iprd impairment charges 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds company may recognize additional noncash impairment charges future cancellation delay pipeline programs measured fair value capitalized connection mergers acquisitions charges could material research development expenses 2011 2010 2009 reflect 138 million 428 million 232 million respectively accelerated depreciation asset abandonment costs associated restructuring activities sharebased compensation total pretax sharebased compensation expense 369 million 2011 509 million 2010 415 million 2009 december 31 2011 391 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 18 years segment reporting sharebased compensation costs unallocated expenses restructuring costs restructuring costs 13 billion 985 million 16 billion 2011 2010 2009 respectively nearly costs recorded 2011 relate merger restructuring program restructuring costs recorded 2010 915 million related merger restructuring program 77 million related global restructuring program initiated 2008 “2008 restructuring program” remaining activity related legacy scheringplough program included gain sale manufacturing facility restructuring costs recorded 2009 14 billion related merger restructuring program 178 million related 2008 restructuring program 39 million related legacy scheringplough program 2011 2010 2009 separation costs 11 billion 768 million 14 billion respectively incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated merck eliminated 7590 positions 2011 6880 related merger restructuring program 450 related 2008 restructuring program 260 related legacy scheringplough program 12465 positions 2010 11410 related merger restructuring program 890 related 2008 restructuring program remainder legacy scheringplough program 3525 positions 2009 related 2008 restructuring program position eliminations comprised actual headcount reductions elimination contractors vacant positions also included restructuring costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs well contract termination shutdown costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included materials production marketing administrative research development discussed equity income affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates increased 4 2011 610 million primarily due higher partnership returns azlp 2011 company divested interest jjmcp joint venture 2010 equity income affiliates declined 587 million 22 billion 2009 equity income affiliates longer included equity income msp partnership became wholly owned company result merger merial limited “merial” due sale merck’s interest 2009 addition lower partnership returns azlp well lower equity income spmsd result restructuring charges recorded joint venture also contributed decline 2010 see “selected joint venture affiliate information” income expense net income expense net 946 million expense 2011 reflecting 500 million charge related resolution arbitration proceeding involving company’s rights market remicade simponi see note 6 consolidated financial statements 136 million gain disposition company’s interest jjmcp joint venture see note 10 consolidated financial statements 127 million gain sale certain manufacturing facilities related assets see note 5 consolidated financial statements income expense net 2010 13 billion expense reflecting 950 million charge vioxx liability reserve see note 12 consolidated financial statements charges related settlement certain pending awp litigation 200 million exchange losses due two venezuelan currency devaluations discussed partially offset 443 million income recognized upon astrazeneca’s asset option exercise see note 10 consolidated financial statements 102 million income recognized settlement certain disputed royalties income expense net 107 billion income 2009 primarily reflecting 75 billion gain resulting recognizing merck’s previously held equity interest msp partnership fair value result obtaining control msp partnership merger 32 billion gain sale merck’s interest merial see note 10 consolidated financial statements noted exchange losses 2010 reflect losses relating venezuelan currency devaluations effective january 11 2010 venezuelan government devalued currency bsf 215 per us dollar twotiered official exchange rate 1 “the essentials rate” bsf 260 per us dollar 2 “the nonessentials rate” bsf 430 per us dollar january 2010 company required remeasure local currency operations venezuela us dollars venezuelan economy determined hyperinflationary throughout 2010 company settled transactions essentials rate therefore remeasured monetary assets liabilities utilizing essentials rate december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 transactions would settled official rate bsf 430 per us dollar result announcement company remeasured december 31 2010 monetary assets liabilities new official rate segment profits segment profits comprised segment revenues less certain elements materials production costs operating expenses including components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate production costs standard costs research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits arbitration settlement charge gain divestiture jjmcp joint venture gain sale certain manufacturing facilities related assets recorded 2011 charge vioxx liability reserve income recognized astrazeneca’s asset option exercise recognized 2010 gains related msp partnership disposition merial 2009 addition amortization purchase accounting adjustments acquisitionrelated costs intangible asset impairment charges restructuring costs taxes paid joint venture level portion equity income also excluded determination segment profits additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items reflected “other” table also included “other” miscellaneous corporate profits operating profits related thirdparty manufacturing sales divested products businesses well supply sales pharmaceutical segment profits rose 7 2011 driven largely increase sales gross margin improvement discussed pharmaceutical segment profits increased 52 2010 driven largely inclusion legacy scheringplough results taxes income effective income tax rates 128 2011 406 2010 148 2009 reflect impacts purchase accounting adjustments restructuring costs partially offset beneficial impact foreign earnings addition effective tax rate 2011 also reflects net favorable impact approximately 700 million relating settlement merck’s 20022005 federal income tax audit favorable impact certain foreign state tax rate changes resulted net 270 million reduction deferred tax liabilities intangibles established purchase accounting impact 500 million charge related resolution arbitration proceeding jj 2010 effective tax rate reflects impact vioxx liability reserve tax impact recorded 147 million charge associated change tax law requires taxation prescription drug subsidy company’s retiree health benefit plans enacted first quarter 2010 part us health care reform legislation impact astrazeneca’s asset option exercise unfavorable impacts partially offset 391 million tax benefit changes foreign entity’s tax rate resulted reduction deferred tax liabilities product intangibles recorded conjunction merger favorable impact enactment tax extenders legislation including rd tax credit favorable impact foreign earnings dividends company’s foreign subsidiaries 2009 effective tax rate reflects favorable impacts increased income lower tax jurisdictions includes favorable impact msp partnership gain tax settlements including previously announced settlement canada revenue agency “cra” favorable impacts partially offset unfavorable effect gain sale merck’s interest merial taxable united states combined federal state tax rate approximately 380 net income earnings per common share net income attributable merck co inc 63 billion 2011 861 million 2010 129 billion 2009 eps 202 2011 028 2010 565 2009 increases net income eps 2011 compared 2010 primarily due lower iprd impairment charges amortization inventory stepup lower legal reserves favorable impact tax settlements partially offset arbitration settlement charge recorded 2011 income recognized 2010 astrazeneca’s asset option exercise declines net income eps 2010 compared 2009 primarily due gains recognized 2009 associated msp partnership result merger disposition merial well incremental costs 2010 result merger including recognition full year amortization intangible assets inventory stepup addition iprd impairment charges charge establish vioxx liability reserve lower equity income affiliates impact us health care reform legislation also contributed declines net income eps 2010 compared 2009 income recognized astrazeneca’s asset option exercise 2010 benefited net income eps 2009 also affected dilutive impact shares issued merger nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance used management merck providing management believes information enhances investors’ understanding company’s results nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items consist acquisitionrelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance therefore information nongaap income nongaap eps considered addition lieu net income eps prepared accordance generally accepted accounting principles united states “gaap” additionally since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap income nongaap eps performance company measured basis along performance metrics senior management’s annual compensation derived part using nongaap income nongaap eps reconciliation gaap financial measures nongaap financial measures follows 1 represents difference calculated gaap eps calculated nongaap eps may different amount calculated dividing impact excluded items weightedaverage shares applicable year acquisitionrelated costs nongaap income nongaap eps exclude ongoing impact certain amounts recorded connection mergers acquisitions amounts include amortization intangible assets inventory stepup well intangible asset impairment charges also excluded integration transaction costs associated merger well costs associated mergers acquisitions severance costs part company’s formal restructuring programs costs excluded management believes costs representative ongoing normal business activities restructuring costs nongaap income nongaap eps exclude costs related restructuring actions including restructuring activities related merger see note 4 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions company undertaken restructurings different types covered periods therefore charges considered nonrecurring however management excludes amounts nongaap income nongaap eps believes helpful understanding performance continuing business certain items nongaap income nongaap eps exclude certain items represent substantive unusual items evaluated individual basis evaluation considers quantitative qualitative aspect unusual nature generally represent items either result nature magnitude management would anticipate would occur part company’s normal business regular basis certain items comprised arbitration settlement charge gain disposition company’s interest jjmcp joint venture gain associated sale certain manufacturing facilities related assets charge establish vioxx liability reserve income recognized upon astrazeneca’s asset option exercise gain resulting recognizing merck’s previously held equity interest msp partnership fair value result obtaining controlling interest merger gain divestiture merck’s interest merial also excluded nongaap income nongaap eps tax benefits settlement federal income tax audit favorable impact certain foreign state tax rate changes resulted net reduction deferred tax liabilities intangibles established purchase accounting tax charge related us health care reform legislation research development chart reflecting company’s current research pipeline february 21 2012 set forth item 1 “business research development” research development update company currently two candidates regulatory review united states internationally mk8669 ridaforolimus investigational oral mtor mammalian target rapamycin inhibitor development treatment metastatic softtissue bone sarcomas patients favorable response chemotherapy accepted standard review fda september 2011 august 2011 european medicines agency accepted marketing authorization application ridaforolimus part exclusive license agreement ariad pharmaceuticals inc “ariad” merck responsible development worldwide commercialization ridaforolimus ariad option copromote ridaforolimus sarcoma united states subject execution copromotion agreement mk0653c zetia ezetimibe combined atorvastatin accepted standard review fda treatment primary mixed hyperlipidemia response notice company’s filing pfizer inc “pfizer” filed patent infringement lawsuit us district court company asserting certain pfizer patent rights respect atorvastatin lawsuit potential bar fda approval company’s nda 30 months january 6 2014 subject shortened lengthened court decision shortened agreement parties addition candidates regulatory review company 19 drug candidates phase iii development targeting broad range diseases company plans file five major products approval 2012 2013 including suvorexant insomnia bridion reversal neuromuscular blockade v503 cervical cancer vaccine odanacatib osteoporosis tredaptive atherosclerosis mk4305 suvorexant investigational dual orexin receptor antagonist potential new approach treatment insomnia orexins neuropeptides chemical messengers released specialized neurons hypothalamus region brain believed important regulator brain’s sleepwake process february 2012 merck announced based positive results two pivotal phase iii efficacy trials suvorexant company anticipates filing nda mk4305 fda 2012 mk8616 bridion medication reversal certain muscle relaxants used surgery bridion currently approved launched many countries outside united states prior merger scheringplough received notapprovable letter fda bridion company conducted additional clinical trials address fda’s comments plans file nda bridion fda 2012 v503 ninevalent hpv vaccine development help protect certain hpvrelated diseases v503 incorporates antigens five additional cancercausing hpv types compared gardasil phase iii clinical program includes eventdriven clinical trial ongoing merck continues anticipate filing biologics license application “bla” v503 fda 2012 mk0822 odanacatib oral onceweekly investigational treatment osteoporosis postmenopausal women osteoporosis disease reduces bone density strength results increased risk bone fractures odanacatib cathepsin k inhibitor selectively inhibits cathepsin k enzyme cathepsin k known play central role function osteoclasts cells break existing bone tissue particularly protein components bone inhibition cathepsin k novel approach treatment osteoporosis odanacatib continues studied determine safety potential effects hip vertebral nonvertebral fractures eventdriven phase iii clinical trial company anticipates filing nda mk0822 fda 2013 mk0524a drug candidate combines extendedrelease niacin novel flushing inhibitor laropiprant mk0524a demonstrated ability lower ldlcholesterol “ldlc” “bad” cholesterol raise hdlcholesterol “hdlc” “good” cholesterol lower triglycerides significantly less flushing traditional extended release niacin alone high ldlc low hdlc elevated triglycerides risk factors associated heart attacks strokes april 2008 merck received notapprovable letter fda response nda mk0524a meeting discuss letter fda stated additional efficacy safety data required suggested merck wait results hps2thrive treatment hdl reduce incidence vascular events eventdriven cardiovascular outcomes study expected completed 2012 company anticipates filing nda fda mk0524a 2013 mk0524a approved 60 countries outside united states treatment dyslipidemia particularly patients combined mixed dyslipidemia characterized elevated levels ldlc triglycerides low hdlc patients primary hypercholesterolemia heterozygous familial nonfamilial marketed tredaptive cordaptive certain countries tredaptive used patients combination statins cholesterol lowering effects statin monotherapy inadequate tredaptive used monotherapy patients statins considered inappropriate tolerated mk8962 elonva corifollitropin alpha injection approved eu controlled ovarian stimulation combination gnrh antagonist development multiple follicles women participating assisted reproductive technology program currently phase iii development united states based feedback fda additional data ongoing phase iii trial required time filing merck anticipates filing nda elonva fda 2013 mk6621 vernakalant iv investigational candidate treatment atrial fibrillation marketed brinavess eu merck acquired exclusive rights develop commercialize vernakalant iv well exclusive worldwide rights oral formulations vernakalant prior merck’s acquisition rights vernakalant iv canada mexico united states program placed clinical hold fda phase iii act v trial suspended 2010 act v terminated united states program remains hold company plans discussions fda mk8175a nomace2 marketed zoely eu oral contraceptive use women prevent pregnancy nomace2 combined oral contraceptive tablet containing unique monophasic combination two hormones nomegestrol acetate highly selective progesteronederived progestin 17beta estradiol estrogen similar one naturally present women’s body november 2011 merck received complete response letter fda nomace2 company planning conduct additional clinical study requested fda update application future mk5348 vorapaxar thrombin receptor antagonist developed prevention thrombosis clot formation reduction cardiovascular events vorapaxar evaluated two major clinical outcomes studies different patient groups tracer thrombin receptor antagonist clinical event reduction acute coronary syndrome clinical outcomes trial patients acute coronary syndrome tra2p thrombin receptor antagonist secondary prevention atherothrombotic ischemic events secondary prevention study patients previous heart attack ischemic stroke documented peripheral vascular disease february 2012 merck announced topline results tra2p study tra2p showed addition vorapaxar standard care significantly reduced risk protocolspecified primary endpoint composite cardiovascular death heart attack myocardial infarction stroke urgent coronary revascularization compared standard care significant increase bleeding including intracranial hemorrhage among patients taking vorapaxar addition standard care although lower risk intracranial hemorrhage patients without history stroke full results tra2p presented american college cardiology scientific sessions march 2012 november 2011 researchers presented results tracer outcomes study american heart association scientific sessions results published tracer achieve primary endpoint january 2011 merck external study investigators announced combined dsmb two clinical trials reviewed available safety efficacy data recommended patients tracer trial discontinue study drug investigators close study merck review data tra2p tracer investigators outside experts help better understand profile investigational medicine specific patient populations determine next steps including potential regulatory filings mk0524b drug candidate combines novel approach raising hdlc lowering triglycerides extendedrelease niacin combined laropiprant proven benefits simvastatin one combination product merck anticipates filing nda mk0524b fda 2014 mk7243 investigational allergy immunotherapy sublingual tablet “ait” phase iii development grass pollen allergy company north american rights ait dissolvable oral tablet designed prevent allergy symptoms inducing protective immune response allergies thereby treating underlying cause disease merck investigating ait treatment grass pollen allergic rhinoconjunctivitis children adults company anticipates filing nda mk7243 fda 2013 mk3641 ait ragweed allergy also phase iii development north american market company anticipates filing nda mk3641 fda 2013 mk3814 preladenant selective adenosine 2a receptor antagonist phase iii development treatment parkinson’s disease company anticipates filing nda preladenant fda 2014 mk3415a investigational candidate treatment clostridium difficile infection combination two monoclonal antibodies used treat patients single infusion company anticipates filing nda mk3415a fda 2014 v212 inactivated varicellazoster virus vaccine development prevention herpes zoster company enrolling two phase iii trials one autologous hematopoietic cell transplant patients solid tumor malignancies undergoing chemotherapy hematological malignancies company anticipates filing bla first autologous hematopoietic cell transplant data 2014 filing second indication cancer patients later date v419 investigational hexavalent pediatric combination vaccine contains components current vaccines designed help protect six potentially serious diseases diphtheria tetanus whooping cough bordetella pertussis polio poliovirus types 1 2 3 invasive disease caused haemophilus influenzae type b hepatitis b developed collaboration sanofipasteur company anticipates filing bla v419 fda 2014 mk0431e combines januvia atorvastatin single tablet developed treatment diabetes atherosclerosis company anticipates filing nda mk0431e fda 2014 mk7009 vaniprevir investigational oral twice daily protease inhibitor treatment chronic hepatitis c virus drug phase iii trials japan company anticipates filing new drug application mk7009 japan 2014 mk0859 anacetrapib investigational inhibitor cholesteryl ester transfer protein “cetp” investigated lipid management raise hdlc reduce ldlc based results phase iii define determining efficacy tolerability cetp inhibition anacetrapib safety study 1623 patients coronary heart disease coronary heart disease risk equivalents company initiated large eventdriven cardiovascular clinical outcomes trial reveal randomized evaluation effects anacetrapib lipidmodification involving patients preexisting vascular disease company continues anticipate filing nda anacetrapib fda beyond 2015 2011 merck discontinued clinical development program telcagepant company’s investigational calcitonin generelated peptide receptor antagonist treatment acute migraine decision based assessment data across clinical program company also discontinued clinical development program mk0431c combination sitagliptin pioglitazone treatment diabetes based review regulatory commercial prospects combination drug candidate 2012 merck discontinued clinical development program eu mk0887a zenhale fixed dose combination two previously approved drugs treatment asthma mometasone furoate formoterol fumarate dehydrate marketed united states dulera inhalation aerosol company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources disease areas unmet medical needs scientific opportunity commercial opportunity merck managing research development portfolio across diverse approaches discovery development balancing investments appropriately novel innovative targets potential major impact human health developing bestinclass approaches delivering maximum value approved medicines vaccines new indications new formulations another important component company’s sciencebased diversification based expanding company’s portfolio modalities include small molecules vaccines also biologics peptides small proteins antibodies rnai merck moved diversify portfolio merck bioventures division potential harness market opportunity presented biological medicine patent expiries delivering high quality followon biologic products enhance access patients worldwide company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies company’s clinical pipeline includes candidates multiple disease areas including atherosclerosis cancer cardiovascular diseases diabetes infectious diseases inflammatoryautoimmune diseases insomnia neurodegenerative diseases ophthalmics osteoporosis respiratory diseases women’s health inprocess research development connection merger company recorded fair value human animal health research projects underway scheringplough msp partnership fair value projects allocated pharmaceutical animal health operating segments 53 billion 13 billion respectively significant projects include victrelis bridion vorapaxar well ezetimibeatorvastatin combination product victrelis medicine treatment hepatitis c approved fda eu 2011 noted company filed nda fda 2011 ezetimibeatorvastatin combination product company anticipates filing nda fda 2012 bridion 2011 2010 approximately 666 million 378 million respectively iprd projects received marketing approval major market company began amortizing assets based estimated useful lives company also recognized intangible assets fair value research projects underway connection smartcells inc acquisition 2010 see note 5 consolidated financial statements insmed inc acquisition 2009 iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd merger acquisition date company may also recover research development expenditures made since merger develop program circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2011 company recorded 587 million iprd impairment charges within research development expenses primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges company determined developments clinical research program vorapaxar discussed constituted triggering event required company evaluate vorapaxar intangible asset impairment utilizing market participant assumptions considering several different scenarios company concluded best estimate current fair value intangible asset related vorapaxar 350 million resulted recognition impairment charge 17 billion 2010 february 2012 merck announced topline results tra2p study result merck evaluated vorapaxar intangible asset impairment concluded impairment necessary december 31 2011 noted merck continue review data tra2p tracer investigators outside experts help better understand profile investigational medicine specific patient populations determine next steps including potential regulatory filings process company may required take impairment charges related vorapaxar remaining 763 million iprd impairment charges recorded 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2011 estimated costs complete projects acquired connection merger phase iii development human health analogous stage development animal health approximately 13 billion acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth 2011 company completed transactions across broad range therapeutic categories including earlystage technology transactions merck actively monitoring landscape growth opportunities meet company’s strategic criteria may 2011 merck completed acquisition inspire pharmaceuticals inc “inspire” specialty pharmaceutical company focused developing commercializing ophthalmic products terms merger agreement merck acquired outstanding shares common stock inspire price 500 per share cash total approximately 420 million transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated inspire’s product right intangible assets related deferred tax liabilities deferred tax asset relating inspire’s net operating loss carryforwards goodwill transaction closed may 16 2011 accordingly results operations acquired business included company’s results operations since acquisition date pro forma financial information included inspire’s historical financial results significant compared company’s financial results selected joint venture affiliate information expand research base realize synergies combining capabilities opportunities assets previous years merck formed number joint ventures astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 12 billion 13 billion 14 billion 2011 2010 2009 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest returns aggregated 574 million 546 million 674 million 2011 2010 2009 respectively conjunction 1998 restructuring discussed astra purchased option “asset option” payment 443 million recorded deferred income buy merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” april 2010 astrazeneca exercised asset option merck received 647 million astrazeneca representing net present value march 31 2008 projected future pretax revenue received merck nonppi products recorded reduction company’s investment azlp company recognized 443 million deferred income 2010 component income expense net addition 1998 merck granted astra option “shares option” buy merck’s common stock interest kbi merck’s interest nexium prilosec exercisable 2012 exercise price shares option primarily based net present value projected future pretax revenue received merck nexium prilosec determined time exercise subject certain trueup mechanisms company believes likely astrazeneca exercise shares option astrazeneca exercises option company longer record equity income azlp supply sales azlp decline substantially sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe sales joint venture products follows johnson°merck consumer pharmaceuticals company september 2011 merck sold 50 interest jjmcp joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter “otc” consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net merck’s rights pepcid brand outside united states canada affected transaction following transaction jj owns venture’s assets include exclusive rights market otc pepcid mylanta mylicon local otc brands currently sold united states canada partnership assets also included manufacturing facility termination jjmcp joint venture provides merck greater flexibility allowing company capitalize pipeline potential prescriptiontootc switches well actively pursue otc licensing activities united states canada sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date 129 million 2010 203 million 2009 merckscheringplough partnership 2000 merck scheringplough collectively “partners” entered agreement create equally owned partnership develop market united states new prescription medicines cholesterol management 2002 ezetimibe first new class cholesterollowering agents launched united states zetia marketed ezetrol outside united states 2004 combination product containing active ingredients zetia zocor approved united states vytorin marketed inegy outside united states cholesterol agreements provided sharing operating income generated msp partnership based upon percentages varied product sales level country operating income included expenses partners contractually agreed share expenses incurred support msp partnership shared partners included equity income affiliates however costs reflected overall results partners results merck’s interest msp partnership prior merger reflected equity income affiliates 12 billion 2009 result merger msp partnership became wholly owned company activity resulting sale msp partnership products merger consolidated merck’s results discussion performance products 2011 2010 see “sales” sales joint venture products follows1 1 amounts exclude sales products partners outside msp partnership merial limited 2009 merck sold 50 interest merial limited “merial” joint venture sanofiaventis merck sanofiaventis rhônepoulenc sa formed merial 1997 combining animal health businesses fully integrated animal health company standalone joint venture equally owned party merck received 40 billion cash recorded 32 billion pretax gain 2009 reflected income expense net sales products marketed joint venture 18 billion january 1 2009 september 17 2009 divestiture date march 2011 merck sanofiaventis mutually terminated agreement form new animal health joint venture termination agreement without penalty either party capital expenditures capital expenditures 17 billion 2011 17 billion 2010 15 billion 2009 expenditures united states 12 billion 2011 990 million 2010 982 million 2009 depreciation expense 24 billion 2011 26 billion 2010 17 billion 2009 14 billion 17 billion 10 billion respectively applied locations united states total depreciation expense 2011 2010 2009 included accelerated depreciation 589 million 849 million 348 million respectively associated restructuring activities see note 4 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fully fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders selected data cash provided operating activities 124 billion 2011 108 billion 2010 34 billion 2009 increase cash provided operating activities 2011 compared 2010 reflects increased results operations partially offset 500 million payment made jj result arbitration settlement well net payments approximately 465 million internal revenue service “irs” result conclusion examination certain merck’s federal income tax returns discussed increase cash provided operating activities 2010 compared 2009 primarily reflects inclusion full year legacy scheringplough operations well 41 billion payments 2009 vioxx settlement funds 660 million payment 2009 made connection previously disclosed settlement canada revenue agency “cra” cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders global economic downturn sovereign debt issues among factors adversely impacted foreign receivables certain european countries see note 7 consolidated financial statements company continues receive payment receivables conditions resulted increase average length time takes collect accounts receivable outstanding thereby adversely affecting cash provided operating activities cash used investing activities 29 billion 2011 compared 35 billion 2010 primarily reflecting higher proceeds sales securities investments proceeds disposition certain businesses partially offset higher purchases securities investments addition 2010 proceeds astrazeneca’s asset option exercise decrease restricted assets contributed cash flows investing activities cash used investing activities 35 billion 2010 compared cash provided investing activities 32 billion 2009 change reflects lower proceeds sales securities investments higher purchases securities investments 2010 well decrease restricted assets proceeds disposition merck’s interest merial 2009 partially offset use cash 2009 fund merger proceeds received 2010 related astrazeneca’s asset option exercise cash used financing activities 69 billion 2011 compared 54 billion 2010 higher use cash financing activities primarily driven lower proceeds issuance debt higher purchases treasury stock higher payments debt partially offset increase shortterm borrowings cash used financing activities 54 billion 2010 compared 16 billion 2009 reflecting lower proceeds issuance debt purchases treasury stock 2010 increased dividends paid stockholders higher payments debt partially offset increase shortterm borrowings dividends paid stockholders 47 billion 2011 47 billion 2010 32 billion 2009 effort implement merck’s strategy expand product offerings capabilities emerging markets company anticipates future allocate capital resources across regions december 31 2011 total worldwide cash investments 184 billion including 150 billion cash equivalents shortterm investments 35 billion longterm investments substantial majority cash investments held foreign subsidiaries would subject significant tax payments cash investments repatriated however cash provided operating activities united states continues company’s primary source funds finance domestic operating needs capital expenditures treasury stock purchases dividends paid shareholders april 2011 irs concluded examination merck’s 20022005 federal income tax returns result company required make net payments approximately 465 million company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 700 million tax provision benefit 2011 net benefit reflects decrease unrecognized tax benefits years examination partially offset increases unrecognized tax benefits years subsequent examination period result settlement company disagrees irs treatment one issue raised examination appealing matter irs administrative process previously disclosed october 2006 cra issued merck notice reassessment containing adjustments related certain intercompany pricing matters february 2009 merck cra negotiated settlement agreement regard matters accordance settlement merck paid additional tax approximately 300 million interest approximately 360 million additional amounts penalties due assessment settlement accounted first quarter 2009 merck previously established reserves matters portion taxes paid expected creditable us tax purposes addition previously disclosed cra proposed adjustments 1999 2000 relating intercompany pricing matters july 2011 cra issued assessments miscellaneous audit issues tax years 20012004 adjustments would increase canadian tax due approximately 330 million plus approximately 380 million interest december 31 2011 company disagrees positions taken cra believes without merit company continues contest assessments cra appeals process cra expected prepare similar adjustments later years management believes resolution matters material effect company’s financial position liquidity 2010 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards additionally company seeking resolution one issue raised examination irs administrative appeals process company’s reserves uncertain tax positions adequate cover adjustments related examination period irs began examination 20072009 tax years company 2010 company’s contractual obligations december 31 2011 follows payments due period 1 2011 merck entered transaction require company make future bulk supply purchases 150 million maximum fouryear period commencing upon occurrence certain predetermined events amount reflected table predetermined events yet occurred therefore timing resulting payments given year cannot yet determined 2 december 31 2011 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 56 billion including 308 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2012 cannot made purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts reflected research development obligations include contingent milestone payments loans payable current portion longterm debt reflects 469 million longdated notes subject repayment option holders required funding obligations 2012 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 700 million 100 million respectively pension plans postretirement benefit plans 2012 may 2011 company entered new 20 billion 364day credit facility new 20 billion fouryear credit facility maturing may 2015 company terminated existing 20 billion 364day credit facility expired may 2011 20 billion revolving credit facility scheduled mature august 2012 outstanding facilities provide backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding either facility december 2010 merck closed underwritten public offering 20 billion senior unsecured notes consisting 850 million aggregate principal amount 225 notes due 2016 115 billion aggregate principal amount 3875 notes due 2021 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices proceeds notes used general corporate purposes including reduction shortterm debt december 2009 company filed securities registration statement securities exchange commission “sec” automatic shelf registration process available “wellknown seasoned issuers” effective three years connection merger effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent merger company’s longterm credit ratings assigned moody’s investors service standard poor’s aa3 stable outlook aa stable outlook respectively ratings continue allow access capital markets flexibility obtaining funds competitive terms company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer despite strong financial profile certain contingent events realized discussed note 12 consolidated financial statements could material adverse impact company’s liquidity capital resources company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2011 board directors declared quarterly dividend 042 per share company’s common stock first quarter 2012 april 2011 merck announced board directors approved additional purchases 50 billion merck’s common stock treasury company purchased 19 billion common stock 58 million shares treasury 2011 company approximately 45 billion remaining program previous november 2009 treasury stock purchase authorization treasury stock purchases time limit made time open market block transactions privately negotiated transactions company purchased 16 billion common stock 2010 purchases treasury stock made 2009 financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management significant portion company’s revenues denominated foreign currencies company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales probable hedged transaction occur portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows weaker us dollar would result net benefit market value merck’s hedges would declined estimated 330 million 256 million respectively uniform 10 weakening us dollar december 31 2011 2010 market value determined using foreign exchange option pricing model holding factors except exchange rates constant merck principally uses purchased local currency put options uniform weakening us dollar would yield largest overall potential loss market value options sensitivity measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level 2009 company used may future use forward contracts hedge changes fair value certain foreign currency denominated availableforsale securities attributable fluctuations foreign currency exchange rates derivative contracts designated fair value hedges sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly strengthened 10 currency exposures company december 31 2011 income taxes would declined approximately 165 million 2011 company net long position relative major foreign currencies consideration forward contracts uniform strengthening us dollar yield largest overall potential net loss earnings due exchange december 31 2010 company net short position relative major foreign currencies consideration forward contracts therefore uniform 10 weakening us dollar would reduced income taxes 127 million measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows effective january 11 2010 venezuelan government devalued currency bsf 215 per us dollar twotiered official exchange rate 1 “the essentials rate” bsf 260 per us dollar 2 “the nonessentials rate” bsf 430 per us dollar january 2010 company required remeasure local currency operations venezuela us dollars venezuelan economy determined hyperinflationary throughout 2010 company settled transactions essentials rate therefore remeasured monetary assets liabilities utilizing essentials rate december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 transactions would settled official rate bsf 430 per us dollar result announcement company remeasured december 31 2010 monetary assets liabilities new official rate company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income “oci” remains accumulated comprehensive income “aoci” either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk february 2011 company entered nine payfloating receivefixed interest rate swap contracts notional amounts 35 billion aggregate designated fair value hedges fixedrate notes notional amounts matched amount hedged fixedrate notes two interest rate swap contracts designated fair value hedges fixedrate notes matured 2011 notional amounts 125 million effectively converted company’s 250 million 5125 fixedrate notes due 2011 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes benchmark interest rate recorded interest expense offset fair value changes swap contracts also 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted 51 billion fixedrate notes maturity dates varying march 2015 june 2019 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 288 million cash included 43 million accrued interest unamortized adjustment carrying value debt associated interest rate swap contracts 245 million amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt related swap contracts change interest rates indicated one percentage point increase interest rates december 31 2011 2010 would positively affected net aggregate market value instruments 12 billion 10 billion respectively one percentage point decrease december 31 2011 2010 would negatively affected net aggregate market value 14 billion 12 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded fair values intangible assets including acquired iprd determined utilizing information available near merger acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make separate determination useful life asset begin amortization judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probability adjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year provision aggregate indirect customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases directly intermediary wholesaler contracted customer generally purchases product contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision based expected payments driven patient usage contract performance benefit provider customers company uses historical customer segment mix adjusted known events order estimate expected provision amounts accrued aggregate indirect customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers customers amounts accrued adjustments recorded trends significant events indicate change estimated provision appropriate company continually monitors provision aggregate indirect customer discounts material adjustments estimates associated aggregate indirect customer discount provision 2011 2010 2009 summarized information changes aggregate indirect customer discount accrual follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 87 million 17 billion respectively december 31 2011 117 million 12 billion respectively december 31 2010 company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months twelve months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market additional generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales approximately 10 net sales 2011 2010 2009 distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide mentioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase iii clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2011 127 million december 31 2010 197 million contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions see note 12 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2011 2010 approximately 240 million 190 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying providing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 25 million 2011 estimated 93 million aggregate years 2012 2016 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 171 million 185 million december 31 2011 2010 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 133 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options pensions postretirement benefit plans net periodic benefit cost pension postretirement benefit plans totaled 665 million 2011 696 million 2010 511 million 2009 higher costs 2011 2010 compared 2009 primarily due incremental costs associated merger pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due december 31 2011 discount rates company’s us pension postretirement benefit plans ranged 400 500 compared range 400 560 december 31 2010 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data well actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate result analysis 2012 company’s expected rate return range 575 875 compared range 525 875 2011 us pension postretirement benefit plans company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 84 million favorable unfavorable impact net periodic benefit cost reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 36 million favorable unfavorable impact net periodic benefit cost required funding obligations 2012 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees amortization net losses company’s us plans december 31 2011 expected increase net periodic benefit cost approximately 8 million annually 2012 2016 restructuring costs restructuring costs recorded connection restructuring programs designed reduce cost structure increase efficiency enhance competitiveness result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within materials production costs marketing administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses purchased assigned reporting units company tests goodwill impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macro economic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price additionally company evaluates extent fair value exceeded carrying value reporting unit last date valuation performed company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles excluding iprd recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment project company tests iprd impairment least annually frequently impairment indicators exist onestep test compares fair value iprd intangible asset carrying value impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized within company’s operating results impairments investments company reviews investments impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 17 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements december 31 2011 foreign earnings 443 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability recently issued accounting standards june 2011 fasb issued amended guidance presentation comprehensive income financial statements amendment provides companies option present components net income comprehensive income either one continuous statement comprehensive income two separate consecutive statements eliminates option present components comprehensive income part statement changes stockholders’ equity provisions new guidance effective interim annual periods beginning 2012 adoption new guidance impact company’s financial position results operations cash flows cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7aitem 7 managements discussion analysis financial condition results operation managements discussion analysis operations financial condition set forth beginning page 13 companys 2002 annual report shareholders incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations executive summary overview scheringplough discovers develops manufactures markets medical therapies treatments enhance human health scheringplough also markets leading consumer brands overthecounter otc foot care sun care markets operates global animal health business two sources new products acquired acquisition licensing arrangements products scheringplough’s latestage research pipeline respect acquisitions licensing scheringplough recently acquired new product licenses however limited opportunities obtaining licensing critical latestage products positive material financial impact limited opportunities typically require substantial amounts funding scheringplough often competes opportunities companies greater financial resources strategy focused science earlier decade scheringplough experienced number business regulatory legal challenges april 2003 board directors named fred hassan new chairman board chief executive officer scheringplough corporation support board recruited new senior executive team initiated strategic plan goal stabilizing repairing turning around scheringplough order build longterm shareholder value strategic plan action agenda six eightyear fivephase plan october 2006 scheringplough announced entered fourth phase action agenda build base build base phase scheringplough continues focus strategy value creation across broad front including • growing business • penetrating new markets • expanding existing products • discovering developing acquiring new products part effort scheringplough enhancing infrastructure upgrading processes systems strengthening talentboth recruitment talented individuals development key employees efforts companywide scheringplough focusing especially research development key component action agenda applying science meet unmet medical needs research development activities focus mechanisms treat serious diseases result core strategy scheringplough invest substantial funds scientific research goal creating therapies treatments important medical commercial value consistent core strategy scheringplough increasing investment research development scheringplough’s progressing pipeline includes drug candidates across wide range therapeutic areas 21 compounds approaching phase development scheringplough continues develop later phase growthdrivers pipeline eg thrombin receptor antagonist golimumab vicriviroc hcv protease inhibitor anticipates higher spending clinical trial activities results highlights scheringplough’s performance 2006 follows • scheringplough’s net sales 2006 106 billion increase 11 billion 11 percent compared 2005 period net income available common shareholders 2006 11 billion compared 183 million 2005 cash flow operating activities 22 billion 2006 • global sales scheringplough’s cholesterol franchise products vytorin zetia made cholesterol joint venture merck company inc merck continued grow 2006 significantly contributed scheringplough’s improved operating results cash flow addition increased sales pharmaceutical products remicade nasonex temodar clarinex also contributed favorably scheringplough’s overall operating results cash flow • scheringplough gained approvals new products indications including lifesaving antifungal medicine noxafil oral suspension united states eu prevention invasive fungal infections noxafil discovered scheringplough’s research laboratories temodal japan treatment form brain cancer malignant glioma remicade eu ulcerative colitis suboxone sublingual tablets eu opioid dependence • scheringplough streamlined global supply chain yield expected annualized cost savings 100 million • scheringplough reached agreement us attorney’s office district massachusetts us department justice settle previously disclosed investigation related actions took place prior 2003 agreement provided aggregate settlement amount 435 million settlement material adverse effect scheringplough’s results operations financial condition business strategic alliances typical pharmaceutical industry scheringplough licenses manufacturing marketing andor distribution rights certain products others also manufactures markets andor distributes products owned others pursuant licensing joint venture arrangements time third parties involved additional factors relating third party outside control scheringplough may create positive negative impacts scheringplough vytorin zetia remicade subject arrangements key scheringplough’s current business financial performance addition potential strategic alternatives may impacted change control provisions arrangements could result vytorin zetia acquired merck remicade reverting back centocor change control provision relating vytorin zetia included contract merck filed exhibit 10r scheringplough’s 10k change control provision relating remicade contained contract centocor filed exhibit 10v scheringplough’s 10k cholesterol franchise scheringplough’s cholesterol franchise products vytorin zetia managed joint venture scheringplough merck treatment elevated cholesterol levels zetia scheringplough’s novel cholesterol absorption inhibitor vytorin combination zetia zocor merck’s statin medication financial commitment compete cholesterol reduction market shared merck profits sales vytorin zetia also shared merck operating results joint venture merck recorded using equity method accounting material change sales market share scheringplough’s cholesterol franchise would significant impact scheringplough’s results operations cash flows order maintain enhance infrastructure business scheringplough must continue increase profits increased profitability largely dependent upon performance scheringplough’s cholesterol franchise cholesterolreduction market single largest pharmaceutical category world vytorin zetia competing market combined basis products continued grow terms market share 2006 franchise two products together captured 15 percent total prescriptions us cholesterol management market based january 2007 ims data japan included joint venture merck japanese market bayer healthcare comarket scheringplough’s cholesterolabsorption inhibitor zetia upon approval scheringplough anticipates receiving approval japan 2007 due backlog new drug applications japan scheringplough cannot precisely predict timing approval license arrangements centocor remicade prescribed treatment immunemediated inflammatory disorders rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis remicade scheringplough’s second largest marketed pharmaceutical product line cholesterol franchise remicade licensed manufactured centocor inc johnson company scheringplough exclusive marketing rights product outside us japan certain asian markets 2005 scheringplough exercised option contract centocor license rights develop commercialize golimumab new tnfalpha monoclonal antibody territories remicade golimumab currently phase iii trials scheringplough centocor collaborating resolving difference parties’ opinions expiration date scheringplough’s rights golimumab august 2006 scheringplough received determination arbitration rights market golimumab extend 15 years first commercial sales territories centocor appealed ruling manufacturing sales marketing scheringplough supports commercialized products manufacturing sales marketing efforts scheringplough also moving forward additional investments enhance infrastructure business including capital expenditures drug development process products moved drug discovery pipeline markets information technology systems postmarketing studies monitoring scheringplough continually reviews business including manufacturing operations identify actions enhance longterm competitiveness however scheringplough’s manufacturing cost base relatively fixed actions significantly reduce scheringplough’s manufacturing infrastructure involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements 2006 scheringplough closed one manufacturing plant took streamlining actions scheringplough continues review carrying value manufacturing assets indications impairment future events decisions may lead additional asset impairments related costs regulatory competitive environment • scheringplough subject jurisdiction various national state local regulatory agencies regulatory compliance complex costly impacting timing needed bring new drugs market drugs new indications • since 2002 scheringplough working us fda consent decree resolve issues involving scheringplough’s compliance current good manufacturing practices certain manufacturing sites new jersey puerto rico terms decree provided fda notified scheringplough significant violation fda law regulations decree fiveyear period since decree’s entry may 2002 scheringplough may petition court decree dissolved fda oppose scheringplough’s petition assurance particular date consent decree lifted • scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu eumember states • scheringplough engages clinical trial research many countries around world research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products • pricing sales marketing programs arrangements related business practices scheringplough participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities • us many scheringplough’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts international markets scheringplough operates environment government mandated costcontainment programs • market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors loss patent protection due challenges competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature discussion operating results net sales significant portion net sales made major pharmaceutical health care product distributors major retail chains us consequently net sales quarterly growth comparisons may affected fluctuations buying patterns major distributors retail chains trade buyers fluctuations may result seasonality pricing wholesaler buying decisions factors addition fluctuations sales many pharmaceutical products us subject increased pricing pressure managed care groups institutions government agencies groups seeking discounts scheringplough pharmaceutical manufacturers us market also required provide statutorily defined rebates various government agencies order participate medicaid program veterans’ health care program governmentfunded programs international markets scheringplough operates environment governments may mandated costcontainment programs placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs consolidated net sales 2006 106 billion increase 11 billion 11 percent compared 2005 increase primarily reflected growth sale volumes remicade nasonex pegintron temodar increase also reflected unfavorable impact 1 percent foreign exchange consolidated net sales 2005 totaled 95 billion increase 12 billion 15 percent compared 2004 reflecting higher volumes remicade nasonex pegintron temodar inclusion full year sales avelox cipro addition foreign exchange favorable impact 1 percent net sales years ended december 31 2006 2005 2004 follows nm meaningful percentage international net sales remicade drug treatment immunemediated inflammatory disorders rheumatoid arthritis early rheumatoid arthritis psoriatic arthritis crohn’s disease ankylosing spondylitis plaque psoriasis ulcerative colitis 32 percent 12 billion 2006 compared 2005 26 percent 2005 942 million compared 2004 due greater demand expanded indications continued market growth 2006 competitive products indications referred introduced additional competitive products expected introduced 2007 global net sales nasonex nasal spray oncedaily corticosteroid nasal spray allergies rose 28 percent 944 million 2006 compared 2005 24 percent 737 million 2005 compared 2004 product captured greater us international market share 2006 2005 us sales benefited increased promotional effort introduction new scentfree alcoholfree formulation nasonex nasal spray generic form flonase fluticasone propionate approved early 2006 may unfavorably impact corticosteroid nasal spray market going forward global net sales pegintron powder injection pegylated interferon product treating hepatitis c increased 11 percent 837 million 2006 compared 2005 33 percent 751 million 2005 compared 2004 sales increase 2006 reflected higher sales volume japan us sales growth 2005 due december 2004 launch pegintron rebetol combination therapy japan sales 2005 benefited significant number patients waiting approval pegintron beginning treatment pegintron sales japan begun decline toward end 2006 trend expected continue 2007 new patient enrollment hepatitis c treatment moderates new competition enters japanese market global net sales clarinex marketed aerius many countries outside us treatment seasonal outdoor allergies yearround indoor allergies increased 12 percent 722 million compared 2005 due increased demand europe latin america well increased sales us despite slightly declining market share global net sales clarinex 2005 decreased 7 percent 646 million compared 2004 primarily due reduced market share declining market us global net sales temodar capsules treatment certain types brain tumors increased 20 percent 703 million 2006 compared 2005 increased 28 percent 588 million 2005 compared 2004 increases 2006 2005 sales due increased utilization new indications 2005 temodar approved us fda treating newly diagnosed glioblastoma multiforme gbm prevalent form brain cancer european commission use combination radiotherapy gbm patients 25 eumember states well iceland norway 2006 temodar approved japan treatment malignant glioma growth rates temodar expected moderate significant market penetration already achieved treatment gbm international net sales prescription claritin decreased 4 percent 356 million 2006 compared 2005 sales 2005 increased 16 percent 371 million compared 2004 due launch claritin reditabs japan coupled unusually severe japanese allergy season 2005 global net sales integrilin injection glycoprotein platelet aggregation inhibitor treatment patients acute coronary syndrome sold primarily us scheringplough increased 5 percent 329 million 2006 compared 2005 sales decreased 3 percent 315 million compared 2004 effective september 1 2005 scheringplough restructured integrilin copromotion agreement millennium terms restructured agreement scheringplough acquired exclusive us development commercialization rights integrilin exchange upfront payment 36 million royalties integrilin sales restructured agreement calls minimum royalty payments 85 million per year millennium 2006 2007 global 2006 net sales rebetol capsules use combination pegintron intron treating hepatitis c decreased 6 percent 311 million compared 2005 due lower sales europe increased competition global net sales 2005 increased 15 percent 331 million compared 2004 due primarily launch pegintron rebetol combination therapy japan december 2004 japan sales 2005 benefited significant number patients waiting approval pegintron beginning hepatitis c treatment sales expected continue decline result moderation hepatitis c patient enrollments japan new competition enters japanese market net sales avelox fluoroquinolone antibiotic treatment certain respiratory skin infections sold primarily us scheringplough result license agreement bayer increased 34 percent 304 million 2006 compared 228 million 2005 due share growth new indications sales avelox 2004 represented initial three months sales agreement bayer effective october 1 2004 global net sales intron injection chronic hepatitis b c antiviral anticancer indications decreased 17 percent 237 million 2006 compared 2005 10 percent 2005 287 million compared 2004 due conversion pegintron treating hepatitis c japan international net sales caelyx treatment ovarian cancer metastatic breast cancer kaposi’s sarcoma increased 13 percent 206 million 2006 compared 2005 primarily due expanding market product sales 2005 increased 21 percent 181 million compared 2004 reflecting adoption ovarian cancer metastatic breast cancer indications international net sales subutex tablets treatment opiate addiction increased 3 percent 203 million 2006 compared 2005 due increased market share sales increased 6 percent 197 million 2005 compared 2004 due increased market penetration october 2006 suboxone approved eu including 25 member states well iceland norway treatment opioid dependence global net sales elocon cream mediumpotency topical steroid decreased 2 percent 141 million 2006 compared 2005 decreased 14 percent 144 million 2005 compared 2004 reflecting generic competition introduced us first quarter 2005 generic competition expected continue adversely affect sales product net sales cipro fluoroquinolone antibiotic treatment certain respiratory skin urinary tract infections sold primarily us scheringplough result license agreement bayer decreased 24 percent 111 million 2006 compared 146 million 2005 due market share erosion generic competition sales cipro 2004 represented initial three months sales agreement bayer pharmaceutical net sales include large number lower sales volume prescription pharmaceutical products several products sold limited markets outside us many multiple source products longer protected patents products include treatments respiratory cardiovascular dermatological infectious oncological diseases included pharmaceutical sales scheringplough’s albuterol products 2005 fda issued final rule requires cfc albuterol products including scheringplough’s proventil cfc removed market later december 31 2008 scheringplough manufacturers albuterol cfc transition albuterol hfa proventil hfa prior 2008 yearend deadline scheringplough begun transition hfa product scheringplough uncertain ultimate impact scheringplough’s overall future sales proventil products due complexities multiple external factors influencing transition including competing albuterol hfa products global net sales consumer health care products include otc foot care sun care products increased 3 percent 30 million compared 2005 reflecting increase sales sun care products dr scholl’s foot care products sales 11 billion 2005 2004 sales otc claritin decreased 1 percent 390 million 2006 compared 2005 6 percent 394 million 2005 compared 2004 result restrictions retail sale otc products containing pseudoephedrine pse addition otc claritin continues face competition private labels branded loratadine net sales sun care products increased 18 million 9 percent 2006 compared 2005 28 million 16 percent 2005 compared 2004 primarily due success new coppertone continuous spray products launched 2005 sales sun care products 2005 also reflected stronger overall suncare season us future sales difficult predict consumer health care market highly competitive heavy advertising consumers frequent competitive product introductions global net sales animal health products increased 7 percent 910 million 2006 compared 2005 11 percent 2005 851 million compared 2004 reflecting strong growth core brands across geographic species areas led higher sales companion animal products 2006 products serving us cattle market including nuflor vaccine business led sales growth 2005 increased net sales also due part better product supply us scheringplough expects growth rate moderate due increased competition including introduction generic products costs expenses equity income summary costs expenses equity income years ended december 31 2006 2005 2004 follows nm meaningful percentage substantially sales cholesterol products included scheringplough’s net sales results sales reflected equity income cholesterol joint venture addition due virtual nature joint venture scheringplough incurs substantial selling general administrative expenses captured equity income included scheringplough’s statements consolidated operations result scheringplough’s gross margin ratios sga expenses rd expenses percentage net sales reflect benefit impact joint venture’s operating results gross margin despite negative impacts cost sales costs resulting scheringplough’s actions streamline manufacturing operations 2006 gross margin increased 651 percent 2006 648 percent 2005 improvement gross margin primarily due increased sales higher margin products process improvements within scheringplough’s supply chain including cost savings manufacturing streamlining activities completed 2006 cost sales included charges totaling 146 million associated scheringplough’s actions streamline manufacturing operations offset savings approximately 30 million result actions see note 2 “special charges manufacturing streamlining” item 8 “financial statements supplemental data” additional information gross margin increased 648 percent 2005 629 percent 2004 primarily due supply chain process improvements increased sales highermargin products favorable impact foreign exchange partly offset higher royalties related bayer products beginning september 1 2005 royalties integrilin selling general administrative selling general administrative expenses sga increased 8 percent 47 billion 2006 compared 2005 reflecting ongoing investments emerging markets field support product launches well higher promotional spending sga expenses increased 15 percent 44 billion 2005 compared 38 billion 2004 increase primarily due addition 2004 fourth quarter bayer sales representatives increased selling expenses europe support continued launch vytorin zetia increased promotional spending primarily nasonex asmanex products agreement bayer research development research development rd spending increased 17 percent 22 billion 2006 compared 2005 period 2005 rd spending increased 16 percent 19 billion compared 2004 period 2006 increase due higher costs associated clinical trials well building greater breadth capacity support scheringplough’s progressing pipeline 2005 increase partially due 124 million charge third quarter 2005 resulting scheringplough’s exercise rights develop commercialize golimumab rd spending 2004 included 80 million charge conjunction license toyama chemical company ltd garenoxacin generally changes rd spending reflect timing scheringplough’s funding internal research efforts research collaborations various partners discover develop steady flow innovative products maximize scheringplough’s chances successful development new products scheringplough began development excellence initiative 2005 build talent critical mass create uniform level excellence deliver highpriority programs within rd 2006 scheringplough began global clinical harmonization program maximize globalize quality clinical trial execution pharmacovigilance regulatory processes incomeexpense net scheringplough income net 135 million 2006 compared expense net 5 million 146 million 2005 2004 respectively due higher interest rates larger overall balances cash equivalents shortterm investments special charges manufacturing streamlining manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamline global supply chain enhance scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new jersey total actions resulted elimination 1000 positions scheringplough expects actions yield annualized cost savings approximately 100 million special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 accrued liability balance december 31 2006 expected paid first quarter 2007 scheringplough expect incur material additional charges related manufacturing streamlining actions announced 2006 20042005 special charge activities special charges incurred 2005 2004 follows litigation charges 2005 litigation reserves increased 250 million increase resulted total reserve 500 million massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 19 “legal environmental regulatory matters” representing scheringplough’s current estimate resolve matter august 29 2006 scheringplough announced reached agreement us attorney’s office district massachusetts us department justice settle massachusetts investigation aggregate amount 435 million plus interest settlement amount relates massachusetts investigation awp investigations litigation ongoing subsequent december 31 2006 scheringplough made payments totaling 388 million related settlement including interest 12 million substantially remaining payments settlement agreement paid remainder 2007 see note 19 “legal environmental regulatory matters” item 8 “financial statements supplementary data” additional information employee termination costs august 2003 scheringplough announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program retired december 31 2005 total cost program approximately 191 million comprised increased pension costs 108 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million amounts recognized 2005 2004 program 7 million 20 million respectively additional amounts expected recognized program termination costs associated verp totaled 21 million 99 million 2005 2004 respectively following summarizes activity accounts related employee termination costs asset impairment charges year ended december 31 2005 scheringplough recognized asset impairment charges 16 million related primarily consolidation scheringplough’s us biotechnology organizations scheringplough recorded asset impairment charges 34 million 2004 related primarily shutdown small european research development facility equity income cholesterol joint venture global cholesterol franchise sales include sales vytorin zetia made cholesterol joint venture merck scheringplough totaled 39 billion 24 billion 12 billion 2006 2005 2004 respectively sales growth 2006 due increase market share 2005 sales comparison benefited us launch vytorin second half 2004 franchise two products combined captured 15 percent total prescriptions us cholesterol management market based january 2007 ims data scheringplough utilizes equity method accounting joint venture sharing income operations based upon percentages vary product sales level country scheringplough’s allocation joint venture income increased milestones earned merck scheringplough partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement partner physician details set annual basis italy contractual amount included profit sharing calculation reimbursed amounts equal partner’s physician details multiplied contractual fixed fee scheringplough reports amounts part equity income cholesterol joint venture amounts represent specific incremental identifiable costs scheringplough’s detailing cholesterol products markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners additional information regarding joint venture merck also included note 3 “equity income cholesterol joint venture” item 8 “financial statements supplementary data” equity income cholesterol joint venture totaled 15 billion 873 million 347 million 2006 2005 2004 respectively increase 2006 equity income compared 2005 reflecting continued strong sales vytorin zetia 2005 equity income comparison benefited us launch vytorin second half 2004 2005 2004 scheringplough recognized milestones merck 20 million 7 million respectively 20 million milestone 2005 related certain european approvals vytorin ezetimibesimvastatin 2005 7 million milestone 2004 related approval ezetimibesimvastatin mexico 2004 certain conditions specified joint venture agreements merck scheringplough could earn additional milestones totaling 105 million noted scheringplough incurs substantial selling general administrative costs reflected equity income cholesterol joint venture instead included overall cost structure scheringplough provision income taxes tax expense 362 million 228 million 779 million 2006 2005 2004 respectively tax provisions 2006 2005 2004 include benefit related us operating losses 2004 scheringplough established valuation allowance net us deferred tax assets including benefit us operating losses management concluded likely benefit us net deferred tax assets realized december 31 2006 scheringplough continues maintain valuation allowance us deferred tax assets scheringplough expects report us net operating loss nol carryforward 154 billion tax return year ended december 31 2006 us nol carryforward could materially reduced examination scheringplough’s income tax returns internal revenue service irs 2006 scheringplough generated approximately 600 million us operating losses however due differences financial tax reporting expected nol generated 2006 us tax return less us operating loss year scheringplough expects continue generate us operating losses 2007 however us nol subject differences financial tax reporting 2006 2005 income tax provision primarily relates foreign taxes 2005 tax provision includes benefit 46 million related irs notice issued august 2005 resulted reduction previously accrued tax liability attributable repatriations american jobs creation act 2004 ajca 2004 tax provision includes 417 million charge related intended ajca repatriation took place 2005 irs examining scheringplough’s 19972002 federal income tax returns process completing examination scheringplough anticipates examination completed end 2007 finalization irs audit may result adjustments scheringplough’s accruals tax contingencies us nols reported scheringplough’s income tax returns scheringplough’s tax reserves reflect best estimate probable tax liability however reasonably possible ultimate resolution tax matters may materially greater less amount accrued july 2006 fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxes” fin 48 prescribes detailed guidance financial statement recognition measurement disclosure uncertain tax positions recognized enterprise’s financial statements accordance fasb statement 109 “accounting income taxes” scheringplough required apply provisions interpretation beginning january 1 2007 provisions fin 48 applied existing uncertain income tax positions effective date upon implementation fin 48 cumulative effect applying provisions interpretation reported adjustment opening balance scheringplough’s retained earnings 2007 although scheringplough still evaluating potential impact fin 48 expects decrease opening retained earnings january 1 2007 225 million 300 million corresponding increase appropriate tax liability accounts upon adoption interpretation net incomeloss available common shareholders scheringplough net incomeloss available common shareholders 11 billion 183 million 981 million 2006 2005 2004 respectively net income available common shareholders 2006 2005 included deduction preferred stock dividends 86 million period related issuance 6 percent mandatory convertible preferred stock august 2004 net loss available common shareholders included deduction preferred stock dividends 34 million net incomeloss available common shareholders 2006 2005 2004 also included special charges manufacturing streamlining costs approximately 248 million 294 million 153 million respectively see note 2 “special charges manufacturing streamlining” item 8 “financial statements supplementary data” additional information addition 2006 net income available common shareholders included income item 22 million resulting cumulative effect change accounting principle net tax related implementation sfas 123r “sharebased compensation” liquidity financial resources discussion cash flow operating activities 2006 net cash provided operating activities 22 billion increase 13 billion compared 2005 increase primarily resulted higher net income timing operating cash payments receipts disclosed note 19 “legal environment regulatory matters” scheringplough reached agreement us attorney’s office district massachusetts us department justice settle massachusetts investigation aggregate amount 435 million plus interest subsequent december 31 2006 scheringplough made payments totaling 388 million related settlement including interest 12 million substantially remaining payments settlement agreement paid remainder 2007 2005 operating activities generated 882 million cash compared use 154 million 2004 increase primarily due higher net income timing payments special charges related litigation partially offset increase accounts receivable due sales growth payments approximately 375 million tax authorities tax liabilities related repatriation foreign earnings ajca tax payments 239 million related settlement certain tax contingencies tax years 1993 1996 tax charges related ajca expensed 2004 operating cash flow favorably impacted us tax refund 404 million result loss carryback however cash flow unfavorably impacted 473 million payment us government tax deficiency related certain transactions tax years 1991 1992 payment 294 million settlement agreement us attorney’s office eastern district pennsylvania investing activities net cash used investing activities 2006 29 billion primarily related net purchases shortterm investments 24 billion previously invested cash equivalents 458 million capital expenditures net cash used investing activities 2005 454 million primarily related 478 million capital expenditures purchase intangible assets 51 million partially offset proceeds sales property equipment 43 million net reduction shortterm investments 33 million net cash used investing activities 2004 621 million included capital expenditures 489 million net purchases investments 264 million partially offset cash proceeds 118 million transfer license rights 7 million dispositions property equipment financing activities net cash used financing activities 2006 2005 14 billion 633 million respectively uses cash financing activities 2006 2005 include payment dividends common preferred shares 412 million 410 million respectively repayment 10 billion bank debt shortterm commercial borrowings 2006 12 billion shortterm commercial paper borrowings 2005 uses cash financing activities 2005 partially offset proceeds 900 million bank debt incurred foreign subsidiary related funding portion repatriations ajca 2005 bank debt fully repaid 2006 net cash provided financing activities 2004 reflected proceeds 14 billion preferred stock issuance 546 million increase shortterm borrowings partially offset payment dividends common preferred shares 354 million discussion cash flows scheringplough moving forward additional investments enhance infrastructure business currently process building us pharmaceutical sciences center new jersey capital expenditures approximately 38 million made 2006 related center additional capital expenditures approximately 260 million expected next three years center allow scheringplough streamline integrate drug development process products moved drug discovery pipeline market additional related expenditures upgrade equipment staffing center 2006 us operations generated negative cash flow us operations cash needs excess cash generated us operations must fund dividend payments majority research development costs us capital expenditures expected us operation also generate negative cash flow 2007 total cash equivalents shortterm investments less total debt approximately 33 billion december 31 2006 cash generated operations available cash shortterm investments expected provide scheringplough ability fund cash needs intermediate term 6 percent mandatory convertible preferred stock august 2004 scheringplough issued 6 percent mandatory convertible preferred stock received net proceeds 14 billion deducting commissions discounts underwriting expenses proceeds used reduce shortterm commercial paper borrowings pay tax litigation settlement amounts litigation costs fund operating expenses capital expenditures preferred stock issued scheringplough’s 20 billion shelf registration preferred share automatically convert 22451 27840 common shares scheringplough depending average closing price scheringplough’s common shares period immediately preceding mandatory conversion date september 14 2007 defined prospectus see note 15 “shareholders’ equity” item 8 “financial statements supplementary data” additional information conversion preferred shares trigger cash payment scheringplough december 31 2006 563 million remains registered unissued shelf registration borrowings credit facilities november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 proceeds offering 24 billion used general corporate purposes including repaying commercial paper outstanding us upon issuance notes rated a3 moody’s investors service moody’s credit watch negative implications standard poor’s sp interest rates payable notes subject adjustment rating assigned notes either moody’s sp downgraded a3 respectively interest rate payable series notes would increase see note 13 “shortterm borrowings longterm debt commitments” item 8 “financial statements supplementary data” additional information july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 therefore december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent adjustment interest rate payable notes increased scheringplough’s interest expense approximately 6 million annually interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade either moody’s sp a3 respectively notes subsequently rated baa1 moody’s bbb sp scheringplough 15 billion credit facility syndicate banks facility matures may 2009 requires scheringplough maintain total debt total capital ratio 60 percent met december 31 2006 credit line available general corporate purposes considered support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2005 325 million drawn facility whollyowned international subsidiary purposes funding repatriations ajca 2006 borrowing amount fully repaid december 31 2006 borrowings outstanding facility addition credit facility scheringplough entered 575 million credit facility fourth quarter 2005 purposes funding repatriations ajca december 31 2005 entire amount drawn whollyowned international subsidiary fund repatriations facility paid full terminated 2006 december 31 2006 2005 shortterm borrowings including credit facilities mentioned totaled 242 million 13 billion respectively including outstanding commercial paper 149 million 298 million respectively weightedaverage interest rate shortterm borrowings december 31 2006 2005 64 percent 47 percent respectively credit ratings scheringplough’s current unsecured senior credit ratings outlook follows shortterm ratings discussed significantly affected scheringplough’s ability issue roll outstanding commercial paper borrowings time however scheringplough believes ability commercial paper issuers scheringplough one shortterm credit ratings p2 moody’s a2 sp andor fitch issue roll outstanding commercial paper times less companies higher shortterm credit ratings addition total amount commercial paper capacity available issuers typically less higherrated companies scheringplough’s sizable lines credit commercial banks well cash shortterm investments held us international subsidiaries serve alternative sources liquidity support commercial paper program scheringplough’s credit ratings could decline current levels impact decline could reduce availability commercial paper borrowing would increase interest rate scheringplough’s short longterm debt discussed scheringplough believes existing cash shortterm investments cash generated operations allow scheringplough fund cash needs intermediate term contractual obligations offbalance sheet arrangements scheringplough various contractual obligations reported liabilities consolidated balance sheets others required recognized liabilities certain purchase commitments executory contracts following table summarizes payments due period scheringplough’s known contractual obligations december 31 2006 1 longterm debt obligations include 1250 million aggregate principal amount 555 percent senior unsecured notes due 2013 1150 million aggregate principal amount 675 percent senior unsecured notes due 2033 excludes interest obligations see note 13 “shortterm borrowings longterm debt commitments” item 8 “financial statements supplementary data” additional information 2 research contracts include potential milestone payments made since payments contingent occurrence certain events table also excludes research contracts cancelable scheringplough without penalty 3 purchase obligations consist cancelable noncancelable inventory expense items 4 caption includes obligations based undiscounted amounts estimated payments certain scheringplough’s pension plans preferred stock dividends contractual obligations regulatory competitive environment scheringplough operates scheringplough subject jurisdiction various national state local regulatory agencies regulations described detail item 1 “business” regulatory compliance complex regulatory standards including good clinical practices good laboratory practices good manufacturing practices vary jurisdiction constantly evolving regulatory compliance also costly regulatory compliance also impacts timing needed bring new drugs market drugs new indications failure comply regulations result delays approval drugs seizure recall drugs suspension revocation authority necessary production sale drugs fines civil criminal sanctions regulatory compliance cost compliance failures material impact scheringplough’s results operations cash flows financial condition much still unknown science human health every drug benefits risks may balanced societal government pressures constantly shifting demand innovation meet urgent unmet medical needs adversity risk pressures impact regulatory environment market scheringplough’s products regulatory compliance pharmacovigilance consent decree since 2002 scheringplough working us fda consent decree resolve issues involving scheringplough’s compliance current good manufacturing practices cgmp certain manufacturing sites new jersey puerto rico see details note 18 “consent decree” item 8 “financial statements supplementary data” terms consent decree scheringplough made payments totaling 500 million end 2005 scheringplough completed revalidation programs bulk active pharmaceutical ingredients finished drug products well 212 significant steps cgmp work plan accordance schedules required consent decree scheringplough obtained thirdparty expert certification completion cgmp work plan required decree certification turn subject acceptance fda terms decree provided fda notified scheringplough significant violation fda law regulations decree fiveyear period since decree’s entry may 2002 scheringplough may petition court decree dissolved fda oppose scheringplough’s petition assurance particular date consent decree lifted regulatory inspections scheringplough subject pharmacovigilance reporting requirements many countries jurisdictions including us eu eumember states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert drug’s manufacturer governmental agency potential problems 2003 pharmacovigilance inspections officials british french medicines agencies conducted request european medicines agency emea cited serious deficiencies reporting processes scheringplough continued work longterm action plan rectify deficiencies provided regular updates emea fourth quarter 2005 local uk emea regulatory authorities conducted follow inspection assess scheringplough’s implementation action plan first quarter 2006 authorities also inspected usbased components scheringplough’s pharmacovigilance system inspectors acknowledged progress made since 2003 also continued note significant concerns quality systems supporting scheringplough’s pharmacovigilance processes similarly follow inspection scheringplough’s clinical trial practices uk inspectors identified issues respect scheringplough’s management clinical trials related pharmacovigilance practices scheringplough intends continue upgrading skills processes systems clinical practices pharmacovigilance scheringplough remains committed accomplish work invest significant resources area february 2006 scheringplough began global clinical harmonization program building clinical excellence trial design execution tracking strengthen scheringplough’s scientific compliance rigor global basis scheringplough know action emea national authorities take response inspections possible actions include inspections demands improvements reporting systems criminal sanctions scheringplough andor responsible individuals changes conditions marketing authorizations scheringplough’s products regulatory compliance postmarketing surveillance scheringplough engages clinical trial research many countries around world clinical trial research activities must comply stringent regulatory standards subject inspection us eu local country regulatory authorities failure comply current good clinical practices applicable laws regulations quality processes result delays approval clinical trials suspension ongoing clinical trials delays approval marketing authorizations criminal sanctions scheringplough andor responsible individuals changes conditions marketing authorizations scheringplough’s products increased costs clinical trials postmarketing surveillance certain marketed drugs competitors within industry raised safety concerns led recalls withdrawals adverse labeling marketed products addition situations raised concerns among prescribers patients relating safety efficacy pharmaceutical products general scheringplough’s personnel regular open dialogue fda regulators review product labels materials regular basis new information becomes known following wake recent product withdrawals companies significant safety issues health authorities fda emea pmda japan continued increase focus safety assessing benefitrisk balance drugs health authorities appear become cautious making decisions approvability new products indications rereviewing select products already marketed adding uncertainties regulatory processes also greater regulatory scrutiny especially us advertising promotion particular directtoconsumer advertising similarly major health authorities including fda emea pmda also increased collaboration amongst especially regard evaluation safety benefitrisk information media attention also increased current environment health authority regulatory action one market safety labeling change may regulatory prescribing marketing implications markets extent previously seen health authorities pmda publicly acknowledged significant backlog workload due resource constraints within agency backlog caused long regulatory review times new indications products including initial approval zetia japan added uncertainty predicting approval timelines markets pmda committed correcting backlog made progress last year expected continue foreseeable future uncertainties inherent government regulatory approval processes including among things delays approval new products formulations indications may also affect scheringplough’s operations effect regulatory approval processes operations cannot predicted scheringplough nevertheless achieved significant number important regulatory approvals since 2004 including approvals vytorin clarinex d24 clarinex reditabs clarinex d12 new indications temodar nasonex significant approvals since 2004 include asmanex dpi dry powder inhalation us noxafil us eu australia pegintron japan new indications remicade scheringplough also number significant regulatory submissions filed major markets awaiting approval pricing pressures described specifically note 19 “legal environmental regulatory matters” item 8 “financial statements supplementary data” pricing sales marketing programs arrangements related business practices scheringplough participants health care industry increasing scrutiny federal state regulatory investigative prosecutorial administrative entities include department justice us attorney’s offices office inspector general department health human services fda federal trade commission ftc various state attorneys general offices many health care laws certain governmental entities operate including federal state antikickback statutes statutory common law false claims laws construed broadly courts permit government entities exercise significant discretion event governmental entities believes wrongdoing occurred one could institute civil criminal proceedings instituted resolved unfavorably could subject scheringplough substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs scheringplough also cannot predict whether investigations affect marketing practices sales result could material adverse impact scheringplough’s results operations cash flows financial condition business us many scheringplough’s pharmaceutical products subject increasingly competitive pricing managed care groups institutions government agencies groups seek price discounts us market scheringplough pharmaceutical manufacturers required provide statutorily defined rebates various government agencies order participate medicaid veterans’ health care program governmentfunded programs international markets scheringplough operates environment government mandated costcontainment programs several governments placed restrictions physician prescription levels patient reimbursements emphasized greater use generic drugs enacted acrosstheboard price cuts methods control costs since scheringplough unable predict final form timing future domestic international governmental health care initiatives including passage laws permitting importation pharmaceuticals us effect operations cash flows cannot reasonably estimated similarly effect operations cash flows decisions government entities managed care groups concerning formularies pharmaceutical reimbursement policies cannot reasonably estimated medicare scheringplough cannot predict net effect medicare prescription drug benefit markets sales new medicare drug benefit medicare part took effect january 1 2006 offers voluntary prescription drug coverage subsidized medicare 40 million medicare beneficiaries competing private prescription drug plans pdps medicare advantage plans many scheringplough’s leading drugs already covered medicare part b eg temodar integrilin intron medicare part b provides payment physician services include prescription drugs administered along physician services manner drugs reimbursed medicare part b may limit scheringplough’s ability offer larger price concessions make large price increases drugs scheringplough drugs relatively small portion sales medicare population eg clarinex hepatitis c franchise scheringplough could experience expanded utilization vytorin zetia new drugs scheringplough’s rd pipeline greater consequence scheringplough may legislation’s impact pricing rebates discounts competition market pharmaceutical products competitive scheringplough’s operations may affected technological advances competitors industry consolidation patents granted competitors competitive combination products new products competitors new information clinical trials marketed products postmarketing surveillance generic competition scheringplough’s products mature addition patent positions increasingly challenged competitors outcome highly uncertain adverse result patent dispute preclude commercialization products negatively affect sales existing products effect operations competitive factors patent disputes cannot predicted outlook scheringplough track actions build longterm high performance build base phase action agenda scheringplough continue make investments support geographical expansion strategy plans make sound promotional investments continue driving growth key brands worldwide scheringplough remains focused controlling overhead spending maintaining rightsized sales force current opportunities us scheringplough currently provide numeric guidance however following outlook may helpful readers assessing future prospects currently us cholesterol lowering market adjusting entry market multiple generic forms competing cholesterol products despite introduction new innovative competing treatments generic versions competing products scheringplough continues anticipate sales vytorin zetia grow 2007 decisions government entities managed care groups concerning formularies reimbursement policies could negatively impact dollar size andor growth cholesterol management market including vytorin zetia scheringplough’s pipeline continues progress expects number patients scheringplough’s clinical trials increase substantially 2007 scheringplough also continue invest research development focus enhancing infrastructure upgrading processes systems talent result scheringplough expects rd expenses excluding upfront payments grow faster adjusted net sales 2007 adjusted net sales defined net sales plus assumed 50 percent global cholesterol joint venture net sales scheringplough believes growth comparison provides useful guideline review outlook rd expenses result scheringplough’s actions streamline manufacturing operations scheringplough expects annualized cost savings approximately 100 million 2007 gross margin improve accordingly risks described item 1a “risk factors” could cause actual results differ expectations provided section impact recently issued accounting standards september 2006 fasb issued sfas 157 “fair value measurements” effective calendaryear companies january 1 2008 statement defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions scheringplough currently assessing potential impacts implementing standard september 2006 sec staff issued staff accounting bulletin sab topic 1n sab 108 “financial statements considering effects prior year misstatements quantifying misstatements current year financial statements” effective calendaryear companies december 31 2006 sab 108 provides guidance prior year misstatements taken consideration quantifying misstatements current year financial statements purposes determining whether financial statements materially misstated guidance companies take account effect misstatement current year balance sheet well impact upon current year income statement assessing materiality current year misstatement current year misstatement quantified guidance sab topic 1m “financial statements materiality” sab 99 applied determine whether misstatement material implementation sab 108 impact scheringplough’s financial statements july 2006 fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxes” fin 48 prescribes detailed guidance financial statement recognition measurement disclosure uncertain tax positions recognized enterprise’s financial statements accordance fasb statement 109 “accounting income taxes” scheringplough required apply provisions interpretation beginning january 1 2007 provisions fin 48 applied existing uncertain income tax positions effective date upon implementation fin 48 cumulative effect applying provisions interpretation reported adjustment opening balance retained earnings although scheringplough still evaluating potential impact fin 48 upon adoption fin 48 expects decrease opening retained earnings january 1 2007 225 million 300 million corresponding increase accrued liability accounts upon adoption interpretation critical accounting policies estimates following accounting policies estimates considered significant changes certain judgments assumptions inherent policies could affect scheringplough’s financial statements • revenue recognition • rebates discounts returns • provision income taxes • impairment intangible assets property • accounting pensions postretirement benefit plans • accounting legal regulatory matters revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process revenue recognition new products based specific facts circumstances including estimated acceptance rates established products similar marketing characteristics absent ability make reliable estimates rebates discounts returns scheringplough would defer revenue recognition product discounts granted based terms arrangements wholesalers managedcare organizations government purchasers certain market conditions rebates estimated based sales contract terms historical experience trend analysis projected market conditions various markets served scheringplough evaluates market conditions products groups products primarily analysis thirdparty demand market research data well internally generated information data information provided purchasers obtained third parties subject inherent limitations accuracy validity sales returns estimated recorded based historical sales returns information analysis recent wholesale purchase information consideration stocking levels wholesalers forecasted demand amounts products exhibit unusual sales return patterns due dating competition including expected generic introductions marketing matters specifically investigated analyzed part formulation return reserves scheringplough’s agreements major us pharmaceutical wholesalers address number commercial issues product returns timing payment processing chargebacks quantity inventory held wholesalers respect quantity inventory held wholesalers agreements provide financial disincentive wholesalers acquire quantities product excess necessary meet current patient demand use agreements scheringplough expects avoid situations scheringplough’s shipments product reflective current demand rebates discounts returns scheringplough’s rebate accruals federal state governmental programs including medicaid medicare part december 31 2006 2005 115 million 144 million respectively commercial discounts returns rebate accruals us december 31 2006 2005 371 million 378 million respectively accruals established period related revenue recognized resulting reduction sales establishment liabilities included total current liabilities case returns receivable adjustments allowance provided accounts receivable case governmental rebate programs scheringplough’s payments involve interpretations relevant statutes regulations interpretations subject challenges changes interpretive guidance governmental authorities result challenge change could affect whether estimated governmental rebate amounts ultimately sufficient satisfy scheringplough’s obligations additional information governmental inquiries focused part calculation rebates contained note 19 “legal environmental regulatory matters” item 8 “financial statements supplementary data” addition possible result governmental challenges changes interpretive guidance actual rebates could materially exceed amounts accrued following summarizes activity accounts related accrued rebates sales returns discounts 1 year ended december 31 2006 adjustment prioryear estimates rebates includes 24 million resulting reversal accrued rebate amounts recorded 2005 2004 tricare retail pharmacy program august 2006 us federal court appeals ruled pharmaceutical manufacturers obligated pay formulating recording accruals management utilizes assumptions estimates include historical experience wholesaler data projection market conditions estimated lag time sale payment rebate utilization estimates forecasted product demand amounts discussed critical accounting policy entitled “revenue recognition” part review accruals management performs sensitivity analysis considers differing assumptions subject judgment rebate accrual calculation based upon scheringplough’s sensitivity analysis reasonably possible changes assumptions related rebate accruals federal state governmental programs could favorably unfavorably impact net sales income taxes approximately 20 million 2006 provision income taxes december 31 2006 taxes provided approximately 42 billion earnings international subsidiaries scheringplough considers earnings indefinitely reinvested international subsidiaries scheringplough believes accrual tax contingencies adequate open years based past experience interpretations tax law judgments potential actions taxing authorities scheringplough accrues liabilities identified tax contingencies result tax positions taken could challenged tax authorities scheringplough’s tax reserves reflect scheringplough’s best estimate probable tax liability however reasonably possible ultimate resolution tax matters may materially greater less amount accrued scheringplough adopt fin 48 “accounting uncertainty income taxes” january 1 2007 see “impact recently issued accounting standards” discussed additional information regarding expected impacts scheringplough’s financial statements implementation fin 48 scheringplough’s potential tax exposures result varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property although scheringplough’s cross border arrangements affiliates based upon internationally accepted standards tax authorities various jurisdictions may disagree subsequently challenge amount profits taxed country scheringplough records valuation allowance reduce deferred tax assets amount likely realized scheringplough considered ongoing prudent feasible tax planning strategies assessing need valuation allowance event scheringplough determine would able realize additional portion net deferred tax assets adjustment valuation allowance would increase income period determination made likewise scheringplough subsequently determine would able realize additional portion remaining net deferred tax asset future adjustment deferred tax asset would charged income period determination made impairment intangible assets property intangible assets representing capitalized costs purchased goodwill patents licenses forms intellectual property totaled 492 million december 31 2006 annual amortization expense next five years estimated approximately 45 million per year based intangible assets recorded december 31 2006 value assets subject continuing scientific medical marketplace uncertainty example marketed pharmaceutical product withdrawn market safety reasons marketing product could occur pronounced warnings amounts capitalized product may need reduced due impairment events giving rise impairment inherent risk pharmaceutical industry cannot predicted management regularly reviews intangible assets possible impairment certain scheringplough’s manufacturing sites operate capacity overall costs operating manufacturing sites significantly increased due consent decree compliance activities scheringplough’s manufacturing cost base relatively fixed actions part management significantly reduce scheringplough’s manufacturing infrastructure involve complex issues result shifting products manufacturing plants take many years due construction regulatory requirements including revalidation registration requirements management continues review carrying value certain manufacturing assets indications impairment future events decisions may lead additional asset impairments andor related costs accounting pension postretirement benefit plans pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions scheringplough assesses pension postretirement benefit plan assumptions regular basis evaluating assumptions scheringplough considers many factors including evaluation discount rate expected rate return plan assets healthcare cost trend rate retirement age assumption scheringplough’s historical assumptions compared actual results analysis current market conditions asset allocations see note 7 “retirement plans postretirement benefits” item 8 “financial statements supplementary data” additional information discount rates used pension postretirement benefit plan calculations evaluated annually modified reflect prevailing market rates measurement date highquality fixed income debt instrument portfolio would provide future cash flows needed pay benefits included benefit obligations come due countries debt instruments thinly traded estimates based available market rates actuarial assumptions based upon management’s best estimates judgment assumptions held constant increase 50 basis points discount rate would estimated favorable impact 23 million net pension postretirement benefit cost increase 50 basis points expected rate return assumption would estimated favorable impact 8 million net pension postretirement benefit cost assumptions held constant decrease 50 basis points discount rate would estimated unfavorable impact 33 million net pension postretirement benefit cost decreased 50 basis points expected rate return assumption would estimated unfavorable impact 8 million net pension postretirement benefit cost expected rates return pension postretirement benefit plans represent average rates return earned plan assets period benefits included benefit obligation paid developing expected rate return scheringplough determines expected returns major asset classes principally equities fixed income real estate return expectations asset classes based assumptions economic growth inflation supported longterm historical data well scheringplough’s actual experience return plan assets expected portfolio performance also reflects contribution active management appropriate unrecognized net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions expected returns based primarily calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ scheringplough’s expected returns majority assets realized marketrelated value assets ratably fiveyear period total unrecognized net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees targeted investment portfolio scheringplough’s us pension plan allocated 65 percent equities 28 percent fixed income investments 7 percent real estate targeted investment portfolio scheringplough’s us postretirement benefit plans allocated 70 percent equities 30 percent fixed income investments portfolios’ equity weightings consistent longterm nature plans’ benefit obligations nonus pension plans targeted investment portfolio varies based duration pension liabilities local governmental rules regulations substantially investments equities fixed income valued based quoted public market values investments real estate valued based periodic appraisals september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans” amendment fasb statements 87 88 106 132r effective december 31 2006 scheringplough accounts retirement postretirement benefit plans accordance sfas 158 shareholders’ equity december 31 2006 reduced approximately 7 percent upon adoption sfas 158 see note 7 “retirement plans postretirement benefits” item 8 “financial statements supplemental data” additional information sfas 158 allows extended adoption date yearend measurement date requirement allowed statement currently majority scheringplough’s retirement postretirement benefit plans’ assets liabilities measured december 31 remaining plans measurement dates yearend scheringplough anticipates adopting yearend measurement date effective december 31 2007 scheringplough expect material impact financial statements upon adoption accounting legal regulatory matters management judgments estimates required accounting legal regulatory matters ongoing basis including insurance coverages scheringplough reviews status claims investigations legal proceedings ongoing basis time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s results operations cash flows financial condition market risk disclosure scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rates equity prices following describes nature risks foreign currency exchange risk scheringplough subsidiaries 50 countries 2006 sales outside us accounted approximately 60 percent global sales virtually sales denominated currencies local country scheringplough’s reported profits cash flows exposed changing exchange rates date management deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide level protection adverse changes exchange rates risk adverse exchange rate change also mitigated fact scheringplough’s international operations widespread addition point time scheringplough’s international subsidiaries hold financial assets liabilities denominated currencies us dollars financial assets liabilities consist primarily shortterm thirdparty intercompany receivables payables changes exchange rates affect translated value financial assets liabilities gains losses arise translation affect net income occasion scheringplough used derivatives hedge specific foreign currency exposures however derivative transactions material interest rate equity price risk financial assets exposed changes interest rates andor equity prices primarily cash equivalents shortterm investments debt equity securities held nonqualified trusts employee benefits assets totaled 6 billion december 31 2006 cash equivalents shortterm investments 10 percent decrease interest rates would decrease interest income approximately 25 million securities held nonqualified trusts due longterm nature liabilities trust assets fund scheringplough’s exposure market risk deemed low financial obligations exposed variability interest rates primarily shortterm borrowings scheringplough currently maintains investment portfolio shortterm investment instruments excess amount borrowings accordingly scheringplough mitigated exposure changes interest rates relating financial obligations scheringplough longterm debt outstanding 10 percent decrease interest rates would increase fair value debt approximately 115 million however scheringplough currently expect refund debt disclosure notice cautionary statements private securities litigation reform act management’s discussion analysis financial condition results operations sections report written reports oral statements made time scheringplough may contain forwardlooking statements within meaning private securities litigation reform act 1995 forward looking statements relate strictly historical current facts based current expectations forecasts future events identify forward looking statements use words “anticipate” “believe” “could” “estimate” “expect” “forecast” “project” “intend” “plan” “potential” “will” similar words terms particular forwardlooking statements include statements relating future actions ability access capital markets prospective products product approvals timing conditions regulatory approvals patent intellectual property protection future performance results current anticipated products sales efforts research development programs estimates rebates discounts returns expenses programs reduce expenses cost savings reductions work force outcome contingencies litigation investigations growth strategy financial results forwardlooking statements publications may turn wrong guarantees scheringplough’s financial operational performance scheringplough’s stock scheringplough assume obligation update forwardlooking statement many factors could cause actual results differ materially scheringplough’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known although possible predict identify factors refer item 1a “risk factors” report incorporate herein reference identification important factors respect risks uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations following section form 10k generally discusses 2019 2018 results yeartoyear comparisons 2019 2018 discussion 2017 results yeartoyear comparisons 2018 2017 included form 10k found “management’s discussion analysis financial condition results operations” part ii item 7 company’s annual report form 10k fiscal year ended december 31 2018 filed february 27 2019 description merck’s business merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients company recently sold certain businesses healthcare services segment process divesting remaining businesses company continues look investment opportunities area health care approach investments shifted toward venture capital investments third parties opposed whollyowned businesses alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 planned spinoff women’s health legacy brands biosimilars new company february 2020 merck announced intention spinoff products women’s health trusted legacy brands biosimilars businesses new yettobenamed independent publicly traded company newco distribution newco’s publicly traded stock company shareholders distribution expected qualify taxfree company shareholders us federal income tax purposes legacy brands included transaction consist dermatology pain respiratory select cardiovascular products including zetia vytorin well rest merck’s diversified brands franchise merck’s existing research pipeline programs continue owned developed within merck planned newco development capabilities initially focused latestage development lifecycle management expected time develop research capabilities selected therapeutic areas spinoff expected completed first half 2021 subject market certain conditions overview merck’s performance 2019 demonstrates execution commercial research operations driven focus key growth drivers innovative pipeline investment reinforcing company’s scienceled strategy 2019 merck enhanced portfolio pipeline external innovation increased investment new capital projects focused primarily expanding manufacturing capacity across merck’s key businesses returned capital shareholders worldwide sales 468 billion 2019 increase 11 compared 2018 including 2 unfavorable effect foreign exchange sales increase driven primarily merck’s growth pillars oncology human health vaccines certain hospital acute care products animal health growth areas partially offset ongoing effects generic competition particularly diversified brands cardiovascular franchises well competitive pressure particularly diabetes virology franchises merck continued prioritize business development aimed enhancing portfolio strengthening pipeline executing several business development transactions 2019 expand oncology presence merck completed acquisitions peloton therapeutics inc peloton clinicalstage biopharmaceutical company focused development novel small molecule therapeutic candidates treatment cancer diseases immune design latestage immunotherapy company employing nextgeneration vivo approaches enable body’s immune system fight disease merck also announced agreement acquire arqule inc arqule biopharmaceutical company focused kinase inhibitor discovery development treatment cancer diseases acquisition closed january 2020 augment merck’s animal health business company acquired antelliq group antelliq leader digital animal identification traceability monitoring solutions 2019 company received numerous regulatory approvals progressed many important pipeline candidates clinical development within oncology keytruda received multiple additional approvals united states european union eu china japan monotherapy therapeutic areas nonsmallcell lung cancer nsclc smallcell lung cancer sclc esophageal cancer combination axitinib treatment renal cell carcinoma rcc combination chemotherapy head neck squamous cell carcinoma hnscc combination lenvima endometrial carcinoma lynparza developed collaboration astrazeneca plc astrazeneca received us food drug administration fda approval treatment appropriate patients germline brcamutated gbrcam pancreatic cancer european commission ec approval use certain patients advanced ovarian cancer advanced metastatic breast cancer addition oncology company received regulatory approvals hospital acute care vaccines therapeutic areas fda approved recarbrio imipenem cilastatin relebactam injection new combination antibacterial treatment certain patients complicated urinary tract infections caused certain gramnegative microorganisms recarbrio approved ec february 2020 fda ec also approved expanded indications zerbaxa treatment patients hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia habpvabp caused certain susceptible gramnegative microorganisms additionally ervebo ebola zaire vaccine live vaccine prevention disease caused zaire ebolavirus adults approved united states received conditional approval eu addition recent regulatory approvals discussed company advanced latestage pipeline particularly oncology several regulatory submissions keytruda lynparza lenvima united states internationally company’s phase 3 oncology programs include keytruda therapeutic areas biliary tract breast cervical colorectal cutaneous squamous cell endometrial esophageal gastric hepatocellular mesothelioma nasopharyngeal ovarian prostate smallcell lung cancers lynparza combination keytruda nonsmall cell lung cancer lenvima combination keytruda bladder endometrial head neck melanoma nonsmallcell lung cancers additionally company candidates phase 3 clinical development several therapeutic areas including v114 investigational polyvalent conjugate vaccine prevention pneumococcal disease received breakthrough therapy designation fda prevention invasive pneumococcal disease caused vaccine serotypes pediatric patients 6 weeks 18 years age adults mk7264 gefapixant selective nonnarcotic orallyadministered p2x3receptor antagonist developed treatment refractory chronic cough mk8591a islatravir investigational nucleoside reverse transcriptase translocation inhibitor nrtti combination doravirine treatment hiv1 infection mk1242 vericiguat investigational treatment heart failure developed collaboration see “research development” company allocating resources effectively support commercial opportunities near term making necessary investments support longterm growth research development expenses 2019 reflect higher clinical development spending increased investment discovery research early drug development november 2019 merck’s board directors approved increase company’s quarterly dividend raising 061 per share 055 per share company’s outstanding common stock 2019 company returned 105 billion shareholders dividends share repurchases earnings per common share assuming dilution attributable common shareholders eps 2019 381 compared 232 2018 eps years reflects impact acquisition divestiturerelated costs well restructuring costs certain items certain items 2019 include charge related acquisition peloton 2018 include charge related formation collaboration eisai co ltd eisai nongaap eps excludes items 519 2019 434 2018 see “nongaap income nongaap eps” pricing global efforts toward health care cost containment continue exert pressure product pricing market access worldwide changes us health care system part health care reform well increased purchasing power entities negotiate behalf medicare medicaid private sector beneficiaries contributed pricing pressure several international markets governmentmandated pricing actions reduced prices generic patented drugs addition company’s revenue performance 2019 negatively affected costreduction measures taken governments thirdparties lower health care costs company anticipates actions additional actions future continue negatively affect revenue performance operating results sales us plus international may equal total due rounding worldwide sales grew 11 2019 driven primarily higher sales oncology franchise reflecting strong growth keytruda well increased alliance revenue related lynparza lenvima also contributing revenue growth higher sales vaccines including gardasilgardasil 9 varivax proquad mmr ii well increased sales certain hospital acute care products including bridion higher sales animal health products also drove revenue growth 2019 sales growth 2019 partially offset effects generic competition cardiovascular products zetia vytorin hospital acute care products invanz cubicin noxafil oncology product emend products within diversified brands franchise well biosimilar competition immunology product remicade diversified brands franchise includes certain products approaching expiration marketing exclusivity longer protected patents developed markets lower sales diabetes products januvia janumet hiv products isentressisentress hd also partially offset revenue growth 2019 sales united states grew 12 2019 driven primarily higher sales keytruda combined sales proquad mmr ii varivax bridion well higher alliance revenue lenvima lynparza revenue growth partially offset lower sales januvia janumet invanz emend isentressisentress hd cubicin noxafil international sales grew 10 2019 performance international markets led china total sales 32 billion 2019 representing growth 47 compared 2018 including 7 unfavorable effect foreign exchange increase international sales primarily reflects growth keytruda gardasilgardasil 9 combined sales proquad mmr ii varivax well higher alliance revenue lynparza lenvima sales growth partially offset lower sales zetia vytorin zepatier remicade products within diversified brands franchise international sales represented 57 total sales 2019 2018 see note 18 consolidated financial statements details sales company’s products discussion performance select products franchises follows pharmaceutical segment oncology calculation meaningful 1 alliance revenue represents merck’s share profits product sales net cost sales commercialization costs see note 4 consolidated financial statements keytruda antipd1 therapy approved treatment multiple malignancies including cervical cancer classical hodgkin lymphoma chl esophageal cancer gastric gastroesophageal junction adenocarcinoma hnscc hepatocellular carcinoma hcc nsclc sclc melanoma merkel cell carcinoma microsatellite instabilityhigh msih mismatch repair deficient cancer primary mediastinal large bcell lymphoma pmbcl rcc urothelial carcinoma keytruda clinical development program includes studies across broad range cancer types see “research development” january 2020 fda approved keytruda monotherapy treatment certain patients bacillus calmetteguerin bcgunresponsive highrisk nonmuscle invasive bladder cancer nmibc based results keynote057 trial july 2019 fda approved keytruda monotherapy treatment certain patients recurrent locally advanced metastatic squamous cell carcinoma esophagus whose tumors express pdl1 combined positive score cps ≥10 determined fdaapproved test based results keynote181 keynote180 trials june 2019 fda approved keytruda monotherapy combination chemotherapy firstline treatment patients metastatic unresectable recurrent hnscc based results pivotal phase 3 keynote048 trial keytruda initially approved hnscc fda’s accelerated approval process based data phase 1b keynote012 trial accordance accelerated approval process continued approval contingent upon verification description clinical benefit demonstrated keynote048 resulted fda converting accelerated approval full regular approval keytruda approved indications ec november 2019 japan’s ministry health labour welfare mhlw december 2019 also june 2019 fda approved keytruda monotherapy treatment certain patients metastatic sclc based pooled data keynote158 cohort g keynote028 cohort c1 clinical trials april 2019 fda approved keytruda combination inlyta axitinib tyrosine kinase inhibitor firstline treatment patients advanced rcc common type kidney cancer based findings pivotal phase 3 keynote426 trial keytruda approved indication ec september 2019 japan’s mhlw december 2019 also april 2019 fda approved expanded label keytruda monotherapy firstline treatment patients nsclc expressing pdl1 tumor proportion score tps ≥1 determined fdaapproved test egfr alk genomic tumor aberrations stage iii disease patients candidates surgical resection definitive chemoradiation metastatic disease approval based results phase 3 keynote042 trial september 2019 fda approved combination keytruda plus lenvima treatment certain patients advanced endometrial carcinoma msih mismatch repair deficient march 2019 ec approved keytruda combination carboplatin either paclitaxel nabpaclitaxel firstline treatment adults metastatic squamous nsclc based data phase 3 keynote407 trial keytruda approved indication fda october 2018 april 2019 ec approved new extended dosing schedule 400 mg every six weeks q6w delivered intravenous infusion 30 minutes approved monotherapy indications eu q6w dose available addition formerly approved dose keytruda 200 mg every three weeks q3w infused 30 minutes additionally 2019 keytruda received following approvals china’s national medical products administration nmpa combination pemetrexed platinum chemotherapy firstline treatment patients metastatic nonsquamous nsclc egfr alk genomic tumor aberrations based data pivotal phase 3 keynote189 trial monotherapy firstline treatment patients locally advanced metastatic nsclc whose tumors express pdl1 determined nmpaapproved test egfr alk genomic tumor aberrations based results phase 3 keynote042 trial combination carboplatin paclitaxel firstline treatment patients metastatic squamous nsclc based findings pivotal phase 3 keynote407 trial global sales keytruda grew 55 2019 driven higher demand company continues launch keytruda multiple new indications globally sales united states continue build across multiple approved indications particular treatment nsclc monotherapy combination chemotherapy nonsquamous squamous metastatic nsclc along uptake recently launched rcc adjuvant melanoma indications contributing us sales growth include hnscc urothelial carcinoma melanoma msih cancer keytruda sales growth international markets driven primarily performance europe japan china reflecting increased use treatment nsclc well recently approved indications described company party certain thirdparty license agreements pursuant company pays royalties sales keytruda terms significant agreements merck pays royalty 65 worldwide sales keytruda 2023 one third party royalty decline 25 2024 2026 terminate thereafter company pays additional 2 royalty worldwide sales keytruda another third party termination date varies country royalty expire united states 2024 major european markets 2025 royalties included cost sales pursuant repricing rule japanese government reduced price keytruda 175 effective february 2020 additionally keytruda subject another significant price reduction april 2020 provision japanese pricing rules lynparza oral poly adpribose polymerase parp inhibitor developed part collaboration astrazeneca entered july 2017 see note 4 consolidated financial statements approved treatment certain types advanced ovarian breast pancreatic cancers increase alliance revenue related lynparza 2019 driven primarily expanded use united states eu japan china reflecting part ongoing launch new indications lynparza received approval treatment certain types advanced ovarian cancer united states december 2018 eu japan june 2019 china december 2019 based results phase 3 solo1 trial also april 2019 ec approved lynparza treatment certain adult patients advanced breast cancer based results phase 3 olympiad trial additionally december 2019 fda approved lynparza maintenance treatment certain adult patients advanced pancreatic cancer based results phase 3 polo trial lenvima oral receptor tyrosine kinase inhibitor developed part collaboration eisai entered march 2018 see note 4 consolidated financial statements approved treatment certain types thyroid cancer hcc combination evorolimus certain patients rcc additionally september 2019 fda approved combination keytruda plus lenvima treatment certain patients advanced endometrial carcinoma msih mismatch repair deficient marks first us approval combination keytruda plus lenvima increase alliance revenue related lenvima 2019 reflects strong performance treatment hcc following recent worldwide launches well full year collaboration activity 2019 global sales emend prevention chemotherapyinduced postoperative nausea vomiting declined 26 2019 driven primarily lower demand pricing united states due competition including recent generic competition emend injection following us patent expiry september 2019 patent provided us market exclusivity emend expired 2015 patent provided market exclusivity major european markets expired may 2019 additionally emend injection lose market exclusivity major european markets august 2020 company anticipates sales emend injection markets decline significantly thereafter vaccines worldwide sales gardasilgardasil 9 vaccines help prevent certain cancers diseases caused certain types hpv grew 19 2019 driven primarily higher demand asia pacific region particularly china higher demand certain european markets reflecting increased vaccination rates boys girls growth partially offset lower sales united states us sales decline driven borrowing gardasil 9 doses us centers disease control prevention cdc pediatric vaccine stockpile offset part higher demand pricing 2019 company borrowed doses gardasil 9 cdc pediatric vaccine stockpile borrowing reduced sales 2019 approximately 120 million company recognized corresponding liability 2018 company replenished doses borrowed cdc pediatric vaccine stockpile 2017 resulting recognition sales 125 million 2018 reversal liability related borrowing decision japan’s mhlw suspend active recommendation hpv vaccination still review company party certain thirdparty license agreements pursuant company pays royalties sales gardasilgardasil 9 terms significant agreements merck pays 7 royalty worldwide sales gardasilgardasil 9 one third party agreement expires december 2023 additional 7 royalty sales gardasilgardasil 9 united states another third party agreement expires december 2028 royalties included cost sales global sales proquad pediatric combination vaccine help protect measles mumps rubella varicella grew 27 2019 driven primarily higher volumes pricing united states well volume growth eu largely reflecting competitor supply issue worldwide sales mmr ii vaccine help protect measles mumps rubella grew 28 2019 driven primarily higher sales united sates reflecting increased demand due measles outbreaks well higher pricing company anticipates us sales mmr ii decline 2020 driven lower expected demand related fewer measles outbreaks global sales varivax vaccine help prevent chickenpox varicella grew 25 2019 driven primarily government tenders latin america well higher pricing volume growth united states varivax sales expected decline 2020 due part timing government tenders competition select latin american markets global sales rotateq vaccine help protect rotavirus gastroenteritis infants children grew 9 2019 driven primarily continued uptake launch china higher volumes united states partially offset lower volumes latin america december 2019 fda approved ervebo prevention disease caused zaire ebolavirus individuals 18 years age older previously announced merck working initiate manufacturing licensed doses expects doses start becoming available approximately third quarter 2020 merck working closely us government world health organization unicef gavi vaccine alliance plan eventual licensed doses support future public health preparedness response efforts zaire ebolavirus disease merck seeking profit sales vaccine rather ensure vaccine sustainable recovering manufacturing operational costs associated program ervebo also granted conditional marking authorization ec additionally merck made submissions african country national regulatory authorities collaboration african vaccine regulatory forum allow vaccine registered african countries considered atrisk ebola outbreaks february 2020 merck confirmed four african countries approved ervebo approvals additional countries africa anticipated near future hospital acute care global sales bridion reversal two types neuromuscular blocking agents used surgery grew 23 2019 driven higher demand globally particularly united states worldwide sales noxafil prevention invasive fungal infections declined 11 2019 driven primarily generic competition united states patent provided us market exclusivity certain forms noxafil representing majority us noxafil sales expired july 2019 accordingly company experiencing decline us noxafil sales result generic competition expects decline continue additionally patent noxafil expired number major european markets december 2019 result company anticipates sales noxafil markets decline significantly future periods global sales invanz treatment certain infections declined 47 2019 driven generic competition united states patent provided us market exclusivity invanz expired november 2017 generic competition began second half 2018 company subsequently experienced significant decline invanz sales united states result generic competition since lost us invanz sales global sales cubicin iv antibiotic complicated skin structure infections bacteremia caused designated susceptible organisms declined 30 2019 resulting primarily ongoing generic competition united states following expiration us composition patent cubicin 2016 2019 fda ec approved expanded indications zerbaxa treatment habpvabp caused certain susceptible gramnegative microorganisms based results pivotal phase 3 aspectnp trial zerbaxa previously approved united states eu treatment adults certain complicated urinary tract intraabdominal infections july 2019 fda approved recarbrio injection new combination antibacterial treatment adults limited alternative treatment options complicated urinary tract infections complicated intraabdominal infections caused certain susceptible gramnegative microorganisms recarbrio approved ec february 2020 merck anticipates making recarbrio available first half 2020 january 2020 fda approved dificid fidaxomicin oral suspension dificid tablets treatment clostridioides formerly clostridium difficileassociated diarrhea children aged six months older immunology sales simponi oncemonthly subcutaneous treatment certain inflammatory diseases marketed company europe russia turkey declined 7 2019 driven unfavorable effect foreign exchange lower pricing europe sales simponi unfavorably affected launch biosimilars competing product company expects competition continue unfavorably affect sales simponi sales remicade treatment inflammatory diseases marketed company europe russia turkey declined 29 2019 driven ongoing biosimilar competition company’s marketing territories company lost market exclusivity remicade major european markets 2015 longer market exclusivity marketing territories company experiencing pricing volume declines markets result biosimilar competition expects declines continue virology worldwide sales isentressisentress hd hiv integrase inhibitor use combination antiretroviral agents treatment hiv1 infection declined 15 2019 primarily reflecting lower demand united states eu due competitive pressure september 2019 fda approved supplemental new drug applications nda pifeltro doravirine combination antiretroviral agents delstrigo doravirinelamivudinetenofovir disoproxil fumarate complete regimen expand indications include adult patients hiv1 infection virologically suppressed stable antiretroviral regimen cardiovascular combined global sales zetia marketed countries outside united states ezetrol vytorin marketed outside united states inegy medicines lowering ldl cholesterol declined 35 2019 driven primarily lower sales eu patents ezetrol inegy expired april 2018 april 2019 respectively accordingly company experiencing sales declines markets result generic competition expects declines continue sales decline also attributable loss exclusivity australia merck lost market exclusivity united states zetia 2016 vytorin 2017 subsequently lost nearly us sales products result generic competition sales atozet marketed outside united states medicine lowering ldl cholesterol grew 13 2019 primarily driven higher demand eu korea sales rosuzet marketed outside united states medicine lowering ldl cholesterol doubled 2019 primarily driven launch japan well higher demand korea adempas cardiovascular drug treatment pulmonary arterial hypertension part worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including adempas see note 4 consolidated financial statements increase alliance revenue 27 2019 driven higher profits bayer higher sales adempas merck’s marketing territories diabetes worldwide combined sales januvia janumet medicines help lower blood sugar levels adults type 2 diabetes declined 7 2019 result continued pricing pressure united states partially offset higher demand international markets company expects us pricing pressure continue patents provide market exclusivity januvia janumet united states expire july 2022 although sixmonth pediatric exclusivity may extend date patent provides market exclusivity januvia eu expires july 2022 although pediatric exclusivity may extend date september 2022 supplementary patent certificate provides market exclusivity janumet eu expires april 2023 company anticipates sales januvia janumet markets decline substantially patent expiries women’s health worldwide sales nuvaring vaginal contraceptive product declined 3 2019 driven primarily lower demand eu due generic competition largely offset higher sales united states reflecting higher pricing partially offset lower demand patent provided us market exclusivity nuvaring expired april 2018 generic competition began december 2019 company anticipates rapid substantial decline us nuvaring sales 2020 result generic competition worldwide sales implanonnexplanon singlerod subdermal contraceptive implant grew 12 2019 primarily driven higher demand pricing united states biosimilars calculation meaningful biosimilar products marketed company pursuant agreement samsung bioepis co ltd samsung develop commercialize multiple prespecified biosimilar candidates currently company markets renflexis infliximababda tumor necrosis factor tnf antagonist biosimilar remicade infliximab treatment certain inflammatory diseases ontruzant trastuzumabdttb human epidermal growth factor receptor 2 her2 neu receptor antagonist biosimilar herceptin trastuzumab treatment her2positive breast cancer her2 overexpressing gastric cancer brenzys etanercept biosimilar tnf antagonist biosimilar enbrel treatment certain inflammatory diseases merck’s commercialization territories agreement vary product sale growth biosimilars 2019 driven continued uptake renflexis united states since launch 2017 continued uptake ontruzant eu since launch 2018 launch brenzys brazil 2019 animal health segment sales livestock products grew 6 2019 predominantly due products obtained april 2019 acquisition antelliq leader digital animal identification traceability monitoring solutions see note 3 consolidated financial statements growth sales livestock products also driven higher demand aqua swine products sales companion animal products grew 2 2019 driven primarily higher demand bravecto line products parasitic control costs expenses greater 100 cost sales cost sales 141 billion 2019 compared 135 billion 2018 cost sales includes amortization intangible assets recorded connection business acquisitions totaled 14 billion 2019 compared 27 billion 2018 cost sales also includes amortization amounts capitalized connection collaborations 464 million 2019 compared 347 million 2018 see note 8 consolidated financial statements additionally costs 2019 include intangible asset impairment charges 705 million related marketed products recorded connection business acquisitions see note 8 consolidated financial statements company may recognize additional noncash impairment charges future related intangible assets measured fair value capitalized connection business acquisitions charges could material costs 2018 include 423 million charge related termination collaboration agreement samsung insulin glargine see note 3 consolidated financial statements also included cost sales expenses associated restructuring activities amounted 251 million 2019 compared 21 million 2018 primarily reflecting accelerated depreciation asset writeoffs related planned sale closure manufacturing facilities separation costs associated manufacturingrelated headcount reductions incurred reflected restructuring costs discussed gross margin 699 2019 compared 681 2018 gross margin improvement 2019 reflects charge recorded 2018 connection termination collaboration agreement samsung noted favorable product mix lower amortization intangible assets noted improvements gross margin partially offset unfavorable manufacturing variances inventory writeoffs pricing pressure higher restructuring costs selling general administrative selling general administrative sga expenses 106 billion 2019 increase 5 compared 2018 driven primarily higher administrative costs acquisition divestiturerelated costs largely related acquisition antelliq promotional expenses primarily support strategic brands restructuring costs partially offset favorable effect foreign exchange lower selling costs sga expenses 2019 include restructuring costs 34 million related primarily accelerated depreciation facilities closed divested separation costs associated sales force reductions incurred reflected restructuring costs discussed sga expenses include acquisition divestiturerelated costs 126 million 2019 compared 32 million 2018 consisting integration transaction certain costs related business acquisitions divestitures research development research development rd expenses 99 billion 2019 increase 1 compared 2018 increase driven primarily 993 million charge 2019 acquisition peloton see note 3 consolidated financial statements well higher expenses related clinical development increased investment discovery research early drug development increase rd expenses 2019 partially offset 14 billion charge 2018 related formation oncology collaboration eisai see note 4 consolidated financial statements 344 million charge 2018 related acquisition viralytics limited viralytics see note 3 consolidated financial statements favorable effect foreign exchange rd expenses comprised costs directly incurred merck research laboratories mrl company’s research development division focuses human healthrelated activities 61 billion 2019 compared 56 billion 2018 also included rd expenses animal health research costs licensing costs incurred divisions support rd activities including depreciation production general administrative aggregate 26 billion 2019 23 billion 2018 rd expenses also include inprocess research development iprd impairment charges 172 million 152 million 2019 2018 respectively see note 8 consolidated financial statements company may recognize additional noncash impairment charges future related cancellation delay pipeline programs measured fair value capitalized connection business acquisitions charges could material addition rd expenses include expense income related changes estimated fair value measurement liabilities contingent consideration recorded connection business acquisitions 2019 2018 company recorded net reduction expenses 39 million 54 million respectively related changes estimates restructuring costs early 2019 merck approved new global restructuring program restructuring program part worldwide initiative focused optimizing company’s manufacturing supply network well reducing global real estate footprint program continuation company’s plant rationalization builds prior restructuring programs include actions associated planned spinoff newco company continues evaluate global footprint overall operating model subsequently identified additional actions restructuring program could identify actions time actions currently contemplated restructuring program expected substantially completed end 2023 cumulative pretax costs incurred company implement program estimated approximately 25 billion company expects record charges approximately 800 million 2020 related restructuring program company anticipates actions restructuring program result annual net cost savings approximately 900 million end 2023 actions previous global restructuring programs substantially completed restructuring costs primarily representing separation related costs associated restructuring activities 638 million 2019 632 million 2018 separation costs incurred associated actual headcount reductions well estimated expenses existing severance programs headcount reductions probable could reasonably estimated also included restructuring costs asset abandonment facility shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation plan costs segment reporting restructuring costs unallocated expenses additional costs associated company’s restructuring activities included cost sales selling general administrative research development company recorded aggregate pretax costs 927 million 2019 658 million 2018 related restructuring program activities see note 5 consolidated financial statements income expense net details components income expense net see note 14 consolidated financial statements pharmaceutical segment profits comprised segment sales less standard costs well sga expenses directly incurred segment animal health segment profits comprised segment sales less cost sales well sga rd expenses directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred mrl general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits also excluded determination segment profits costs related restructuring activities acquisition divestiturerelated costs including amortization purchase accounting adjustments intangible asset impairment charges changes estimated fair value measurement liabilities contingent consideration additionally segment profits reflect expenses corporate manufacturing cost centers miscellaneous income expense unallocated items reflected “other” table also included “other” miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales 2019 result changes company’s internal reporting structure certain costs previously included pharmaceutical segment included part nonsegment expenses within mrl prior period pharmaceutical segment profits recast reflect changes comparable basis pharmaceutical segment profits grew 14 2019 compared 2018 driven primarily higher sales well lower selling costs animal health segment profits declined 3 2019 driven primarily unfavorable product mix higher investments selling product development unfavorable effect foreign exchange partially offset higher sales taxes income effective income tax rates 147 2019 288 2018 reflect impacts acquisition divestiturerelated costs restructuring costs beneficial impact foreign earnings including product mix effective income tax rate 2019 also reflects favorable impact 364 million net tax benefit related settlement certain federal income tax matters see note 15 consolidated financial statements reversal tax reserves established connection 2014 divestiture merck’s consumer care mcc business due lapse statute limitations addition effective income tax rate 2019 reflects unfavorable impacts charge acquisition peloton tax benefit recognized charges 117 million related finalization treasury regulations transition tax associated 2017 enactment us tax legislation known tax cuts jobs act tcja see note 15 consolidated financial statements effective income tax rate 2018 includes measurementperiod adjustments provisional amounts recorded 2017 associated enactment tcja including 124 million related transition tax addition effective income tax rate 2018 reflects unfavorable impacts charge recorded connection formation collaboration eisai charge related termination collaboration agreement samsung tax benefit recognized net loss income attributable noncontrolling interests net loss income attributable noncontrolling interests 66 million 2019 compared 27 million 2018 losses 2019 2018 driven primarily portion goodwill impairment charges related certain business healthcare services segment attributable noncontrolling interests net income earnings per common share net income attributable merck co inc 98 billion 2019 62 billion 2018 eps 381 2019 232 2018 nongaap income nongaap eps nongaap income nongaap eps alternative views company’s performance merck providing management believes information enhances investors’ understanding company’s results permits investors understand management assesses performance nongaap income nongaap eps exclude certain items nature items impact analysis underlying business performance trends excluded items considered nonrecurring consist acquisition divestiturerelated costs restructuring costs certain items excluded items significant components understanding assessing financial performance nongaap income nongaap eps important internal measures company senior management receives monthly analysis operating results includes nongaap eps management uses measures internally planning forecasting purposes measure performance company along metrics addition senior management’s annual compensation derived part using nongaap pretax income since nongaap income nongaap eps measures determined accordance gaap standardized meaning prescribed gaap therefore may comparable calculation similar measures companies information nongaap income nongaap eps considered addition substitute superior net income eps prepared accordance generally accepted accounting principles united states gaap reconciliation gaap financial measures nongaap financial measures follows 1 estimated tax impact excluded items determined applying statutory rate originating territory nongaap adjustments 2 amount 2017 provisional see note 15 consolidated financial statements acquisition divestiturerelated costs nongaap income nongaap eps exclude impact certain amounts recorded connection business acquisitions divestitures amounts include amortization intangible assets amortization purchase accounting adjustments inventories well intangible asset impairment charges expense income related changes estimated fair value measurement liabilities contingent consideration also excluded integration transaction certain costs associated business acquisitions divestitures restructuring costs nongaap income nongaap eps exclude costs related restructuring actions see note 5 consolidated financial statements amounts include employee separation costs accelerated depreciation associated facilities closed divested accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions restructuring costs also include asset abandonment facility shutdown related costs well employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans sharebased compensation costs certain items adjusted evaluated individual basis considering quantitative qualitative aspects typically consist items unusual nature significant results particular period indicative future operating results excluded nongaap income nongaap eps 2019 charge acquisition peloton see note 3 consolidated financial statements tax charges related finalization us treasury regulations related tcja net tax benefit related settlement certain federal income tax matters tax benefit related reversal tax reserves established connection 2014 divestiture mcc see note 15 consolidated financial statements excluded nongaap income nongaap eps 2018 charge related formation collaboration eisai see note 4 consolidated financial statements charge related termination collaboration agreement samsung insulin glargine see note 3 consolidated financial statements charge acquisition viralytics see note 3 consolidated financial statements measurementperiod adjustments related provisional amounts recorded tcja see note 15 consolidated financial statements excluded nongaap income nongaap eps 2017 charge related formation collaboration astrazeneca see note 4 consolidated financial statements well provisional net tax charge related enactment tcja net tax benefit related settlement certain federal income tax matters tax benefit related settlement state income tax matter see note 15 consolidated financial statements research development chart reflecting company’s current research pipeline february 21 2020 set forth item 1 “business research development” research development update company currently several candidates regulatory review united states internationally keytruda antipd1 therapy approved treatment many cancers clinical development expanded indications approvals result broad clinical development program currently consists 1000 clinical trials including 600 trials combine keytruda cancer treatments studies encompass 30 cancer types including biliary tract cervical colorectal cutaneous squamous cell endometrial gastric head neck hepatocellular hodgkin lymphoma nonhodgkin lymphoma melanoma mesothelioma nasopharyngeal nonsmallcell lung ovarian pmbcl prostate renal smallcell lung triplenegative breast urothelial many currently phase 3 clinical development trials planned cancers keytruda review eu monotherapy firstline treatment patients stage iii nsclc candidates surgical resection definitive chemoradiation metastatic nsclc whose tumors express pdl1 tps ≥1 egfr alk genomic tumor aberrations based results phase 3 keynote042 trial keytruda review japan monotherapy combination chemotherapy firstline treatment advanced gastric gastroesophageal junction adenocarcinoma based results pivotal phase 3 keynote062 trial keytruda also review japan monotherapy secondline treatment advanced metastatic esophageal esophagogastric junction carcinoma based results phase 3 keynote181 trial merck made decision withdraw type ii variation application keytruda indication eu october 2019 fda accepted supplemental biologics license application bla seeking use keytruda treatment patients recurrent andor metastatic cutaneous squamous cell carcinoma cscc curable surgery radiation based results keynote629 trial fda set prescription drug user fee act pdufa date june 29 2020 february 2020 merck announced fda issued complete response letter regarding merck’s supplemental blas seeking update dosing frequency keytruda include 400 mg dose infused 30 minutes everysixweeks q6w option multiple indications submitted applications based pharmacokinetic modeling simulation data presented 2018 american society clinical oncology asco annual meeting data supported ec approval 400 mg q6w dosing keytruda monotherapy indications march 2019 merck reviewing letter discuss next steps fda additionally keytruda received breakthrough therapy designation fda combination neoadjuvant chemotherapy treatment highrisk earlystage triplenegative breast cancer tnbc combination enfortumab vedotin firstline setting treatment patients unresectable locally advanced metastatic urothelial cancer eligible cisplatincontaining chemotherapy fda’s breakthrough therapy designation intended expedite development review candidate planned use alone combination treat serious lifethreatening disease condition preliminary clinical evidence indicates drug may demonstrate substantial improvement existing therapies one clinically significant endpoints september 2019 merck announced results pivotal neoadjuvantadjuvant phase 3 keynote522 trial patients earlystage tnbc trial investigated regimen neoadjuvant keytruda plus chemotherapy followed adjuvant keytruda monotherapy keytruda regimen compared regimen neoadjuvant chemotherapy followed adjuvant placebo chemotherapyplacebo regimen interim findings presented european society medical oncology esmo 2019 congress neoadjuvant phase keytruda plus chemotherapy resulted statistically significant increase pathological complete response pcr versus chemotherapy patients earlystage tnbc improvement seen adding keytruda neoadjuvant chemotherapy observed regardless pdl1 expression dual primary endpoint eventfreesurvival efs median followup 155 months keytruda regimen reduced risk progression neoadjuvant phase recurrence adjuvant phase compared chemotherapyplacebo regimen merck continues discuss interim analysis data keynote522 regulatory authorities keytruda breast cancer clinical development program encompasses several internal external collaborative studies february 2020 merck announced pivotal phase 3 keynote355 trial investigating keytruda combination chemotherapy met one dual primary endpoints progressionfree survival pfs patients metastatic triplenegative breast cancer mtnbc whose tumors expressed pdl1 cps ≥10 based interim analysis conducted independent data monitoring committee dmc firstline treatment keytruda combination chemotherapy nabpaclitaxel paclitaxel gemcitabinecarboplatin demonstrated statistically significant clinically meaningful improvement pfs compared chemotherapy alone patients based recommendation dmc trial continue without changes evaluate dual primary endpoint overall survival os may 2019 merck announced phase 3 keynote119 trial evaluating keytruda monotherapy second thirdline treatment patients metastatic tnbc meet prespecified primary endpoint superior os compared chemotherapy endpoints formally tested per study protocol primary endpoint os met june 2019 merck announced full results pivotal phase 3 keynote062 trial evaluating keytruda monotherapy combination chemotherapy firstline treatment advanced gastric gastroesophageal junction adenocarcinoma monotherapy arm study keytruda met primary endpoint demonstrating noninferiority chemotherapy current standard care os patients whose tumors expressed pdl1 cps ≥1 combination arm keynote062 keytruda plus chemotherapy found statistically superior os cps ≥1 cps ≥10 pfs cps ≥1 compared chemotherapy alone results presented 2019 asco annual meeting september 2017 fda approved keytruda thirdline treatment previously treated patients recurrent locally advanced metastatic gastric gastroesophageal junction cancer whose tumors express pdl1 cps ≥1 determined fdaapproved test keynote062 potential confirmatory trial accelerated thirdline approval addition keynote062 additional firstline phase 3 studies merck’s gastric clinical program include keynote811 keynote859 well keynote585 neoadjuvant adjuvant treatment setting january 2020 merck announced phase 3 keynote604 trial investigating keytruda combination chemotherapy met one dual primary endpoints pfs firstline treatment patients extensive stage sclc final analysis study also improvement os patients treated keytruda combination chemotherapy compared chemotherapy alone however os results meet statistical significance per prespecified statistical plan results presented upcoming medical meeting discussed regulatory authorities lynparza oral parp inhibitor currently approved certain types advanced ovarian breast pancreatic cancers codeveloped multiple cancer types part collaboration astrazeneca see note 4 consolidated financial statements lynparza review eu firstline maintenance monotherapy patients gbrcam metastatic pancreatic cancer whose disease progressed following firstline platinumbased chemotherapy lynparza approved indication fda december 2019 based results phase 3 polo trial decision european medicines agency ema expected second half 2020 january 2020 fda accepted supplemental nda lynparza combination bevacizumab maintenance treatment women advanced ovarian cancer whose disease showed complete partial response firstline treatment platinumbased chemotherapy bevacizumab based results pivotal phase 3 paola1 trial pdufa date set second quarter 2020 indication also review eu january 2020 fda accepted priority review supplemental nda lynparza treatment patients metastatic castrationresistant prostate cancer mcrpc deleterious suspected deleterious germline somatic homologous recombination repair hrr gene mutations progressed following prior treatment new hormonal agent based positive results phase 3 profound trial pdufa date set second quarter 2020 indication also review eu june 2019 merck astrazeneca presented full results phase 3 solo3 trial evaluated lynparza compared chemotherapy treatment platinumsensitive relapsed patients gbrcam advanced ovarian cancer received two prior lines chemotherapy results trial showed statisticallysignificant clinicallymeaningful improvement objective response rate orr lynparza arm compared chemotherapy arm key secondary endpoint pfs also significantly increased lynparza arm compared chemotherapy arm results presented 2019 asco annual meeting mk5618 selumetinib mek 12 inhibitor codeveloped part strategic collaboration astrazeneca see note 4 consolidated financial statements selumetinib priority review fda potential new medicine pediatric patients aged three years older neurofibromatosis type 1 nf1 symptomatic inoperable plexiform neurofibromas regulatory submission based positive results national cancer institute cancer therapy evaluation programsponsored sprint phase 2 stratum 1 trial pdufa date set second quarter 2020 v503 review japan initial indication females prevention certain hpvrelated diseases precursors february 2020 fda accepted priority review supplemental bla gardasil 9 prevention certain head neck cancers caused vaccinetype hpv females males 9 45 years age fda set pdufa date june 2020 addition candidates regulatory review company several drug candidates phase 3 clinical development addition keytruda programs discussed lynparza addition indications review discussed phase 3 development combination keytruda treatment nsclc lenvima orally available tyrosine kinase inhibitor currently approved certain types thyroid cancer hcc combination certain patients rcc codeveloped part strategic collaboration eisai see note 4 consolidated financial statements pursuant agreement companies jointly initiate clinical studies evaluating keytrudalenvima combination six types cancer endometrial cancer nsclc hcc hnscc bladder cancer melanoma well basket trial targeting multiple cancer types fda granted breakthrough therapy designation keytruda combination lenvima potential treatment patients advanced andor metastatic rcc potential treatment patients unresectable hcc amenable locoregional treatment mk7264 gefapixant selective nonnarcotic orallyadministered p2x3receptor antagonist investigated phase 3 trials treatment refractory chronic cough phase 2 trial treatment women endometriosisrelated pain mk1242 vericiguat sgc stimulator potential treatment patients worsening chronic heart failure developed part worldwide strategic collaboration merck bayer see note 4 consolidated financial statements vericiguat studied patients suffering chronic heart failure reduced ejection fraction phase 3 clinical trial chronic heart failure preserved ejection fraction phase 2 clinical trial november 2019 merck announced phase 3 victoria study evaluating efficacy safety vericiguat met primary efficacy endpoint vericiguat reduced risk composite endpoint heart failure hospitalization cardiovascular death patients worsening chronic heart failure reduced ejection fraction compared placebo given combination available heart failure therapies results victoria study presented upcoming medical meeting 2020 v114 investigational polyvalent conjugate vaccine prevention pneumococcal disease june 2018 merck initiated first phase 3 study adult population prevention invasive pneumococcal disease currently six phase 3 adult studies ongoing including studies healthy adults 50 years age older adults risk factors pneumococcal disease infected hiv recipients allogeneic hematopoietic stem cell transplant october 2018 merck began first phase 3 study pediatric population currently eight studies ongoing including studies healthy infants children afflicted sickle cell disease v114 received breakthrough therapy designation fda prevention invasive pneumococcal disease caused vaccine serotypes pediatric patients 6 weeks 18 years age adults company maintains number longterm exploratory fundamental research programs biology chemistry well research programs directed toward product development company’s research development model designed increase productivity improve probability success prioritizing company’s research development resources candidates company believes capable providing unambiguous promotable advantages patients payers delivering maximum value approved medicines vaccines new indications new formulations merck pursuing emerging product opportunities independent therapeutic area modality small molecule biologics vaccines building biologics capabilities company committed ensuring externally sourced programs remain important component pipeline strategy focus supplementing internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies company’s clinical pipeline includes candidates multiple disease areas including cancer cardiovascular diseases diabetes metabolic diseases infectious diseases neurosciences pain respiratory diseases vaccines acquired inprocess research development connection business acquisitions company recorded fair value inprocess research projects time acquisition yet reached technological feasibility december 31 2019 balance iprd 10 billion iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates time periods receive approvals fda regulatory agencies subject uncertainty significant delays approval process company’s failure obtain approval would delay prevent company realizing revenues products additionally certain iprd programs fail abandoned development company realize future cash flows estimated recorded iprd acquisition date circumstances occur company’s future operating results could adversely affected company may recognize impairment charges could material 2019 2018 2017 company recorded iprd impairment charges within research development expenses 172 million 152 million 483 million respectively see note 8 consolidated financial statements additional research development required remaining programs reach technological feasibility costs complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval acquisitions research collaborations license agreements merck continues remain focused pursuing opportunities potential drive near longterm growth certain recent transactions described merck actively monitoring landscape growth opportunities meet company’s strategic criteria april 2019 merck acquired immune design latestage immunotherapy company employing nextgeneration vivo approaches enable body’s immune system fight disease 301 million cash transaction accounted acquisition business merck recognized intangible assets iprd 156 million cash 83 million net assets 42 million excess consideration transferred fair value net assets acquired 20 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach actual cash flows likely different assumed july 2019 merck acquired peloton clinicalstage biopharmaceutical company focused development novel small molecule therapeutic candidates targeting hypoxiainducible factor2α hif2α treatment patients cancer nononcology diseases peloton’s lead candidate mk6482 formerly pt2977 novel oral hif2α inhibitor latestage development renal cell carcinoma merck made upfront payment 12 billion cash additionally former peloton shareholders eligible receive 50 million upon us regulatory approval 50 million upon first commercial sale united states 105 billion salesbased milestones transaction accounted acquisition asset merck recorded cash 157 million deferred tax liabilities 52 million net liabilities 4 million acquisition date research development expenses 993 million 2019 related transaction january 2020 merck acquired arqule inc arqule publicly traded biopharmaceutical company focused kinase inhibitor discovery development treatment patients cancer diseases 27 billion arqule’s lead investigational candidate mk1026 formerly arq 531 novel oral bruton’s tyrosine kinase btk inhibitor currently phase 2 dose expansion study treatment bcell malignancies company process determining preliminary fair value assets acquired liabilities assumed total consideration transferred transaction accounted acquisition business capital expenditures capital expenditures 35 billion 2019 26 billion 2018 19 billion 2017 expenditures united states 19 billion 2019 15 billion 2018 12 billion 2017 increased capital expenditures 2019 reflect investment new capital projects focused primarily increasing manufacturing capacity merck’s key products previously announced company plans invest 19 billion new capital projects 20192023 depreciation expense 17 billion 2019 14 billion 2018 15 billion 2017 12 billion 2019 10 billion 2018 10 billion 2017 related locations united states total depreciation expense 2019 2017 included accelerated depreciation 233 million 60 million respectively associated restructuring activities see note 5 consolidated financial statements analysis liquidity capital resources merck’s strong financial profile enables fund research development focus external alliances support inline products maximize upcoming launches providing significant cash returns shareholders cash provided operating activities 134 billion 2019 compared 109 billion 2018 reflecting stronger operating performance increased accounts receivable factoring discussed cash provided operating activities continues company’s primary source funds finance operating needs capital expenditures treasury stock purchases dividends paid shareholders cash used investing activities 26 billion 2019 compared cash provided investing activities 43 billion 2018 change driven primarily lower proceeds sales securities investments acquisitions antelliq peloton 2019 higher capital expenditures partially offset lower purchases securities investments cash used financing activities 89 billion 2019 compared 132 billion 2018 lower use cash financing activities driven primarily proceeds issuance debt lower purchases treasury stock reflecting accelerated share repurchase asr program 2018 discussed well lower payments debt partially offset repayment shortterm borrowings higher dividends paid shareholders lower proceeds exercise stock options company accounts receivable factoring agreements financial institutions certain countries sell accounts receivable see note 6 consolidated financial statements company factored 27 billion 11 billion accounts receivable fourth quarter 2019 2018 respectively factoring arrangements reduced outstanding accounts receivable cash received financial institutions reported within operating activities consolidated statement cash flows certain factoring arrangements ease administration company collect customer payments related factored receivables remits financial institutions december 31 2019 company collected 256 million behalf financial institutions remitted january 2020 net cash flows collections reported financing activities consolidated statement cash flows company’s contractual obligations december 31 2019 follows 1 includes future inventory purchases company committed connection certain divestitures 2 december 31 2019 company’s consolidated balance sheet reflects liabilities unrecognized tax benefits interest penalties 15 billion including 49 million reflected current liability due high degree uncertainty regarding timing future cash outflows liabilities unrecognized tax benefits beyond one year reasonable estimate period cash settlement years beyond 2020 cannot made 3 connection enactment tcja company required pay onetime transition tax company elected pay period eight years 2025 permitted tcja see note 15 consolidated financial statements 4 reflects payments collaborative agreements salesbased milestones achieved 2019 therefore deemed contractual obligations paid january 2020 see note 4 consolidated financial statements 5 amounts exclude reasonably certain lease renewals yet executed see note 9 consolidated financial statements purchase obligations enforceable legally binding obligations purchases goods services including minimum inventory contracts research development advertising amounts include contingent milestone payments related collaborative arrangements acquisitions considered contractual obligations successful achievement developmental regulatory approval commercial milestones december 31 2019 company recognized liabilities contingent salesbased milestone payments related collaborations astrazeneca eisai bayer payment remains subject achievement related sales milestone aggregating 14 billion see note 4 consolidated financial statements excluded research development obligations potential future funding commitments approximately 60 million investments research venture capital funds loans payable current portion longterm debt reflects 226 million longdated notes subject repayment option holders required funding obligations 2020 relating company’s pension postretirement benefit plans expected material however company currently anticipates contributing approximately 100 million us pension plans 150 million international pension plans 15 million postretirement benefit plans 2020 march 2019 company issued 50 billion principal amount senior unsecured notes consisting 750 million 290 notes due 2024 175 billion 340 notes due 2029 10 billion 390 notes due 2039 15 billion 400 notes due 2049 company used net proceeds offering 50 billion general corporate purposes including repayment outstanding commercial paper borrowings december 2018 company exercised makewhole provision 125 billion 500 notes due 2019 repaid debt november 2017 company launched tender offers certain outstanding notes debentures company paid 810 million aggregate consideration applicable purchase price together accrued interest redeem 585 million principal amount debt validly tendered connection tender offers company 60 billion credit facility matures june 2024 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility march 2018 company filed securities registration statement us securities exchange commission sec automatic shelf registration process available “wellknown seasoned issuers” effective three years effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date company continues maintain conservative financial profile company places cash investments instruments meet high credit quality standards specified investment policy guidelines also limit amount credit exposure one issuer company participate offbalance sheet arrangements involving unconsolidated subsidiaries provide financing potentially expose company unrecorded financial obligations november 2019 merck’s board directors declared quarterly dividend 061 per share company’s outstanding common stock paid january 2020 january 2020 board directors declared quarterly dividend 061 per share company’s common stock second quarter 2020 payable april 2020 october 2018 merck’s board directors authorized purchases 10 billion merck’s common stock treasury stock purchase authorization time limit made time openmarket transactions block transactions exchange privately negotiated transactions company spent 48 billion purchase 59 million shares common stock treasury 2019 addition company received 77 million shares settlement asr agreements discussed december 31 2019 company’s remaining share repurchase authorization 72 billion company purchased 91 billion 40 billion common stock 2018 2017 respectively authorized share repurchase programs october 25 2018 company entered asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers october 29 2018 funded existing cash investments well shortterm borrowings upon settlement asr agreements april 2019 merck received additional 77 million shares determined average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount bringing total shares received merck program 644 million financial instruments market risk disclosures company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused changes foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen chinese renminbi achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options merck principally sells foreign currency revenue hedging program uniform weakening us dollar would yield largest overall potential loss market value hedge instruments market value merck’s hedges would declined estimated 456 million 441 million december 31 2019 2018 respectively uniform 10 weakening us dollar market value determined using foreign exchange option pricing model holding factors except exchange rates constant although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows sensitivity analysis changes value us dollar foreign currency denominated derivatives investments monetary assets liabilities indicated us dollar uniformly weakened 10 currency exposures company december 31 2019 2018 income taxes would declined approximately 110 million 134 million 2019 2018 respectively company net short payable position relative major foreign currencies consideration forward contracts uniform weakening us dollar yield largest overall potential net loss earnings due exchange measurement assumes change one foreign currency relative us dollar would affect foreign currencies relative us dollar although predictive nature company believes 10 threshold reflects reasonably possible nearterm changes merck’s major foreign currency exposures relative us dollar cash flows contracts reported operating activities consolidated statement cash flows economy argentina determined hyperinflationary 2018 consequently accordance us gaap company began remeasuring monetary assets liabilities operations earnings impact company’s results immaterial company also uses forward exchange contracts hedge portion net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation unrealized gains losses contracts recorded foreign currency translation adjustment within comprehensive income loss oci remain accumulated comprehensive income loss aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded component changes fair value excluded components recognized oci company recognizes earnings initial value excluded component straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2019 company party 19 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows company’s investment portfolio includes cash equivalents shortterm investments market values significantly affected changes interest rates market value company’s medium longterm fixedrate investments modestly affected changes us interest rates changes medium longterm us interest rates significant impact market value company’s fixedrate borrowings generally longer maturities sensitivity analysis measure potential changes market value merck’s investments debt change interest rates indicated one percentage point increase interest rates december 31 2019 2018 would positively affected net aggregate market value instruments 20 billion 12 billion respectively one percentage point decrease december 31 2019 2018 would negatively affected net aggregate market value 22 billion 14 billion respectively fair value merck’s debt determined using pricing models reflecting one percentage point shifts appropriate yield curves fair values merck’s investments determined using combination pricing duration models critical accounting policies company’s consolidated financial statements prepared conformity gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates application following accounting policies result accounting estimates potential significant impact financial statements acquisitions dispositions determine whether transactions accounted acquisitions disposals assets businesses company makes certain judgments include assessment inputs processes outputs associated acquired set activities company determines substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition fair values intangible assets including acquired iprd determined utilizing information available near acquisition date based expectations assumptions deemed reasonable management given considerable judgment involved determining fair values company typically obtains assistance thirdparty valuation specialists significant items amounts allocated acquired iprd capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination thenuseful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingency resolved contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment judgments made determining estimated fair values assigned assets acquired liabilities assumed business combination well asset lives materially affect company’s results operations fair values identifiable intangible assets related currently marketed products product rights primarily determined using income approach fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows consider historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate fair values identifiable intangible assets related iprd also determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using appropriate discount rate company determines transaction accounted acquisition business transaction accounted asset acquisition rather business combination therefore goodwill recorded asset acquisition acquired iprd alternative future use charged expense contingent consideration recognized acquisition date instances product development milestones recognized upon achievement salesbased milestones recognized milestone deemed probable company achieved revenue recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment businesses within company’s healthcare services segment certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covers chargebacks rebates chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued company continually monitors provision aggregate customer discounts material adjustments estimates associated aggregate customer discount provision 2019 2018 2017 summarized information changes aggregate customer discount accrual related us sales follows accruals chargebacks reflected direct reduction accounts receivable accruals rebates current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 233 million 22 billion respectively december 31 2019 245 million 24 billion respectively december 31 2018 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others product returns provision us pharmaceutical sales percentage us net pharmaceutical sales 11 2019 16 2018 21 2017 outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically 36 days receipt invoice us animal health customers typically 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms distribution programs us wholesalers company encourages wholesalers align purchases underlying demand maintain inventories specified levels terms programs allow wholesalers earn fees upon providing visibility inventory levels well achieving certain performance parameters inventory management customer service levels reducing shortage claims reducing product returns information provided wholesaler distribution programs includes items sales trends inventory onhand onorder quantity product returns wholesalers generally provide abovementioned data company regulatory requirement report lot level information manufacturers level information needed determine remaining shelf life original sale date inventory given current wholesaler inventory levels generally less month company believes collection order lot information across wholesale customers would limited use estimating sales discounts returns inventories produced preparation product launches company capitalizes inventories produced preparation product launches sufficient support estimated initial market demand typically capitalization inventory begin related product candidates phase 3 clinical trials considered high probability regulatory approval company monitors status respective product within regulatory approval process however company generally disclose specific timing regulatory approval company aware specific risks contingencies normal regulatory approval process specific issues identified research process relating safety efficacy manufacturing marketing labeling related inventory would generally capitalized expiry dates inventory affected stage completion company manages levels inventory stage optimize shelf life inventory relation anticipated market demand order avoid product expiry issues inventories capitalized anticipated future sales shelf lives support realization inventory value inventory shelf life sufficient meet initial product launch requirements inventories produced preparation product launches capitalized december 31 2019 2018 168 million 7 million respectively contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters see note 10 consolidated financial statements company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2019 2018 approximately 240 million 245 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents legitimate claim contribution asserted liability initially accrued based upon estimated transaction costs manage site accruals adjusted site investigations feasibility studies related cost assessments remedial techniques completed extent potentially responsible parties may jointly severally liable expected contribute determined company also remediating environmental contamination resulting past industrial activity certain sites takes active role identifying accruing costs past merck performed worldwide survey assess sites potential contamination resulting past industrial activities assessment indicated physical investigation warranted investigation performed providing better evaluation need remedial action need identified remedial action initiated definitive information became available course investigations andor remedial efforts site estimates refined accruals established adjusted accordingly estimates related accruals continue refined annually company believes compliance issues associated applicable environmental laws regulations would material adverse effect company expenditures remediation environmental liabilities 19 million 2019 estimated 47 million aggregate years 2020 2024 management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 67 million 71 million december 31 2019 2018 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 58 million aggregate management also believe expenditures result material adverse effect company’s financial condition results operations liquidity year sharebased compensation company expenses sharebased payment awards employees including grants stock options requisite service period based grant date fair value awards company determines fair value certain sharebased awards using blackscholes optionpricing model uses historical current market data estimate fair value method incorporates various assumptions riskfree interest rate expected volatility expected dividend yield expected life options total pretax sharebased compensation expense 417 million 2019 348 million 2018 312 million 2017 december 31 2019 603 million total pretax unrecognized compensation expense related nonvested stock option restricted stock unit performance share unit awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses pensions postretirement benefit plans net periodic benefit cost pension plans totaled 137 million 2019 195 million 2018 201 million 2017 net periodic benefit credit postretirement benefit plans 49 million 2019 45 million 2018 60 million 2017 pension postretirement benefit plan information financial reporting purposes calculated using actuarial assumptions including discount rate plan benefit obligations expected rate return plan assets changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net loss amortization company reassesses benefit plan assumptions regular basis pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due discount rates company’s us pension postretirement benefit plans ranged 320 350 december 31 2019 compared range 400 440 december 31 2018 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid developing expected rate return company considers longterm compound annualized returns historical market data current market conditions actual returns company’s plan assets using reference information company develops forwardlooking return expectations asset category weightedaverage expected longterm rate return target portfolio allocated across investment categories expected portfolio performance reflects contribution active management appropriate 2020 expected rate return company’s us pension postretirement benefit plans range 700 730 compared range 770 810 2019 decrease reflects lower expected asset returns modest shift asset allocation company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 45 us equities 15 30 international equities 35 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 10 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines actuarial assumptions based upon management’s best estimates judgment reasonably possible change plus minus 25 basis points discount rate assumption assumptions held constant would estimated 70 million favorable unfavorable impact company’s net periodic benefit cost 2019 reasonably possible change plus minus 25 basis points expected rate return assumption assumptions held constant would estimated 50 million favorable unfavorable impact merck’s net periodic benefit cost 2019 required funding obligations 2020 relating company’s pension postretirement benefit plans expected material preceding hypothetical changes discount rate expected rate return assumptions would impact company’s funding requirements net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions recorded component aoci expected returns pension plans based calculated marketrelated value assets methodology asset gainslosses resulting actual returns differ company’s expected returns recognized marketrelated value assets ratably fiveyear period also net loss amounts aoci excess certain thresholds amortized net periodic benefit cost average remaining service life employees restructuring costs restructuring costs recorded connection restructuring programs designed streamline company’s cost structure result company made estimates judgments regarding future plans including future termination benefits exit costs incurred restructuring actions take place accruing termination costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range connection actions management also assesses recoverability longlived assets employed business certain instances asset lives shortened based changes expected useful lives affected assets severance related costs reflected within restructuring costs assetrelated charges reflected within cost sales selling general administrative expenses research development expenses depending upon nature asset impairments longlived assets company assesses changes economic regulatory legal conditions makes assumptions regarding estimated future cash flows evaluating value company’s property plant equipment goodwill intangible assets company periodically evaluates whether current facts circumstances indicate carrying values longlived assets held used may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference asset’s fair value carrying value quoted market prices available company estimate fair value using discounted value estimated future cash flows approach goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount factors considered assessment include general macroeconomic conditions specific industry market cost factors could significant effect earnings cash flows overall financial performance reporting unit whether sustained declines company’s share price company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangible assets excluding iprd initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives events circumstances warrant review company assess recoverability future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows iprd company acquires conjunction acquisition business represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects company evaluates iprd impairment least annually frequently impairment indicators exist performing quantitative test compares fair value iprd intangible asset carrying value impairment testing purposes company may combine separately recorded iprd intangible assets one unit account based relevant facts circumstances generally company combine iprd intangible assets testing purposes operate single asset essentially inseparable fair value less carrying amount impairment loss recognized operating results judgments made evaluating impairment longlived intangibles materially affect company’s results operations impairments investments company reviews investments marketable debt securities impairments based determination whether decline market value investment carrying value otherthantemporary company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost changes fair value considered temporary reported net tax oci otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net taxes income company’s effective tax rate based pretax income statutory tax rates tax planning opportunities available various jurisdictions company operates estimated effective tax rate year applied company’s quarterly operating results event significant unusual onetime item recognized expected recognized company’s quarterly operating results tax attributable item would separately calculated recorded time unusual onetime item company considers resolution prior year tax matters items significant judgment required determining company’s tax provision evaluating tax positions recognition measurement tax position based management’s best judgment given facts circumstances information available reporting date company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements likely threshold met period tax position taken company may subsequently recognize benefit tax position tax matter effectively settled statute limitations expires likely threshold met subsequent period see note 15 consolidated financial statements tax regulations require items included tax return different times items reflected financial statements timing differences create deferred tax assets liabilities deferred tax assets generally represent items used tax deduction credit tax return future years company already recorded tax benefit financial statements company establishes valuation allowances deferred tax assets amount expected future taxable income likely support use deduction credit deferred tax liabilities generally represent tax expense recognized financial statements payment deferred expense company already taken deduction tax return yet recognized expense financial statements recently issued accounting standards discussion recently issued accounting standards see note 2 consolidated financial statements cautionary factors may affect future results report written reports oral statements made time company may contain socalled “forwardlooking statements” based management’s current expectations subject risks uncertainties may cause results differ materially set forth statements one identify forwardlooking statements use words “anticipates” “expects” “plans” “will” “estimates” “forecasts” “projects” words similar meaning negative variations foregoing one also identify fact relate strictly historical current facts statements likely address company’s growth strategy financial results product development product approvals product potential development programs one must carefully consider statement understand many factors could cause actual results differ materially company’s forwardlooking statements factors include inaccurate assumptions broad variety risks uncertainties including known forwardlooking statement guaranteed actual future results may vary materially company assume obligation update forwardlooking statement one carefully evaluate statements light factors including risk factors described company’s filings securities exchange commission especially form 10k forms 10q 8k item 1a “risk factors” annual report form 10k company discusses detail various important risk factors could cause actual results differ expected historic results company notes factors investors permitted private securities litigation reform act 1995 one understand possible predict identify factors consequently reader consider list complete statement potential risks uncertainties item 7a nannannannannannannanitem 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition companys 2001 annual report shareholders incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 management’s discussion analysis operations financial condition results operation form 10k item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 management’s discussion analysis financial condition results operation item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 management’s discussion analysis financial condition results operations 10k item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7aquantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8nanitem 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8item 7a quantitative qualitative disclosures market risk market risk disclosures set forth managements discussion analysis operations financial condition beginning page 13 companys 2002 annual report shareholders incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk see market risk disclosures set forth item 7 “management’s discussion analysis” item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference discussion “financial instruments market risk disclosures” item 7 “management’s discussion analysis financial condition results operations” item 8 item 8financial statements supplementary data consolidated balance sheets december 31 1993 1992 related statements consolidated income consolidated retained earnings consolidated cash flows three years period ended december 31 1993 notes consolidated financial statements independent auditors report deloitte touche quarterly results operations set forth companys 1993 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1994 1993 related statements consolidated income consolidated retained earnings consolidated cash flows three years period ended december 31 1994 notes consolidated financial statements independent auditors report deloitte touche llp dated february 15 1995 quarterly results operations set forth companys 1994 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1995 1994 related statements consolidated income consolidated retained earnings consolidated cash flows three years period ended december 31 1995 notes consolidated financial statements independent auditors report deloitte touche llp dated february 14 1996 quarterly results operations set forth companys 1995 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1996 1995 related statements consolidated income consolidated retained earnings consolidated cash flows three years period ended december 31 1996 notes consolidated financial statements independent auditors report deloitte touche llp dated february 14 1997 quarterly results operations set forth companys 1996 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1997 1996 related statements consolidated income consolidated retained earnings consolidated cash flows three years period ended december 31 1997 notes consolidated financial statements independent auditors report deloitte touche llp dated february 12 1998 quarterly data set forth companys 1997 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1998 1997 related statements consolidated income consolidated shareholders equity consolidated cash flows three years period ended december 31 1998 notes consolidated financial statements independent auditors report deloitte touche llp dated february 12 1999 quarterly data set forth companys 1998 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 1999 1998 related statements consolidated income consolidated shareholders equity consolidated cash flows three years period ended december 31 1999 notes consolidated financial statements independent auditors report deloitte touche llp dated february 11 2000 quarterly data set forth companys 1999 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated balance sheets december 31 2001 2000 related statements consolidated income consolidated shareholders equity consolidated cash flows three years period ended december 31 2001 notes consolidated financial statements independent auditors report deloitte touche llp dated february 15 2002 unaudited quarterly data set forth companys 2001 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data statements consolidated operations years ended december 31 2003 2002 2001 statements consolidated cash flows years ended december 31 2003 2002 2001 consolidated balance sheets december 31 2003 2002 statements consolidated shareholders’ equity years ended december 31 2003 2002 2001 notes consolidated financial statements independent auditors’ report scheringplough corporation subsidiaries statements consolidated operations see notes consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows see notes consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets see notes consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity see notes consolidated financial statements notes consolidated financial statements dollars millions except per share figures summary significant accounting policies principles consolidation consolidated financial statements include scheringplough corporation subsidiaries “company” intercompany balances transactions eliminated certain prior year amounts reclassified conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates use assumptions affect certain reported amounts disclosures actual amounts may differ cash equivalents cash equivalents include operating cash highly liquid investments generally original maturities three months less inventories valued lower cost market cost determined using lastin firstout method substantial portion inventories located united states cost inventories determined firstin firstout method depreciation provided estimated useful lives properties generally use straightline method average useful lives 50 years buildings 25 years building improvements 13 years equipment depreciation expense 304 250 213 2003 2002 2001 respectively foreign currency translation net assets company’s foreign subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation adjustment account included comprehensive income remaining foreign subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation adjustment account exchange gains losses included income accumulated comprehensive income accumulated comprehensive income primarily consists accumulated foreign currency translation adjustment account unrealized gains losses securities classified statement financial accounting standards sfas 115 purposes available sale minimum pension liability adjustment components accumulated comprehensive income december 31 gross unrealized pretax gains 2003 20 unrealized losses immaterial gross unrealized gains losses 2002 immaterial revenue recognition revenues sale products recognized goods shipped customers reliable estimates product returns made reliable estimates product returns made business conditions permit company make reasonable estimates expected demand following approval claritin overthecounter otc product fourth quarter 2002 revenue us sales prescription form claritin recognized product used fill patient prescriptions reliable estimates product returns could made time shipment since expiration initial 180day period exclusivity first generic competitor otc form claritin company experienced additional privatelabel competition result revenues sales otc claritin recognized time shipment extent company make reasonable estimates product returns provisions discounts rebates recorded period related sales recorded purposes revenue recognition end quarter company estimates applicable commercial governmental rebates paid products sold reduces recorded sales estimated amounts rebates estimated based terms historical experience trend analysis projected market conditions various markets served earnings per common share 2002 2001 diluted earnings per common share computed dividing income sum weightedaverage number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options 2003 diluted loss per common share excludes effect shares issuable deferred stock units exercise stock options including would effect decreasing loss per share basic earnings per common share computed dividing income weightedaverage number common shares outstanding shares used calculate basic diluted earnings per common share reconciled follows equivalent 77 million 47 million 35 million common shares issuable company’s stock incentive plans excluded computation diluted earnings per share december 31 2003 2002 2001 respectively effect would antidilutive goodwill effective january 1 2002 company adopted sfas 142 “goodwill intangible assets” sfas 142 eliminates requirement amortize goodwill instead requires periodic testing goodwill impairment goodwill impaired written estimated fair value company performed required annual goodwill impairment tests found recorded goodwill impaired accordingly adoption sfas 142 result adjustment recorded goodwill amortization expense 5 2001 diluted basic earnings per common share 2001 would unchanged goodwill amortization excluded net income pro forma basis company’s goodwill primarily related animal health business intangible assets components balance sheet caption “other intangible assets net” follows intangible assets amortized straightline method respective useful lives 2003 2002 2001 company paid 11 84 121 respectively patent licensing rights costs amortized approximately nine years residual value intangible assets estimated zero amortization expense related intangible assets 2003 2002 2001 55 66 65 respectively intangible assets reviewed determine recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review full year amortization expense next five years estimated approximately 50 per year based intangible assets recorded december 31 2003 accounting stockbased compensation company accounts stock compensation arrangements using intrinsic value method intrinsic value method difference amount employee pay company stock acquired company’s incentive plans stock’s fair value date grant charged expense since employees must pay company grantdate fair value stock options expense recorded stock options alternatively since employees pay stock issued deferred stock units granted grant date fair value recorded expense following table reconciles net lossincome lossearnings per common share eps reported pro forma net lossincome eps company expensed grantdate fair value stock options deferred stock units permitted sfas 123 “accounting stockbased compensation” pro forma amounts may representative initial impact adopting sfas 123 since amended permits alternative methods adoption weightedaverage fair value options granted 2003 2002 2001 529 1125 1335 respectively fair values estimated using blackscholes option pricing model based following assumptions recently issued accounting standards november 2002 fasb issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” normal course business company issue guarantees third parties accordingly interpretation effect company’s financial statements april 2003 fasb issued sfas no149 “amendment statement 133 derivative instruments hedging activities” adoption sfas 149 effect company’s financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” requires certain financial instruments classified liability asset circumstances adoption sfas 150 effect company’s financial statements december 2003 fasb issued fasb interpretation 46 revised “consolidation variable interest entities” fin 46 adoption fin 46 effect company’s financial statements january 2004 fasb issued staff position fas 1061 titled “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp act signed law december 2003 introduces prescription drug benefit medicare well federal subsidy certain conditions sponsors retiree health care benefit plans presently authoritative guidance accounting subsidy issued company elected onetime deferral accounting effects act permitted fsp deferral continues apply authoritative guidance accounting federal subsidy issued special charges components special charges follows employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative voluntary early retirement program united states program eligible employees united states december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program approximately 750 employees retired near yearend 2003 approximately 150 employees staggered retirement dates future total cost program estimated 190 comprised increased pension costs 107 increased postretirement health care costs 57 vacation payments 4 costs related accelerated vesting stock grants 22 employees staggered retirement dates future amounts recognized special charge employees’ remaining service periods delayed expense recognition follows guidance sfas 146 “accounting costs associated exit disposal activities” amounts recognized 2003 program 164 amounts expected recognized 2004 2005 19 7 respectively asset impairment losses asset impairment losses recognized accordance sfas 142 “goodwill intangible assets” sfas 144 “accounting impairment disposal long lived assets” asset impairment losses related following • company ceased production certain products produced one manufacturing sites operating fda consent decree company also announced closure manufacturing site england manufacturing site england substantially ceased sales affected products material asset impairment loss 26 based discounted cash flows recognized related facilities equipment two sites • company ceased marketing licensed cancer therapy drug sold countries outside united states sales product declined material introduction competing products resulted decline market share company’s drug point management concluded longer practical continue participate marketplace asset impairment loss 27 based discounted cash flows recognized related intangible asset • one company’s sun care brands competes “highend” segment overall sun care market two large cosmetics companies entered market segment sales company’s brand declined company acquired brand portion purchase price allocated trade name based upon fair value time company performs periodic reviews values assigned intangible assets connection reviews impairment loss 17 related trade name recognized based discounted cash flows reflects change market conditions since brand acquired sales sun care brand material litigation charges 2003 2002 litigation reserves increased 350 150 respectively primarily result investigations company’s sales marketing practices see “legal environmental regulatory matters” footnote additional information consent decree charge 2001 provision 500 recognized payments federal government consent decree see “consent decree” footnote additional information summary selected special charges following summarizes activity accounts related employee termination costs asset impairment losses balance december 31 2003 employee termination costs represents value stock grants 22 distributed yearend 2003 severance accrued vacation payments paid 2004 7 financial instruments commitments sfas 133 amended requires derivatives recorded balance sheet fair value statement also provides effective portion qualifying cash flow hedges recognized income hedged item affects income changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized income occur risks policy objectives company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes time company hedge selective foreign currency risks derivatives generally however management deemed cost effective engage formulabased program hedging profits cash flows foreign operations using derivative financial instruments company’s foreign subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provides level protection adverse changes exchange rates furthermore risk adverse exchange rate change mitigated fact company’s foreign operations widespread limited basis company hedge selective exposures interest rate risks company mitigates credit risk derivative instruments dealing counterparties considered financially sound accordingly company anticipate loss nonperformance company enter derivative instruments generate trading profits table presents carrying values estimated fair values company’s financial instruments including derivative financial instruments estimated fair values determined based market prices available dealer quotes longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related liabilities longterm investments primarily classified available sale carried fair value realized gains sale securities classified available sale 0 2003 43 2002 35 2001 proceeds sales totaled 0 80 51 respectively realized gains recorded income expense net interest rate swap contracts assets hedge variable rate risk associated 200 variable rate time deposit purchased 1999 company entered interest rate swap matured november 2003 terms swap company received fixed rate approximately 56 percent paid threemonth libor rate notional amount 200 swap designated cash flow hedge effective portion swap deferred transaction hedged recorded earnings interest rate swap’s maturity value 58 swap’s fair value december 31 2002 53 liabilities 1991 1992 company utilized interest rate swaps part international cash management strategy notional principal 1991 arrangement 650 notional principal 1992 arrangement 950 arrangements 20year terms december 31 2003 arrangements provide payment interest based upon libor receipt interest based upon annual election various floating rates result company remains subject moderate degree market risk maturity swaps designated hedging instruments accordingly changes fair value recorded earnings annual net cash flows payments receipts interest rate swap contracts material net asset liability interest rate swaps recorded current assets accrued liabilities applicable fair value swaps liability 1 december 31 2003 company triggered credit rating downgrade provisions swap arrangements result counterparty terminate swaps impact terminating swaps material borrowings general shortterm borrowings consist commercial paper issued united states bank loans notes payable connection company’s purchase research office facility 2000 company issued 100 note paid full march 2003 imputed interest rate note 65 percent commercial paper outstanding december 31 2003 2002 939 1188 respectively weightedaverage interest rate shortterm borrowings december 31 2003 2002 18 percent 33 percent respectively november 26 2003 company issued 1250 aggregate principal amount 53 percent senior unsecured notes due 2013 1150 aggregate principal amount 65 percent senior unsecured notes due 2033 interest payable semiannually net proceeds offering 2369 upon issuance notes rated a3 moody’s investors service inc moody’s creditwatch negative implications standard poor’s rating services sp interest rates payable notes subject adjustment follows rating assigned notes moody’s changes one ratings set forth interest rate payable series notes increase additional interest rate set forth similarly rating assigned notes sp changes one ratings set forth interest rate payable series notes increase additional interest rate set forth event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade moody’s sp a3 respectively moody’s sp raise rating a3 respectively better notes redeemable whole part company’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes fair value combined notes 2473 december 31 2003 company three revolving credit facilities totaling 2000 recently negotiated facility september 2003 1000 364day credit facility three major financial institutions drawn united states facility matures september 2004 facilities syndicate financial institutions provide 500 drawn united states may 2004 repayment due may 2005 second multicurrency facility 500 drawn united states internationally maturity date may 2006 facilities available general corporate purposes considered support company’s commercial paper borrowings facilities require compensating balances however nominal commitment fee paid december 31 2003 funds drawn facilities addition company’s foreign subsidiaries approximately 327 available unused lines credit various financial institutions december 31 2003 credit ratings changes credit ratings december 17 2003 sp lowered company’s corporate credit longterm debt ratings “a” “a” said outlook ratings negative noting weakening company’s intron franchise expected declines earnings cash flows change company’s shortterm corporate credit commercial paper rating lowered “a1” “a1” july 29 2003 january 26 2004 sp placed company’s corporate credit rating shortterm credit rating senior unsecured debt rating creditwatch negative implications february 18 2004 sp downgraded company’s senior unsecured debt ratings “a” “a” time sp also lowered company’s shortterm corporate credit commercial paper rating “a2” “a1” sp removed company creditwatch however outlook remains negative october 9 2003 moody’s lowered company’s corporate credit rating “a3” “a1” lowered commercial paper rating “p2” “p1” following rating action moody’s removed company watchlist revised rating outlook stable negative moody’s also stated credit rating assumed modest outflows settle outstanding litigation acquisitions large payment associated litigation proceedings acquisition activity could place pressure rating andor outlook november 20 2003 fitch ratings fitch downgraded company’s senior unsecured bank loan ratings “a” “a” commercial paper rating “f2” “f1” company’s rating outlook remained negative announcing downgrade fitch noted sales decline company’s leading product franchise intron franchise greater anticipated concerned total company growth reliant performance two key growth drivers zetia remicade near term financing instruments 1999 subsidiary company issued 200 equitytype securities certain put call features put call features obligation included longterm liabilities december 31 2002 securities bore liborbased yield substantially fixed november 28 2003 december 31 2002 rate 52 percent company exercised call option fully redeemed securities november 2003 commitments total rent expense amounted 91 2003 81 2002 72 2001 future minimum rental commitments noncancelable operating leases december 31 2003 range 69 2004 32 2008 aggregate minimum lease obligations 41 due thereafter december 31 2003 company commitments totaling 184 related capital expenditures made 2004 insurance coverage company maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly result recent external events availability insurance become restrictive management considers impact changes continually assesses best way provide insurance needs future company selfinsures higher proportion risk past especially relates products’ liability income expense net components income expense net follows net 2002 includes gain 80 sale us marketing rights suboxone subutex cash paid interest net amounts capitalized 46 26 47 2003 2002 2001 respectively shareholders’ equity summary treasury share transactions follows company preferred share purchase rights outstanding attached presently trade company’s common shares exercisable rights become exercisable person group acquires 20 percent company’s common stock announces tender offer completed would result ownership person group 20 percent company’s common stock person group acquire 20 percent company’s outstanding common stock merger business combination transaction right entitle holder acquirer purchase common shares scheringplough market value twice exercise price right exercise price rights 100 following acquisition person group beneficial ownership 20 percent less 50 percent company’s common stock board directors may call exchange rights owned acquirer whole part exchange ratio one common share one twohundredth share series junior participating preferred stock per right also prior acquisition person group beneficial ownership 20 percent company’s common stock rights redeemable 005 per right option board directors rights expire july 10 2007 unless earlier redeemed exchanged board directors also authorized reduce 20 percent thresholds referred less greater sum 001 percent largest percentage outstanding shares common stock known company beneficially owned person group affiliated associated persons ii 10 percent except following acquisition person group beneficial ownership 20 percent company’s common stock reduction may adversely affect interests holders rights equity income cholesterol joint venture company merck co inc merck agreements jointly develop market zetia ezetimibe oncedaily monotherapy coadministration zetia statins ezetimibe oncedaily fixedcombination tablet simvastatin zocor merck’s cholesterolmodifying medicine agreements also involve development marketing oncedaily fixedcombination tablet containing claritin singulair merck’s oncedaily leukotriene receptor antagonist treatment asthma seasonal allergic rhinitis january 2002 scheringploughmerck pharmaceuticals reported results phase iii clinical trials fixedcombination tablet containing claritin singulair demonstrate sufficient added benefits treatment seasonal allergic rhinitis agreements generally provide equal sharing development costs copromotion approved products company united states countries world except japan agreement exists general copromotion provides company provide equal physician marketing efforts company bear cost sales force marketing products general agreement provides venture operate “virtual” mode maximum degree possible relying respective infrastructures two companies however companies agreed share certain costs limited portion costs manufacturing cost specialty sales force certain specially identified promotion costs noted company incurs substantial costs selling costs reflected equity income cholesterol joint venture borne entirely company agreements provide jointly owned facilities products resulting collaboration manufactured facilities owned either merck company 2003 company earned milestone 20 relates certain european approvals zetia certain conditions merck could pay additional milestones company totaling 132 prior 2003 venture research development phase company’s share research development expense 2002 2001 69 86 respectively reported “research development” statements consolidated operations venture moved beyond research development phase zetia launched late 2002 us marketing application combination ezetimibesimvastatin submitted fda september 2003 reflect venture’s first full year commercial operations company adopted equity method accounting effective beginning 2003 method company records share operating profits less share research development costs “equity income cholesterol joint venture” statements consolidated operations prior year amounts affected equity income cholesterol joint venture year ended december 31 2003 54 included amount company’s share operating profits 113 20 milestone receipt less share research development costs 79 stock incentive plans terms company’s 2002 stock incentive plan approved company’s shareholders 72 million company’s common shares may granted stock options awarded deferred stock units officers certain employees company december 2007 december 31 2003 45 million options deferred stock units remain available future year grants 2002 stock incentive plan option exercise prices equal market price common shares grant dates options expire later 10 years date grant standard options granted 2003 prior generally oneyear vesting term option grants vest longer periods ranging three nine years deferred stock units payable equivalent number common shares distributable single installment three five equal annual installments generally commencing one year date award following table summarizes stock option activity past three years current prior plans approved company’s shareholders summarized information stock options outstanding exercisable december 31 2003 follows number options millions 2003 2002 2001 company awarded deferred stock units totaling 32 million 29 million 27 million respectively inventories yearend inventories consisted following inventories valued lastin firstout basis comprised approximately 19 percent 21 percent total inventories december 31 2003 2002 respectively estimated replacement cost total inventories december 31 2003 2002 1704 1346 respectively retirement plans postretirement benefits company defined benefit pension plans covering eligible employees united states certain foreign countries company provides postretirement health care benefits eligible us retirees dependents measurement date majority plans december 31 net pension expense 2003 117 compared net pension expense 2002 23 increase 94 principally due costs associated voluntary early retirement program see “special charges” footnote additional information estimated onehalf percent reduction expected longterm rate return consolidated plan assets would increase pension expense approximately 7 estimated onehalf percent reduction discount rate would increase pension expense approximately 14 also december 31 2003 company unrecognized net pension loss 628 gains losses arise primarily plan assets earning less longterm expected rate return changes pension discount rates gains future offset 628 net unrecognized loss amortization losses would ultimately increase annual pension expense approximately 25 components net pension postretirement benefits expense income follows components changes benefit obligations follows 1 termination benefits curtailment settlement costs 2003 primarily relate matters discussed “special charges” footnote components changes plan assets follows 1 fair value plan assets domestic pension plans 957 827 december 31 2003 2002 respectively addition plan assets indicated december 31 2003 2002 securities 79 74 respectively held nonqualified trusts designated provide pension benefits certain underfunded plans december 31 2003 2002 accumulated benefit obligation retirement plans 1531 1105 respectively aggregated accumulated benefit obligation fair value plan assets retirement plans accumulated benefit obligation excess plan assets 1245 995 respectively december 31 2003 195 63 respectively december 31 2002 presently company anticipate making contributions 2004 fund us retirement plan postretirement health care plan following reconciliation funded status plans company’s balance sheet amounts recognized balance sheet consist company recognized additional minimum pension liability 349 34 2003 2002 respectively primarily related domestic retirement plans resulted adjustment accumulated comprehensive income net tax 178 18 2003 2002 respectively consolidated weightedaverage assumptions used determine benefit obligations december 31 consolidated weightedaverage assumptions used determine net cost years ended december 31 1 longterm expected rate return plan assets domestic retirement plans 90 percent 100 percent years ended december 31 2003 2002 respectively longterm expected rate return plan assets derived proportionally return assumptions determined major asset classes principally equities fixed income real estate return expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weightedaverage assumed health care cost inflation rate used postretirement measurement purposes 9 percent 2004 trending 45 percent 2009 1 percent increase assumed health care cost trend rate would increase combined postretirement service interest cost 7 postretirement benefit obligation 64 1 percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 6 postretirement benefit obligation 52 2003 medicare prescription drug improvement modernization act “act” signed law united states company elected defer accounting effect act permitted fasb staff position fas 1061 therefore benefit obligations reported herein company’s postretirement benefit plans reflect impact act specific authoritative guidance accounting federal subsidy related act pending issued could require company change previously reported information us plan assets fair value asset allocation us retirement plan december 31 2003 2002 target allocation 2004 follows asset allocation postretirement health care benefit trusts december 31 2003 2002 target allocation 2004 follows company’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns consistent acceptable level overall portfolio market value risk company defined contribution profitsharing plan covering substantially fulltime domestic employees completed one year service annual contribution determined formula based company’s income shareholders’ equity participants’ compensation profitsharing expense totaled 98 80 2002 2001 respectively profit sharing contribution 2003 determined formula described company longer make contributions plan effective 2004 income taxes us foreign operations contributed income taxes follows components income tax expensebenefit follows difference income taxes based us statutory tax rate company’s income tax expense due following lower rates jurisdictions net primarily attributable certain employment capital investment actions taken company result income manufacturing activities jurisdictions subject lower tax rates 2020 due tax loss 2003 company recorded 450 tax refund receivable december 31 2003 december 31 2003 2002 company total deferred tax assets 862 834 respectively deferred tax liabilities 622 552 respectively valuation allowances 61 december 31 2003 valuation allowances significant december 31 2002 significant deferred tax assets december 31 2003 2002 operating costs employee termination costs currently deductible tax purposes totaled 523 555 respectively significant deferred tax liabilities december 31 2003 2002 depreciation differences 318 286 respectively retirement plans 76 101 respectively deferred taxes provided undistributed earnings foreign subsidiaries considered permanent investments december 31 2003 approximated 11100 determining tax liability would arise earnings remitted practicable net consolidated income tax payments 2003 2002 2001 196 584 592 respectively december 31 2003 us internal revenue service irs completed examination company’s tax returns years 1988 unresolved issues outstanding years irs examination years 1989 1992 expected completed 2004 time anticipated irs commence examination years 1993 1996 see “legal environmental regulatory matters” footnote regarding tax matter company believes litigation probable consent decree may 17 2002 company announced reached agreement fda consent decree resolve issues involving company’s compliance current good manufacturing practices cgmp certain manufacturing facilities new jersey puerto rico us district court district new jersey approved entered consent decree may 20 2002 terms consent decree company agreed pay total 500 us government two equal installments 250 first installment paid may 2002 second installment paid may 2003 previously reported company accrued 500 provision consent decree fourth quarter 2001 consent decree requires company complete number actions event certain actions agreed upon consent decree satisfactorily completed time fda may assess payments deadline missed consent decree required company develop submit fda’s concurrence comprehensive cgmp work plans company’s manufacturing facilities new jersey puerto rico covered decree company received fda concurrence proposed cgmp work plans may 14 2003 cgmp work plans contain number significant steps whose timely satisfactory completion subject payments 15 thousand per business day deadline missed payments may exceed 25 2002 50 years 2003 2004 2005 payments subject overall cap 175 connection discussions fda regarding company’s cgmp work plans pursuant terms decree company fda entered letter agreement dated april 14 2003 letter agreement company fda agreed extend six months time period company may incur payments described respect certain significant steps whose proposed due dates december 31 2005 letter agreement increase yearly overall caps payments described addition decree requires company complete programs revalidation finished drug products bulk active pharmaceutical ingredients manufactured covered manufacturing facilities company required consent decree complete revalidation programs bulk active pharmaceutical ingredients september 30 2005 finished drugs december 31 2005 general timely satisfactory completion revalidations subject payments 15 thousand per business day deadline missed subject caps described however product scheduled revalidation certified validated last date validation schedule fda may assess payment 246 percent net domestic sales uncertified product validation certified general product scheduled revalidation consent decree certified within six months scheduled date company must cease production product certification obtained completion significant steps work plans completion revalidation programs subject thirdparty expert certification must accepted fda consent decree provides company believes may able meet deadline company right upon showing good cause request extensions deadlines connection cgmp work plans revalidation programs however guarantee fda grant requests although company believes made significant progress meeting obligations consent decree possible 1 company may fail complete significant step revalidation prescribed deadline 2 third party expert may certify completion significant step revalidation 3 fda may disagree expert’s certification significant step revalidation case possible fda may assess payments described company would expense payments assessed decree incurred also noted “legal environmental regulatory matters” footnote company received notice false claims complaint brought individual purporting act behalf us government approximately 25 pharmaceutical companies alleging pharmaceutical companies defrauded united states made sales various federal governmental agencies drugs allegedly manufactured manner comply current good manufacturing practices company defendants filed motion dismiss action segment information company three reportable segments prescription pharmaceuticals consumer health care animal health segment sales profit data follow consistent company’s current management reporting structure established second quarter 2003 prior period information presented herein restated comparable basis prescription pharmaceuticals segment discovers develops manufactures markets human ethical pharmaceutical products consumer health care segment develops manufactures markets otc foot care sun care products animal health segment discovers develops manufactures markets animal health products net sales segment profit segment 1 2003 corporate includes charges 164 related voluntary early retirement program see “special charges” footnote additional information estimated charges relate reportable segments follows prescription pharmaceuticals 103 consumer health care 8 animal health 4 corporate 49 corporate also includes provisions increase litigation reserves asset impairment charges interest income expense foreign exchange gains losses headquarters expenses miscellaneous items accounting policies used segment reporting described “summary significant accounting policies” net sales major therapeutic category company subsidiaries 40 countries outside united states sales outside united states comprised 57 percent 4775 consolidated net sales 2003 43 percent 4419 2002 39 percent 3789 2001 single foreign country except france japan italy accounted 5 percent consolidated net sales past three years france accounted 8 percent 691 6 percent 613 5 percent 459 consolidated net sales 2003 2002 2001 respectively japan accounted 5 percent 414 5 percent 524 3 percent 320 consolidated net sales 2003 2002 2001 respectively italy accounted 5 percent 436 3 percent 339 3 percent 266 consolidated net sales 2003 2002 2001 respectively net sales geographic area net sales presented geographic area company’s customers located 2003 2002 2001 8 percent 667 21 percent 2092 16 percent 1568 respectively consolidated net sales made mckesson corporation major pharmaceutical health care products distributor also 2003 2002 2001 9 percent 771 11 percent 1101 12 percent 1160 respectively consolidated net sales made amerisourcebergen corporation major pharmaceutical health care products distributor longlived assets geographic location longlived assets shown geographic location primarily property sales products comprising 10 percent company’s us international sales year ended december 31 2003 follows company disaggregate assets segment basis internal management reporting therefore information presented legal environmental regulatory matters background company responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law company alleged potentially responsible party prp company estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps company records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated company also involved various claims legal proceedings nature considered normal business including product liability cases company adjusts accrued liabilities reflect current best estimate probable loss exposure best estimate determinable company accrues minimum amount within probable range liability recorded liabilities matters december 31 2003 related expenses incurred 12 months ended december 31 2003 material expected insurance recoveries considered determining costs environmentalrelated liabilities management believes except matters discussed remainder section remote time material liability excess amounts accrued incurred respect matters discussed remainder section except noted practicable estimate range reasonably possible loss reserve included financial statements resolution matters discussed remainder section individually aggregate could material adverse effect company’s results operations financial condition management reviews status matters discussed remainder section ongoing basis time may settle otherwise resolve terms conditions management believes best interests company aware settlements matters types set forth remainder section particular “investigations” frequently involve fines andor penalties material financial condition results operations entity entering settlement assurances company prevail matters settlements reached acceptable terms including scope release provided amounts exceed amounts reserved even acceptable settlement reached assurance investigations litigations commenced raising similar type issues potentially exposing company additional material liabilities company cannot predict timing resolution matters outcomes environmental residents vicinity publicly owned wastewater treatment plant barceloneta puerto rico filed two lawsuits plant owner operator numerous companies discharge plant including subsidiary company damages injunctive relief relating odors allegedly coming plant connecting sewers one lawsuits class action claiming damages 600 trial date set cases matter submitted mediation november 20 2003 received general notice potential liability epa addressed arnoscholl’s adhesive tapes inc former subsidiary company relating lake culmet cluster site chicago illinois several hundred potentially responsible parties site 2003 scheringplough responded information request new jersey department environmental protection relating contamination lower passaic river basin scheringplough denied connection contamination late september department directed 66 prps 18 contaminated sites assess restore natural resource damage lower passaic river basin department name scheringplough prp however department sent scheringplough letter received september 24 2003 stating company “may legally responsible damages natural resources” state department adopted regulations covering liability calculated making difficult accurately predict ultimate extent company’s exposure patent matters claritin patents february 1998 geneva pharmaceuticals inc geneva submitted abbreviated new drug application anda us fda seeking market generic claritin tablets expiration 2004 company’s desloratadine compound patent company believes protects claritin geneva alleged desloratadine compound patent invalid patent material company’s business march 1998 company filed suit federal court seeking ruling geneva’s anda submission constitutes infringement company’s desloratadine compound patent challenge patent without merit addition geneva 1998 2003 following companies made similar anda submissions generic claritin tablets zenith goldline pharmaceuticals mylan pharmaceuticals inc teva pharmaceuticals usa inc teva ranbaxy pharmaceuticals inc ranbaxy genpharm incorporated l perrigo company perrigo following companies made similar anda submissions generic claritin syrup teva copley pharmaceuticals inc novex pharma alpharma uspd inc taro pharmaceuticals usa inc morton grove pharmaceuticals inc perrigo andrx pharmaceuticals llc andrx impax laboratories inc impax made similar anda submissions generic claritind 12 hour claritind 24 hour formulations ranbaxy made similar anda submission generic claritind 24 hour formulation esi lederle inc lederle subsidiary wyeth made similar anda submission generic claritin reditab formulation following companies submitted “paper” new drug applications “paper” ndas section 505 b2 federal food drug cosmetic act seeking market generic otc form claritin prior expiration company’s desloratadine compound patent whitehallrobins healthcare division wyeth otc reditab formulation mcneil consumer healthcare mcneil otc tablets perrigo otc tablets case company filed suit federal court seeking ruling applicable anda “paper” nda submission proposed marketing generic prescription otc product constitutes infringement company’s desloratadine compound patent challenge patent without merit august 8 2002 federal district court new jersey ruled motions summary judgment finding certain claims desloratadine compound patent anticipated prior patent thus valid august 1 2003 district court’s decision sustained appellate court october 28 2003 appellate court denied company’s petition rehearing rulings actions defendants infringement desloratadine compound patent manufacturers loratadine proceed company also asserted impax’s andrx’s andas generic claritind 24 hour formulations infringe company’s patent covering claritind 24 hour formulation october 2003 company settled litigation impax andrx licensed patent rebetol patents august 2001 geneva pharmaceuticals technology corp geneva pharmaceuticals three rivers pharmaceuticals llc three rivers january 2002 teva submitted separate andas fda seeking market generic forms 200 mg rebetol ribavirin capsules united states expiration company’s patents covering ribavirin formulations geneva pharmaceuticals three rivers teva asserted infringe company’s rebetol patents andor patents invalid rebetol patents material company’s business september 2001 october 2001 march 2002 company filed suits federal court seeking rulings anda submissions geneva pharmaceuticals three rivers teva respectively constitute infringement company’s patents challenges company’s patents without merit 2003 company entered separate licensing agreements three rivers geneva pharmaceuticals teva settled patent litigation company three rivers teva geneva pharmaceuticals granted three rivers geneva pharmaceuticals teva nonexclusive nonsublicensable license company’s us ribavirin patents agreements subject dismissal three rivers’ geneva pharmaceuticals’ teva’s reported patent litigation ribapharm inc subsidiary valeant pharmaceuticals international ribapharm litigation dismissed upon defendants’ motion summary judgment july 16 2003 ribapharm appealed summary judgment decision ribapharm also petitioned fda deny approval three rivers geneva pharmaceuticals teva products fda acted ribapharm petition date report prime pac prrs patent january 2000 jury found company’s prime pac prrs porcine respiratory reproductive syndrome vaccine infringed patent owned boehringer ingelheim vetmedica inc injunction issued august 2000 barring sales company’s vaccine company’s posttrial motions either reversal jury’s verdict new trial denied september 2001 company appealed verdict affirmed appellate court february 2003 litigation damages phase case ongoing trial determine damages scheduled may 3 2004 investigations pennsylvania investigation october 1999 company received subpoena us attorney’s office eastern district pennsylvania pursuant health insurance portability accountability act 1996 concerning company’s contracts pharmacy benefit managers pbms managed care organizations provide disease management services connection marketing pharmaceutical products appears subpoena one number addressed industry participants part inquiry among things pharmaceutical marketing practices government’s inquiry focused among things whether company’s disease management marketing programs arrangements comply federal health care laws whether value disease management programs marketing programs arrangements included calculation rebates government company cooperating investigation march 2002 us attorney’s office began issuing grand jury subpoenas grand jury investigation appears focused one transactions managed care organizations government believes company offered provided deeply discounted pharmaceutical products known “nominally priced” products generally excluded medicaid rebate calculations free discounted disease management services marketing programs arrangements delivered value order place retain one company’s major pharmaceutical products managed care organization’s formulary grand jury appears investigating among things whether transactions described conduct relating thereto violated federal antikickback statutes ii whether value items services described included company’s calculation medicaid rebates outcome investigations could include commencement civil andor criminal proceedings involving substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs company cannot predict whether investigations affect marketing practices sales 2003 third quarter company increased litigation reserves related investigation investigations described us attorney’s office district massachusetts 350 increase reserves reflects maturing discussions offices particularly eastern district pennsylvania adjustment company’s estimate minimum liability relating investigations compliance us generally accepted accounting principles gaap companies required estimate recognize minimum liability loss probable better estimate loss made fourth quarter 2002 company increased litigation reserves 150 matters company cannot predict timing resolution matters company notes total reserves reflect estimate final settlement adjudication matters could possibly less could materially exceed aggregate liability accrued company could materially adverse effect operations financial condition company awp investigations company responding investigations department health human services department justice committee energy commerce us house representatives certain states certain industry company practices regarding average wholesale price awp investigations include department justice review merits federal action filed private entity behalf united states us district court southern district florida well investigation us attorney’s office district massachusetts regarding inter alia whether awp set pharmaceutical companies certain drugs improperly exceeds average prices paid dispensers consequence results unlawful inflation certain government drug reimbursements based awp march 2001 company received subpoena massachusetts attorney general’s office seeking documents concerning use awp pricing andor marketing practices company cooperating investigations outcome investigations could include imposition substantial fines penalties injunctive administrative remedies massachusetts investigation us attorney’s office district massachusetts also investigating whether company’s sales product manufactured private label arrangement managed care organization included company’s medicaid best price calculations early november 2002 company served two additional grand jury subpoenas us attorney district massachusetts among information subpoenas seek broad range information concerning company’s sales marketing clinical trial practices programs respect intron rebetron temodar company’s sales marketing contacts managed care organizations doctors company’s offering provision grants honorariums items services value managed care organizations physician groups doctors educational institutions company understands investigation focused whether certain sales marketing clinical trial practices conduct related thereto certain instances relate use one abovementioned products indications fda approval obtained socalled “offlabel” uses violation federal laws regulations respect offlabel promotional activities investigation also appears focus whether drug samples clinical trial grants items services value given providers incentivize prescribe one abovementioned products including “offlabel” uses violation federal health care antikickback laws company implemented certain changes sales marketing clinical trial practices continuing review practices ensure compliance relevant laws regulations company cooperating investigations future sales intron rebetron temodar may adversely affected company cannot time predict ultimate impact sales outcome investigations could include commencement civil andor criminal proceedings involving imposition substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs 2003 third quarter company increased litigation reserves related investigations us attorney’s office district massachusetts described paragraph immediately preceding investigation described us attorney’s office eastern district pennsylvania 350 increased litigation reserves reflect adjustment company’s estimate minimum liability relating investigations compliance gaap companies required estimate recognize minimum liability loss probable better estimate loss made fourth quarter 2002 company increased litigation reserves 150 matters company notes total reserves reflect estimate final settlement adjudication matters could possibly less could materially exceed aggregate liability accrued company could materially adverse effect operations financial condition company cannot predict timing resolution matters outcomes reported 8k filed may 30 2003 scheringplough disclosed connection abovedescribed investigations us attorney’s office district massachusetts sales marketing clinical trial practices among matters may 28 2003 schering corporation wholly owned significant operating subsidiary scheringplough received letter “boston target letter” office advising schering corporation including subsidiaries divisions target federal criminal investigation respect four areas 1 providing remuneration drug samples clinical trial grants items services value managed care organizations physicians others induce purchase schering pharmaceutical products payment made federal health care programs 2 sale misbranded unapproved drugs company understands mean drugs promoted indications approval us fda obtained socalled “offlabel uses” 3 submitting false pharmaceutical pricing information government purposes calculating rebates required paid medicaid program failing include prices products repackaging arrangement managed care customer well prices free nominally priced goods provided customer induce purchase schering products 4 document destruction obstruction justice relating government’s investigation “target” defined department justice guidelines person prosecutor grand jury substantial evidence linking commission crime judgment prosecutor putative defendant us attorney’s manual section 911151 consumer products matter us department justice antitrust division investigating whether company’s consumer products division entered agreement another company lower commission rate consumer products broker february 2003 antitrust division served grand jury subpoena company seeking documents first time company cooperating investigation nitrodur investigation august 2003 company received civil investigative subpoena issued office inspector general us department health human services seeking documents concerning company’s classification nitrodur medicaid rebate purposes company’s use nominal pricing bundling product sales company cooperating investigation appears subpoena one number addressed pharmaceutical companies concerning inquiry issues relating payment government rebates securities class action litigation february 15 2001 company stated press release fda conducting inspections company’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices primarily relating production processes controls procedures next day february 16 2001 lawsuit filed us district court district new jersey company certain named officers alleging violations sections 10b 20a securities exchange act 1934 rule 10b5 promulgated thereunder additional lawsuits tenor followed complaints consolidated one action us district court district new jersey lead plaintiff florida state board administration appointed court july 2 2001 october 11 2001 consolidated amended complaint filed alleging violations described second sentence paragraph purporting represent class shareholders purchased shares company stock may 9 2000 february 15 2001 company’s motion dismiss consolidated amended complaint denied may 24 2002 october 10 2003 court certified shareholder class discovery ongoing addition lawsuits described immediately preceding paragraph two lawsuits filed us district court district new jersey two lawsuits filed new jersey state court company nominal defendant certain officers directors former director seeking damages behalf company including disgorgement trading profits made defendants allegedly obtained basis material nonpublic information complaints four lawsuits relate issues described company’s february 15 2001 press release allege failure disclose material information breach fiduciary duty directors one federal court lawsuits also includes allegations related investigations us attorney’s offices eastern district pennsylvania district massachusetts ftc’s administrative proceeding company lawsuit state texas warrick pharmaceuticals warrick company’s generics subsidiary described herein lawsuits shareholder derivative action purports assert claims behalf company demand made board directors decision made whether company pursue claims august 2001 plaintiffs new jersey state court shareholder derivative actions moved dismiss voluntarily complaints actions motions granted two shareholder derivative actions pending us district court district new jersey consolidated one action early stages january 2 2002 company received demand letter dated december 26 2001 law firm involved derivative actions described behalf shareholder also involved derivative actions demanding board directors bring claims behalf company based allegations substantially similar alleged derivative actions january 22 2002 board directors adopted board resolution establishing evaluation committee consisting three directors investigate review analyze facts circumstances surrounding allegations made demand letter consolidated amended derivative action complaint described reserving full board authority discretion exercise business judgment respect proper disposition demand committee engaged independent outside counsel advise issued report findings investigation independent directors board late october 2002 report determined shareholder demand refused finding liability part officers directors november 2002 full board adopted recommendation evaluation committee august 9 2001 prescription access litigation project pal bostonbased group formed 2001 litigate drug companies issued press release stating pal members filed lawsuit new jersey state court company december 2001 company served amended complaint case suit pal purports class action alleges among things company’s directtoconsumer advertising falsely depicts benefits claritin violation new jersey consumer fraud act february 2002 company filed motion dismiss case may 2002 court dismissed complaint entirety failure state claim plaintiffs’ appeal denied new jersey state court plaintiffs requested new jersey supreme court hear case request denied ending litigation company defendant number purported nationwide state class action lawsuits plaintiffs seek refund purchase price laxatives phenylpropanolaminecontaining coughcold remedies “ppa products” purchased pharmaceutical manufacturers codefendants lawsuits general plaintiffs claim would purchased would paid less products known certain defects medical risks attendant use litigation claims relating company’s ppa products courts national class action suit several state class action suits denied certification dismissed suits similar application dismiss new jersey remaining statewide class action suit involving company pending approximately 122 individual lawsuits relating laxative products ppa products recalled albuterolvancerilvancenase inhalers also pending company seeking recovery personal injuries death number lawsuits punitive damages claimed march 31 2003 company served putative class action complaint filed us district court new jersey alleging company richard jay kogan resigned chairman board november 13 2002 retired chief executive officer president director company april 20 2003 company’s employee savings plan administrator breached fiduciary obligations certain participants plan allegations primarily relate disclosures company’s good manufacturing practices issues discussed earlier “securities class action litigation” section relation company’s disclosures consent decree fda related matters disclosures meetings investors week september 30 2002 communications discussed “sec inquiry related litigation” may 2003 company served second putative class action complaint filed court allegations nearly identical complaint filed march 31 2003 october 6 2003 consolidated amended complaint filed names additional defendants following directors eugene mcgrath donald miller carl mundy patricia russo kathryn turner two former directors james wood regina herzlinger corporate officers consolidated amended complaint also contains allegations associated boston target letter described “investigations” section footnote company filed motion dismiss complaint august 18 2003 lawsuit filed new jersey superior court chancery division union county served company nominal defendant company’s outside directors alleging breach fiduciary duty directors relating company’s receipt boston target letter described “investigations” section footnote action temporarily stayed pending adjudication separate related action framed shareholder request access company’s books records seeking documents information relating massachusetts investigation antitrust ftc matters company defendant numerous antitrust actions commenced starting 1993 state federal courts independent retail pharmacies chain retail pharmacies consumers plaintiffs allege price discrimination andor conspiracy company defendants restrain trade jointly refusing sell prescription drugs discounted prices plaintiffs company february 1996 agreed settle federal class action behalf approximately twothirds retail pharmacies united states total 22 paid full us district court illinois approved settlement federal class action 1996 1997 seventh circuit court appeals dismissed appeals settlement subject review april 1997 certain plaintiffs federal class action commenced another purported class action us district court illinois company defendants settled previous federal class action complaint alleges defendants conspired implement settlement commitments following settlement discussed district court denied plaintiffs’ motion preliminary injunction hearing company either settled dismissed motion state court retailer consumer actions settlement amounts material company federal court illinois remanded conspiracy portion cases retailers opted class action back district courts filed cases consolidated federal district court brooklyn new york federal court illinois jurisdiction robinsonpatman portion cases trial conspiracy claims set begin october 2004 plaintiffs antitrust actions generally seek treble damages unspecified amount injunction allegedly unlawful conduct april 2 2001 ftc started administrative proceeding company upshersmith inc upshersmith lederle complaint alleges anticompetitive effects settlement patent lawsuits company lederle company upshersmith lawsuits settled related generic versions kdur company’s longacting potassium chloride product subject andas filed lederle upshersmith june 2002 administrative law judge overseeing case issued decision patent litigation settlements complied law respects dismissed claims company appeal decision full commission filed ftc staff december 18 2003 full commission issued opinion reversed 2002 decision administrative law judge found violation antitrust laws ruling instead company’s settlements fact violate laws ftc’s decision involve monetary penalty company appealed decision federal court appeals kdur potassium chloride supplement used cardiac patients following commencement ftc administrative proceeding alleged class action suits filed behalf direct indirect purchasers kdur company upshersmith lederle federal state courts suits allege essentially facts claim violations federal state antitrust laws well state statutory andor common law causes action motion dismiss actions pending pricing matters third quarter 2000 warrick pharmaceuticals warrick company’s generics subsidiary sued state texas june 2002 company subsidiary schering corporation added defendants lawsuit alleges warrick supplied state false reports wholesale prices caused state pay medicaid claims prescriptions warrick’s albuterol sulfate solution inhaler higherthanjustified level state seeks damages approximately 106 warrick including treble damages penalties trial date april 12 2004 set outcome litigation could result imposition fines penalties injunctive remedies case goes trial assurances damages sought state exceed amount set forth state’s petition december 2001 pal filed class action suit federal court massachusetts company september 2002 consolidated complaint filed court result coordination multidistrict litigation panel federal court awp cases throughout country consolidated complaint alleges company warrick conspired providers defraud consumers reporting fraudulently high awps prescription medications reimbursed medicare thirdparty payers complaint seeks declaratory judgment unspecified damages including treble damages included pal litigation described prior paragraph lawsuits allege company warrick reported inflated awps prescription pharmaceuticals thereby caused state federal entities thirdparty payers make excess reimbursements providers actions also allege company warrick failed report accurate prices medicaid rebate program thereby underpaid rebates states actions began october 2001 brought state attorneys general private plaintiffs nonprofit organizations employee benefit funds allege violations federal state law including fraud antitrust racketeer influenced corrupt organizations act rico claims addition warrick company defendants number lawsuits state courts actions generally brought states andor political subdivisions seek unspecified damages including treble punitive damages sec inquiries related litigation sec investigating compliance polish subsidiaries certain pharmaceutical companies us foreign corrupt practices act 1977 pursuant order dated november 13 2003 company voluntarily produced documents related polish subsidiary subsidiaries countries company continues cooperate sec’s requests company also cooperating inquiries police katowice poland asking related information september 9 2003 sec company announced settlement sec enforcement proceeding company richard jay kogan former chairman chief executive officer regarding meetings held investors week september 30 2002 communications without admitting denying allegations company agreed commit future violations regulation fd related securities laws paid civil penalty 1 million mr kogan paid civil penalty 50 thousand federal putative class actions filed company mr kogan regarding meetings held investors week september 30 2002 communications consolidated pursuant consolidation amended complaint dated march 13 2003 filed alleging violations sections 10b 20a securities exchange act 1934 relating alleged disclosures made meetings mentioned paragraph company filed motion dismiss class actions may 6 2003 plaintiffs sought leave court thereafter filed second amended complaint october 14 2003 company moved dismiss second amended complaint september 25 2003 lawsuit filed new jersey superior court union county richard jay kogan company’s outside directors alleging breach fiduciary duty fraud deceit negligent misrepresentation relating alleged disclosures made meetings mentioned company removed case federal court motion remand state court pending matters company subject pharmacovigilance reporting requirements many countries jurisdictions including united states european union eu member states requirements differ jurisdiction include requirements reporting adverse events occur patient using particular drug order alert manufacturer drug governmental agency potential problems pharmacovigilance inspections officials british french medicines agencies conducted request european agency evaluation medicinal products emea serious deficiencies reporting processes identified company taking urgent actions rectify deficiencies quickly possible company know action emea national authorities take response findings possible actions include inspections demands improvements reporting systems criminal sanctions company andor responsible individuals changes conditions marketing authorizations company’s products april 2003 company received notice false claims act complaint brought individual purporting act behalf us government approximately 25 pharmaceutical companies us district court northern district texas complaint alleges pharmaceutical companies including company defrauded united states made sales various federal governmental agencies drugs allegedly manufactured manner comply current good manufacturing practices company defendants filed motion dismiss action july 23 2003 tax matters october 2001 irs auditors asserted reports company liable additional tax 1990 1992 tax years reports allege two interest rate swaps company entered unrelated party recharacterized loans affiliated companies resulting additional tax income tax sought irs auditors relating recharacterization approximately 195 plus interest depending upon court company chooses litigate case may required pay tax possibly interest prior litigation company estimates interest approximately 280 company prevail litigation amounts paid prior litigation would returned company plus accrued interest company could also choose litigate case court would require payment tax interest prior litigation management believes probable matter litigated management also believes tax reserves sufficient absorb loss resulting unfavorable outcome litigation independent auditors’ report board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries december 31 2003 2002 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility corporation’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 19 2004 scheringplough corporation subsidiaries quarterly data unaudited 1 effective 2003 company presenting collaboration merck co inc merck following equity method accounting method company records share operating profits less share research development costs “equity incomeloss cholesterol joint venture” operating profits venture included net sales alliance revenue first three quarters 2003 reclassified “equity incomeloss cholesterol joint venture” also company’s share venture’s research development costs reported “research development” previous quarters 2003 reclassified “equity incomeloss cholesterol joint venture” second quarter 2003 company earned milestone merck 20 reported “other income expense net” second quarter amount also reclassified “equity incomeloss cholesterol joint venture” prior years affected new presentation see “equity income cholesterol joint venture” footnote notes consolidated financial statements additional information see “special charges” footnote notes consolidated financial statements additional information relating special charges cost sales 2002 fourth quarter includes favorable adjustment 92 reflect settlement arbitration relating among things royalty payments biogen full year impact material fourth quarter adjustment partially offset related accruals made previous three quarters 2002 income expense net 2002 fourth quarter includes gain 80 sale us marketing rights suboxone subutex company’s common shares listed principally traded new york stock exchange approximate number holders record common shares january 31 2004 44000 item 9item 8 financial statements supplementary data scheringplough corporation subsidiaries statements consolidated operations accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity accompanying notes integral part consolidated financial statements notes consolidated financial statements dollars millions except per share figures 1 summary significant accounting policies principles consolidation consolidated financial statements include scheringplough corporation subsidiaries company intercompany balances transactions eliminated certain prior year amounts reclassified conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates use assumptions affect certain reported amounts disclosures actual amounts may differ equity method accounting company accounts interest merck co inc merck joint venture using equity method accounting company significant influence operating financial policies accordingly company’s share earnings merck joint venture included consolidated net lossincome revenue sales vytorin zetia recognized joint venture title risk loss passed customer equity income joint venture excludes profit arising transactions company joint venture time underlying profit realized joint venture transaction party company merck see note 3 “equity income cholesterol joint venture” information regarding joint venture cash equivalents cash equivalents include operating cash highly liquid investments generally original maturities three months less included cash equivalents approximately 72 40 restricted cash december 31 2004 2003 respectively investments carried market value classified availableforsale inventories valued lower cost market cost determined using lastin firstout lifo method substantial portion inventories located us cost inventories determined firstin firstout method fifo depreciation property equipment depreciation provided estimated useful lives properties generally use straightline method useful lives property follows depreciation expense 340 304 250 2004 2003 2002 respectively company reviews carrying value property equipment indications impairment accordance statement financial accounting standard sfas 144 accounting impairment disposal longlived assets foreign currency translation net assets company’s foreign subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation adjustment account included comprehensive income remaining foreign subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income notes consolidated financial statements continued exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation adjustment account exchange gains losses included income accumulated comprehensive income accumulated comprehensive income primarily consists accumulated foreign currency translation adjustment account unrealized gains losses securities classified available sale minimum pension liability adjustment components accumulated comprehensive income december 31 gross unrealized pretax gains investments 2004 2003 5 20 respectively unrealized losses immaterial revenue recognition company’s pharmaceutical products sold direct purchasers eg wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies well indirect purchasers market participants eg managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers company recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue company estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period estimates recorded prior periods reevaluated part process reliable estimates items cannot made company defers recognition revenue earnings per common share 2004 diluted loss per common share excludes effect shares issuable deferred stock units exercise stock options impact conversion mandatory convertible preferred shares including securities earnings per share calculation would antidilutive would result lower loss per share 2003 diluted loss per common share excludes effect shares issuable deferred stock units exercise stock options including securities would antidilutive 2002 diluted earnings per common share computed dividing income sum weightedaverage number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options periods presented basic earnings per common share computed dividing incomeloss available common shareholders weightedaverage number common shares outstanding notes consolidated financial statements continued shares used calculate basic diluted earnings per common share reconciled follows year ended december 31 equivalent 86 million 77 million 47 million common shares issuable company’s stock incentive plans excluded computation diluted earnings per share december 31 2004 2003 2002 respectively effect would antidilutive addition 27 million common shares issuable upon conversion company’s mandatory convertible preferred stock excluded computation diluted loss per share effect would antidilutive goodwill intangible assets sfas 142 “goodwill intangible assets” requires intangible assets acquired either individually group assets initially recognized measured based fair value intangible finite life amortized useful life intangible indefinite life including goodwill amortized company evaluates goodwill impairment using fair valuebased test goodwill determined impaired written estimated fair value company’s goodwill primarily related animal health business components intangible assets net follows december 31 intangible assets amortized straightline method respective useful lives residual value intangible assets estimated zero 2004 company recorded intangible assets related license copromotion agreements related levitra avelox 140 amounts amortized effective useful lives agreements ranging seven 14 years also 2004 net carrying amount patents licenses reduced approximately 118 result bristolmyers squibb’s reacquisition copromotion rights tequin us 2003 company paid 11 patent licensing rights costs amortized approximately nine years amortization expense related intangible assets 2004 2003 2002 42 55 66 respectively intangible assets reviewed determine recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review accounting stockbased compensation currently company accounts stock compensation arrangements using intrinsic value method stockbased employee compensation cost reflected net lossincome company’s deferred stock units stock options granted plans exercise price equal market value underlying common stock date notes consolidated financial statements continued grant company’s deferred stock units stock options issued company’s stock incentive plans see note 12 december 2004 financial accounting standards board fasb issued sfas 123r revised 2004 “share based payment” statement 123r requires companies recognize compensation expense amount equal fair value sharebased payments granted employees companies required implement sfas july 2005 recognizing compensation sharebased grants made july 1 2005 unvested portion sharebased grants made prior july 1 2005 restatement previously issued statements allowed required company currently evaluating various implementation options related financial impacts available sfas 123r following table reconciles net lossincome available common shareholders basicdiluted lossearnings per common share reported pro forma net lossincome available common shareholders basicdiluted lossearnings per common share company expensed grantdate fair value stock options deferred stock units permitted sfas 123 “accounting stockbased compensation” weightedaverage fair value options granted 2004 2003 2002 615 529 1125 respectively fair values estimated using blackscholes optionpricing model based following assumptions notes consolidated financial statements continued 2 special charges components special charges year ended december 31 follows litigation charges 2003 2002 litigation reserves increased 350 150 respectively primarily result investigations company’s sales marketing practices see note 16 additional information employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program approximately 850 employees retired yearend 2004 approximately 50 employees staggered retirement dates 2005 total cost program approximately 191 comprised increased pension costs 108 increased postretirement health care costs 57 vacation payments 4 costs related accelerated vesting stock grants 22 employees staggered retirement dates 2005 amounts recognized charge employees’ remaining service periods delayed expense recognition follows guidance sfas 146 accounting costs associated exit disposal activities amounts recognized relating program years ended december 31 2004 2003 20 164 respectively termination costs associated verp totaled 99 15 2004 2003 respectively asset impairment related charges asset impairment charges recognized accordance sfas 142 “goodwill intangible assets” sfas 144 “accounting impairment disposal longlived assets” year ended december 31 2004 company recognized asset impairment charges 27 based discounted cash flows charges 7 related primarily shutdown small european researchanddevelopment facility year ended december 31 2003 company recognized asset impairment charges related following • asset impairment charges totaling 26 recognized based discounted cash flow analysis related facilities equipment two company’s manufacturing sites • asset impairment charge 27 based discounted cash flows recognized related intangible asset licensed cancer therapy drug sold countries outside us • impairment charge 17 related trade name company’s highend sun care brand recognized based discounted cash flows notes consolidated financial statements continued summary selected special charges following summarizes activity accounts related employee termination costs asset impairment charges balance december 31 2004 represents distributions made yearend 2004 3 equity income cholesterol joint venture may 2000 company merck entered two separate agreements jointly develop market us 1 two cholesterol lowering drugs 2 allergyasthma drug december 2001 cholesterol agreement expanded include countries world except japan general companies agreed collaborative activities agreements would operate virtual mode maximum degree possible relying respective infrastructures two companies agreements generally provide equal sharing research development costs copromotion approved products company cholesterol agreements provide company merck jointly develop ezetimibe marketed zetia us asia ezetrol europe oncedaily monotherapy ii coadministration statin drug iii oncedaily fixedcombination tablet ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine combination medication ezetimibesimvastatin marketed vytorin us inegy many international countries zetia ezetrol ezetimibe vytorin inegy combination ezetimibesimvastatin approved use us launched several international markets company utilizes equity method accounting joint venture cholesterol agreements provide sharing net incomeloss based upon percentages vary product sales level country us market scheringplough receives greater share profits first 300 zetia sales 300 zetia sales companies share profits equally scheringplough’s allocation joint venture income increased milestones earned either partner’s share joint venture’s net incomeloss subject reduction partner fails perform specified minimum number physician details particular country partners agree annually minimum number physician details country notes consolidated financial statements continued partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement partner physician details set annual basis reimbursed amount equal partner’s physician details multiplied contractual fixed fee scheringplough reports receipt reimbursement part equity income cholesterol joint venture us gaap amount represent reimbursement specific incremental identifiable costs company’s detailing cholesterol products markets addition reimbursement amount per physician detail reflective scheringplough’s joint venture sales force effort scheringplough’s sales forcerelated infrastructure costs per physician detail generally estimated higher costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners following information provides summary components company’s equity income cholesterol joint venture year ended december 31 2004 2003 company earned milestones 7 20 respectively relating approval ezetimibesimvastatin mexico 2004 certain european approvals ezetimibe 2003 certain conditions specified agreements merck could pay additional milestones company totaling 125 equity income joint venture excludes profit arising transactions company joint venture time underlying profit realized joint venture transaction party company merck due virtual nature joint venture company incurs substantial costs selling general administrative costs reflected “equity income cholesterol joint venture” borne overall cost structure company costs reported respective line items statements consolidated operations cholesterol agreements provide jointly owned facilities products resulting joint venture manufactured facilities owned either merck company discussed company accounts merck scheringplough cholesterol partnership equity method accounting company’s net sales include sales joint venture prior 2003 joint venture research development phase company’s share research development expense 2002 69 reported research development statements consolidated operations allergyasthma agreement provides development marketing oncedaily fixedcombination tablet containing claritin singulair merck’s oncedaily leukotriene receptor antagonist treatment asthma seasonal allergic rhinitis january 2002 merck scheringplough respiratory joint venture reported results phase iii clinical trials fixedcombination tablet notes consolidated financial statements continued containing claritin singulair phase iii study demonstrate sufficient added benefits treatment seasonal allergic rhinitis claritin singulair combination tablet approval country remains clinical development 4 expense income net components expense income net follows net 2002 includes gain 80 sale us marketing rights suboxone subutex cash paid interest net amounts capitalized 166 46 26 2004 2003 2002 respectively 5 income taxes components consolidated lossincome income taxes years ended december 31 follows components income tax expense benefit years ended december 31 follows notes consolidated financial statements continued american jobs creation act 2004 act enacted october 22 2004 one provision act effectively reduces tax rate qualifying repatriation earnings held foreignbased subsidiaries 525 percent normally repatriations would taxed rate 35 percent fourth quarter 2004 company made decision intends repatriate approximately 94 billion act maximum amount foreign earnings qualifying reduced rate intended repatriation earnings trigger us federal tax payment 2005 approximately 417 tax charge 494 less 77 foreign tax credits state tax payment approximately 6 amounts reflected current income tax expense prior act company provide deferred taxes undistributed earnings foreign subsidiaries company intended indefinitely reinvest undistributed earnings foreign subsidiaries company intent indefinitely reinvest undistributed earnings foreign subsidiaries repatriated act therefore provided deferred taxes approximately 2200 undistributed foreign earnings determining tax liability would arise earnings remitted practicable amount would depend number factors including amount earnings distributed whether us operations generating taxable profits losses 2004 company generated approximately 1300 us net operating losses us nol’s tax purposes approximately 300 us nol’s eligible carryback benefits us tax law resulting benefit 52 2003 company generated approximately 1500 us nol’s us tax purposes resulting benefit 452 december 31 2003 us nol’s generated 2003 utilized recoup past us taxes paid company carryback benefits allowed us tax law fourth quarter 2004 due changes tax planning strategies triggered company’s intent repatriate earnings act management longer able conclude likely would realize benefit net us deferred tax assets therefore general valuation allowance net us deferred tax assets established december 31 2004 impact income tax expense 2004 providing valuation allowance us net deferred tax assets 240 difference income taxes based us statutory tax rate company’s income tax expense years ending december 31 due following notes consolidated financial statements continued lower rates jurisdictions net primarily attributable certain employment capital investment actions taken company result income manufacturing activities jurisdictions subject lower tax rates least 2015 december 31 2004 2003 company total deferred tax assets 790 1031 respectively deferred tax liabilities 562 595 respectively reclassification certain 2003 us amounts deferred tax assets liabilities made conform current year presentation valuation allowance net us deferred tax assets established december 31 2004 valuation allowances recorded deferred tax assets december 31 2004 2003 406 61 respectively significant deferred tax liabilities december 31 2004 2003 depreciation differences 333 318 respectively benefit plans 52 76 respectively net consolidated income tax paymentsrefunds exclusive payments related tax audits discussed 2004 2003 2002 144 196 584 respectively december 31 2004 company’s us federal income tax returns audited 1992 tax contingencies recorded address potential exposures involving tax positions taken could challenged taxing authorities potential exposures result varying application statutes rules regulations interpretations including 1 intercompany terms cross border arrangements affiliates management believes intercompany terms based upon sound economic facts circumstances 2 utilization cash held foreign subsidiaries investment us property company’s estimate accrual tax contingencies contains assumptions based past experiences judgments potential actions taxing jurisdictions reasonably possible ultimate resolution tax matters may materially greater less amount accrued october 2001 irs auditors asserted reports company liable additional tax 1990 1992 tax years reports allege two interest rate swaps company entered unrelated party recharacterized loans affiliated companies april 2004 company received formal notice deficiency statutory notice irs asserting additional federal income tax due company received bills related matter irs september 7 2004 payment amount 194 income tax 279 interest made september 13 2004 company filed refund claims tax interest irs december 23 2004 company notified february 16 2005 refund claims denied irs company believes complied applicable rules regulations company intends file suit refund full amount tax interest company’s existing tax reserves adequate cover abovementioned payments 6 product licenses acquisitions 2004 company entered collaboration license agreement toyama chemical co ltd toyama terms agreement company acquired exclusive worldwide rights excluding japan korea china develop use sell garenoxacin toyama’s quinolone antibacterial agent currently development connection execution agreement company incurred charge second quarter 2004 upfront fee 80 toyama amount expensed reported research development year ended december 31 2004 statements consolidated operations september 2004 company announced entered strategic alliance bayer intended enhance companies’ pharmaceutical resources october 2004 us puerto rico company began market sell distribute bayer’s primary care products including avelox cipro exclusive license agreement company pay bayer substantial royalties products based sales addition company assumed bayer’s responsibilities us commercialization activities related erectile dysfunction medicine levitra bayer’s copromotion agreement glaxosmithkline plc company report share levitra results alliance revenue notes consolidated financial statements continued additionally terms agreements bayer also support promotion certain company’s oncology products us key european markets defined period time japan upon regulatory approval bayer comarket company’s cholesterol absorption inhibitor zetia ezetimibe arrangement include rights future cholesterol combination product agreements bayer provide upfront payment made company 140 licensing rights levitra avelox company receive record deferred revenue 120 related sale zetia copromotion rights bayer deferred revenue begin recognized upon regulatory approval japan certain circumstances zetia receive regulatorymarketing approval japan certain date amount required repaid bayer agreements bayer restrict company marketing certain products us would compete avelox cipro levitra result company expects may need sublicense rights garenoxacin quinolone antibacterial agent company licensed toyama company exploring options regard garenoxacin continue fulfill commitments toyama arrangement including taking product regulatory approval february 14 2005 company acquired assets neogenesis pharmaceuticals approximately 18 neogenesis applies novel screening chemistry technologies discover new drug candidates 7 inventories consisted following december 31 inventories valued lastin firstout basis comprised approximately 19 percent total inventories december 31 2004 2003 estimated replacement cost total inventories december 31 2004 2003 1624 1704 respectively 8 shortterm borrowings longterm debt commitments shortterm borrowings general shortterm borrowings consist commercial paper issued us bank loans notes payable commercial paper outstanding december 31 2004 2003 1464 939 respectively weightedaverage interest rate shortterm borrowings december 31 2004 2003 26 percent 18 percent respectively credit facilities company two revolving credit facilities totaling 15 billion facilities syndicate major financial institutions recently negotiated facility may 2004 125 billion fiveyear credit facility matures may 2009 requires company maintain total debt total capital ratio 60 percent second credit facility provides 250 line credit maturity date may 2006 requires company maintain total debt total capital ratio 60 percent time company rated baa3 moody’s bbb sp notes consolidated financial statements continued facilities available general corporate purposes considered support company’s commercial paper borrowings facilities require compensating balances however nominal commitment fee paid december 31 2004 funds drawn either facilities addition company’s foreign subsidiaries approximately 287 available unused lines credit various financial institutions december 31 2004 longterm debt november 2003 company issued 1250 aggregate principal amount 53 percent senior unsecured notes due 2013 1150 aggregate principal amount 65 percent senior unsecured notes due 2033 interest payable semiannually net proceeds offering 2369 upon issuance notes rated a3 moody’s investors service inc moody’s creditwatch negative implications standard poor’s rating services sp interest rates payable notes subject adjustment follows subsequent issuance rating assigned notes moody’s changes one ratings set forth interest rate payable series notes increase additional interest rate set forth table similarly rating assigned notes sp changes one ratings set forth table interest rate payable series notes increase additional interest rate set forth table event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade moody’s sp a3 respectively moody’s sp raise rating a3 respectively better july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 therefore effective december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent adjustment interest rate payable notes increase company’s interest expense 6 annually notes redeemable whole part company’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes shelf registration may 11 2004 company’s shelf registration amended declared effective securities exchange commission sec shelf registered issuance 2 billion various debt equity securities subsequently company issued 1438 billion face amount mandatory convertible preferred stock august 10 2004 shelf december 31 2004 563 principal amount notes consolidated financial statements continued securities remains registered unissued see note 10 “shareholder’s equity” additional information preferred stock issuance changes credit ratings february 18 2004 sp downgraded company’s senior unsecured debt ratings time sp also lowered company’s shortterm corporate credit commercial paper rating a2 a1 company’s sp rating outlook remains negative march 3 2004 sp assigned shelf registration preliminary rating senior unsecured debt preliminary subordinated debt rating bbb april 29 2004 moody’s placed company’s senior unsecured credit rating a3 watchlist possible downgrade based upon concerns related market share declines litigation risks high degree reliance success vytorin july 14 2004 moody’s lowered company’s senior unsecured credit rating a3 baa1 lowered company’s senior unsecured shelf registration rating pa3 pbaa1 lowered company’s subordinated shelf registration rating pbaa1 pbaa2 lowered company’s cumulative noncumulative preferred stock shelf registration rating pbaa2 pbaa3 confirmed company’s p2 commercial paper rating removed company watchlist moody’s rating outlook company negative november 20 2003 fitch ratings fitch downgraded company’s senior unsecured bank loan ratings commercial paper rating company’s rating outlook remained negative announcing downgrade fitch noted sales decline company’s leading product franchise time intron franchise greater anticipated concerned total company growth reliant performance two key growth drivers zetia remicade near term august 4 2004 fitch affirmed company’s senior unsecured rating bank loan rating commercial paper rating reiterated negative outlook commitments total rent expense amounted 100 2004 91 2003 81 2002 future annual minimum rental commitments noncancelable operating leases december 31 2004 follows 2005 80 2006 65 2007 50 2008 43 2009 38 aggregate minimum lease obligations 41 due thereafter december 31 2004 company commitments totaling 151 related capital expenditures made 2005 9 financial instruments sfas 133 “derivative instruments financial hedging activities” amended requires derivatives recorded balance sheet fair value accounting standard also provides effective portion qualifying cash flow hedges recognized income hedged item affects income changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized income occur risks policy objectives company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes time company hedge selective foreign currency risks derivatives generally however management deemed cost effective engage formulabased program hedging profits cash flows foreign operations using derivative financial instruments company’s foreign subsidiaries purchase significant notes consolidated financial statements continued quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provides natural level protection adverse changes exchange rates furthermore risk adverse exchange rate change mitigated fact company’s foreign operations widespread limited basis company hedge selective exposures mitigate interest rate risks company mitigates credit risk derivative instruments dealing counterparties considered financially sound accordingly company anticipate loss nonperformance company enter derivative instruments generate trading profits table presents carrying values estimated fair values company’s financial instruments including derivative financial instruments december 31 estimated fair values determined based market prices available dealer quotes longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related liabilities longterm investments classified available sale carried fair value realized gains sale securities classified available sale 0 2004 0 2003 43 2002 proceeds sales totaled 0 80 respectively realized gains recorded expense income net interest rate swap contracts company interest rate swap arrangement effect counterparty bank subject credit rating triggers arrangement utilizes two longterm interest rate swap contracts one foreignbased subsidiary company bank us subsidiary company bank two contracts equal offsetting terms covered master netting arrangement contract involving foreignbased subsidiary permits subsidiary prepay portion future obligation bank contract involving us subsidiary permits bank prepay portion future obligation us subsidiary interest paid prepaid balances parties market rates prepayments totaling 19 billion made contracts december 31 2004 arrangement originally provided event company failed maintain required minimum credit ratings counterparty may terminate transaction designating early termination notes consolidated financial statements continued date earlier 36 months following date notice terminate sp’s moody’s current credit ratings specified minimum march 8 2005 counterparty given company notice terminate december 1 2004 company counterparty mutually agreed amend swap contracts company counterparty agreed phased termination arrangement including repayment prepaid amounts based agreed schedule scheduled terminations associated repayment prepaid amounts begin later march 30 2005 end later january 15 2009 addition amended agreement 36month grace period previously applied event counterparty gives notice termination result company’s failure maintain required minimum credit ratings extended january 15 2009 event counterparty gives company termination notice provision scheduled terminations associated payments continue according agreed repayment schedule time delivery termination notice january 15 2009 provisions original arrangement also allowed counterparty give 12month notice terminate transaction 10th anniversary transaction november 17 2007 company’s credit ratings least a2 moody’s sp eliminated place company accepted new credit trigger provides counterparty may terminate transaction company fail maintain longterm us dollar denominated senior unsecured indebtedness rating least bbb sp baa2 moody’s termination provision would later november 16 2007 60 days date company receives notice terminate company fail meet minimum credit requirement resulting early termination provision scheduled swap terminations associated payments continue termination date company may option accelerate scheduled terminations associated payments nominal fee february 28 2005 company’s foreignbased subsidiary us subsidiary gave notice counterparty terminate arrangement accordingly prepaid amounts repaid respective obligor company repay us obligation funds repatriated american jobs creation act 2004 1991 1992 company utilized interest rate swaps part international cash management strategy notional principal 1991 arrangement 650 notional principal 1992 arrangement 950 arrangements 20year terms fair value swaps liability 1 december 31 2003 may 10 2004 interest rate swaps related 650 950 swap arrangements terminated impact company’s statements consolidated operations material 10 shareholders’ equity company authorized 50000000 shares preferred stock consists 12000000 preferred shares designated series junior participating preferred stock 28750000 preferred shares designated 6 mandatory convertible preferred stock 9250000 preferred shares whose designations yet determined mandatory convertible preferred stock august 10 2004 company issued 28750000 shares 6 mandatory convertible preferred stock preferred stock face value 144 billion net proceeds company 14 billion deducting commissions discounts underwriting expenses proceeds used general corporate purposes including reduction commercial paper borrowings notes consolidated financial statements continued mandatory conversion date shares september 14 2007 date share automatically convert 22451 27840 common shares company depending average closing price company’s common shares period immediately preceding mandatory conversion date defined prospectus preferred shareholders may elect convert time prior september 14 2007 minimum conversion ratio 22451 common shares per share preferred stock additionally time prior mandatory conversion date closing price company’s common shares exceeds 3341 least 20 trading days within period 30 consecutive trading days company may elect cause conversion less preferred stock outstanding minimum conversion ratio 22451 common shares preferred share preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent company legally permitted pay dividends board directors declares dividend payable company pay dividends dividend payment date dividend payment dates march 15 june 15 september 15 december 15 first dividend paid december 15 2004 treasury stock summary treasury share transactions year ended december 31 follows preferred share purchase rights company preferred share purchase rights outstanding attached presently trade company’s common shares exercisable rights become exercisable person group acquires 20 percent company’s common stock announces tender offer completed would result ownership person group 20 percent company’s common stock person group acquire 20 percent company’s outstanding common stock merger business combination transaction right entitle holder acquirer purchase common shares scheringplough market value twice exercise price right exercise price rights 100 following acquisition person group beneficial ownership 20 percent less 50 percent company’s common stock board directors may call exchange rights owned acquirer whole part exchange ratio one common share one twohundredth share series junior participating preferred stock per right also prior acquisition person group beneficial ownership 20 percent company’s common stock rights redeemable 005 per right option board directors rights expire july 10 2007 unless earlier redeemed exchanged board directors also authorized reduce 20 percent thresholds referred less greater sum 001 percent largest percentage outstanding shares common stock known company beneficially owned person group affiliated associated persons ii 10 percent except following acquisition person group beneficial ownership 20 percent company’s common stock reduction may adversely affect interests holders rights notes consolidated financial statements continued 11 insurance coverage company maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly result recent external events availability insurance become restrictive management considers impact changes continually assesses best way provide insurance needs future company selfinsures higher proportion risk past especially relates products’ liability 12 stock incentive plans terms company’s 2002 stock incentive plan approved company’s shareholders 72 million company’s common shares may granted stock options awarded deferred stock units officers certain employees company december 2007 december 31 2004 27 million options deferred stock units remain available future year grants 2002 stock incentive plan option exercise prices equal market price common shares grant dates options expire later 10 years date grant standard options granted 2004 threeyear vesting term granted 2003 prior generally oneyear vesting term option grants vest longer periods ranging three nine years deferred stock units payable equivalent number common shares distributable single installment three five equal annual installments generally commencing three years date award following table summarizes stock option activity past three years current prior plans approved company’s shareholders summarized information stock options outstanding exercisable december 31 2004 follows notes consolidated financial statements continued 2004 2003 2002 company awarded deferred stock units totaling 34 million 32 million 29 million respectively 13 retirement plans postretirement benefits company defined benefit pension plans covering eligible employees us certain foreign countries company provides postretirement health care benefits eligible us retirees dependents measurement date majority plans december 31 net pension expense 2004 132 compared net pension expense 2003 117 estimated onehalf percent reduction expected longterm rate return consolidated plan assets would increase pension expense approximately 7 estimated onehalf percent reduction discount rate would increase pension expense approximately 19 also december 31 2004 company unrecognized net actuarial loss 636 gains losses arise primarily plan assets earning less longterm expected rate return changes pension discount rates gains future offset 636 net unrecognized loss amortization losses would ultimately increase annual pension expense approximately 32 components net pension postretirement benefits expense follows 1 termination benefits curtailment settlement costs 2004 2003 primarily relate matters discussed note 2 “special charges” notes consolidated financial statements continued components changes benefit obligations follows 1 termination benefits curtailment settlement costs 2004 2003 primarily relate matters discussed note 2 “special charges” components changes plan assets follows addition plan assets indicated december 31 2004 2003 securities 71 79 respectively held nonqualified trusts designated provide pension benefits certain underfunded plans december 31 2004 2003 accumulated benefit obligation retirement plans 1672 1531 respectively aggregated accumulated benefit obligation fair value plan assets retirement plans accumulated benefit obligation excess plan assets 1331 1029 respectively december 31 2004 1245 995 respectively december 31 2003 notes consolidated financial statements continued contributions retirement plans postretirement health care benefits 2005 currently estimated approximately 50 following benefit payments reflect expected future service appropriate expected paid 1 expected benefit payments reduced expected subsidy payments medicare act 0 2 3 15 2005 2006 2007 2008 2009 20102014 respectively following reconciliation funded status plans company’s balance sheet amounts recognized balance sheet consist december 31 2004 2003 company’s additional minimum pension liability 335 349 respectively primarily related domestic retirement plans resulted adjustment accumulated comprehensive income net tax 14 178 2004 2003 respectively notes consolidated financial statements continued consolidated weightedaverage assumptions used determine benefit obligations december 31 consolidated weightedaverage assumptions used determine net cost years ended december 31 longterm expected rate return plan assets derived proportionally return assumptions determined major asset classes principally equities fixed income real estate return expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weightedaverage assumed health care cost inflation rate used postretirement measurement purposes 10 percent 2005 trending 45 percent 2011 1 percent increase assumed health care cost trend rate would increase combined postretirement service interest cost 7 postretirement benefit obligation 55 1 percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 6 postretirement benefit obligation 45 accordance fasb staff position 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 medicare act company began accounting effect federal subsidy medicare act third quarter 2004 result company’s accumulated benefit obligation postretirement benefits reduced 48 company’s net postretirement benefits expense reduced 7 2004 reduction postretirement benefits expense consists reductions service cost interest cost net amortization 2 3 2 respectively plan assets fair value asset allocation consolidated retirement plans december 31 2004 2003 target allocation 2005 follows notes consolidated financial statements continued asset allocation postretirement health care benefit trusts december 31 2004 2003 target allocation 2005 follows company’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns consistent acceptable level overall portfolio market value risk 2003 2002 company defined contribution profitsharing plan covering substantially fulltime domestic employees completed one year service annual contribution determined formula based company’s income shareholders’ equity participants’ compensation profitsharing expense totaled 98 2002 profit sharing contribution 2003 determined formula described company longer makes contributions plan 2004 company began make contributions existing defined contribution savings plan equal 3 percent eligible employee earnings plus matching 2 percent eligible employee earnings based employee contributions plan total company contributions plan 2004 48 14 consent decree may 17 2002 scheringplough announced reached agreement fda consent decree resolve issues involving scheringplough’s compliance current good manufacturing practices cgmp certain manufacturing facilities new jersey puerto rico us district court district new jersey approved entered consent decree may 20 2002 terms consent decree scheringplough agreed pay total 500 us government two equal installments 250 first installment paid may 2002 second installment paid may 2003 previously reported scheringplough accrued 500 provision consent decree fourth quarter 2001 consent decree requires scheringplough complete number actions including comprehensive cgmp work plans scheringplough’s manufacturing facilities new jersey puerto revalidation finished drug products bulk active pharmaceutical ingredients manufactured facilities decree scheduled completion dates december 31 2005 cgmp work plans september 30 2005 revalidation programs bulk active pharmaceutical ingredients december 31 2005 revalidation programs finished drugs cgmp work plans contain number significant steps whose timely satisfactory completion subject payments 15 thousand per business day deadline missed payments may exceed 25 2002 50 years 2003 2004 2005 payments subject overall cap 175 general timely satisfactory completions revalidations subject payments 15 thousand per business day deadline missed subject caps described however product scheduled revalidation certified validated last date validation schedule fda may assess payment 246 percent net domestic sales uncertified product validation certified general product scheduled revalidation notes consolidated financial statements continued consent decree certified within six months scheduled date scheringplough must cease production product certification obtained completion significant steps work plans completion revalidation programs subject thirdparty expert certification well fda’s acceptance certification consent decree provides scheringplough believes may able meet deadline scheringplough right upon showing good cause request extensions deadlines connection cgmp work plans revalidation programs however guarantee fda grant requests although scheringplough believes made significant progress meeting obligations consent decree possible 1 scheringplough may fail complete significant step revalidation prescribed deadline 2 thirdparty expert may certify completion significant step revalidation 3 fda may disagree expert’s certification significant step revalidation case possible fda may assess payments described scheringplough would expense payments assessed decree incurred 15 segment information company three reportable segments prescription pharmaceuticals consumer health care animal health segment sales profit data follow consistent company’s current management reporting structure prescription pharmaceuticals segment discovers develops manufactures markets human pharmaceutical products consumer health care segment develops manufactures markets otc foot care sun care products animal health segment discovers develops manufactures markets animal health products net sales segment profit segment corporate includes interest income expense foreign exchange gains losses headquarters expenses special charges miscellaneous items accounting policies used segment reporting described note 1 “summary significant accounting policies” 2004 corporate includes special charges 153 including 119 employee termination costs well 27 asset impairment charges 7 closure costs primarily related exit notes consolidated financial statements continued small european researchanddevelopment facility see note 2 “special charges” additional information estimated charges relate reportable segments follows prescription pharmaceuticals 135 consumer health care 3 animal health 2 corporate 13 2003 corporate includes special charges 599 including 179 employee termination costs 350 provision increase litigation reserves 70 asset impairment charges see note 2 “special charges” additional information estimated charges relate reportable segments follows prescription pharmaceuticals 515 consumer health care 25 animal health 4 corporate 55 net sales major product net sales geographic area notes consolidated financial statements continued company subsidiaries 50 countries outside us single foreign country except france italy japan accounted 5 percent consolidated net sales past three years net sales presented geographic area company’s customers located net sales customer single customer except mckesson corporation amerisourcebergen corporation two major pharmaceutical health care products distributors accounted 10 percent consolidated net sales past three years longlived assets geographic location longlived assets shown geographic location primarily property sales products comprising 10 percent company’s us international sales year ended december 31 2004 follows scheringplough net sales include sales vytorin zetia marketed partnership merck company accounts joint venture equity method accounting see note 3 “equity income cholesterol joint venture” company disaggregate assets segment basis internal management reporting therefore information presented notes consolidated financial statements continued 16 legal environmental regulatory matters background company involved various claims investigations legal proceedings company records liability contingencies probable liability incurred amount reasonably estimated company adjusts liabilities contingencies reflect current best estimate probable loss minimum liability case may best estimate determinable company records minimum amount within probable range liability expected insurance recoveries considered determining amounts recorded liabilities environmentalrelated matters company believes loss contingency reasonably possible rather probable amount loss cannot estimated liability recorded however liability reasonably possible disclosure loss contingency made company reviews status matters discussed remainder note ongoing basis time company may settle otherwise resolve matters terms conditions management believes best interests company resolution items discussed remainder note individually aggregate could material adverse effect company’s results operations cash flows financial condition resolution including settlements matters types set forth remainder note particular investigations frequently involve fines penalties amount would material financial condition cash flows results operations resolution matters may also involve injunctive administrative remedies would adversely impact business exclusion government reimbursement programs turn would material adverse impact business future financial condition cash flows results operations assurances company prevail matters discussed remainder note settlements reached acceptable terms including scope release provided absence injunctive administrative remedies would adversely impact business exclusion government reimbursement programs amounts exceed amounts reserved even acceptable settlement reached assurance investigations litigations commenced raising similar issues potentially exposing company additional material liabilities outcome matters discussed investigations could include commencement civil andor criminal proceedings involving imposition substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs total liabilities reserved reflect estimate case investigations estimate minimum liability final settlement adjudication matters could possibly less could materially exceed liabilities recorded financial statements could material adverse impact company’s financial condition cash flows operations company cannot predict timing resolution matters outcomes except matters discussed remainder note recorded liabilities contingencies december 31 2004 related expenses incurred year ended december 31 2004 material opinion management based advice legal counsel ultimate outcome matters except matters discussed remainder note material impact company’s results operations cash flows financial condition notes consolidated financial statements continued 2002 2003 company increased litigation contingent liabilities 500 result investigations us attorney’s office district massachusetts us attorney’s office eastern district pennsylvania noted pennsylvania investigation settled payments made company previously recorded liability approximately 250 related massachusetts investigation reasonably possible settlement massachusetts investigation could involve amounts materially excess accrual could material adverse impact company’s financial condition cash flows operations required us gaap since company cannot reasonably estimate potential final resolution company recognized estimated minimum liability massachusetts investigation patent matters dr scholl’s freeze away patent july 26 2004 orasure technologies filed action us district court eastern district pennsylvania alleging patent infringement scheringplough healthcare products sale dr scholl’s freeze away wart removal product complaint seeks permanent injunction unspecified damages including treble damages freeze away product launched march 2004 net sales product 2004 totaled approximately 20 investigations pennsylvania investigation july 30 2004 scheringplough corporation us department justice us attorney’s office eastern district pennsylvania announced settlement previously disclosed investigation office settlement schering sales corporation indirect wholly owned subsidiary scheringplough corporation pled guilty single federal criminal charge concerning payment managed care customer connection settlement • aggregate settlement amount 3455 fines damages scheringplough corporation credited 536 previously paid additional medicaid rebates leaving net settlement amount 2919 plus interest paid 2004 • schering sales corporation excluded participating federal health care programs settlement affect ability scheringplough corporation participate programs • scheringplough corporation entered fiveyear corporate integrity agreement office inspector general department health human services scheringplough corporation agreed implement specific measures promote compliance regulations issues marketing failure comply result financial penalties company cannot predict impact settlement outstanding investigations massachusetts investigation us attorney’s office district massachusetts investigating broad range company’s sales marketing clinical trial practices programs along warrick pharmaceuticals warrick company’s generic subsidiary scheringplough disclosed connection investigation may 28 2003 schering corporation wholly owned significant operating subsidiary scheringplough received letter boston target letter office advising schering corporation including subsidiaries divisions target federal criminal investigation respect four areas 1 providing remuneration drug samples clinical trial grants items services value managed care organizations physicians others induce purchase schering pharmaceutical products 2 sale misbranded unapproved drugs company understands mean drugs promoted indications approval us fda obtained socalled offlabel uses notes consolidated financial statements continued 3 submitting false pharmaceutical pricing information government purposes calculating rebates required paid medicaid program failing include prices product manufactured sold private label arrangement managed care customer well prices free nominally priced goods provided customer induce purchase schering products 4 document destruction obstruction justice relating government’s investigation target defined department justice guidelines person prosecutor grand jury substantial evidence linking commission crime judgment prosecutor putative defendant us attorney’s manual section 911151 company implemented certain changes sales marketing clinical trial practices continuing review practices ensure compliance relevant laws regulations company cooperating investigation see information prior increases liabilities reserved financial statements including relation investigation litigation charges note 2 “special charges” additional information reserves potential impacts outcome investigation background section note company previously recorded liability approximately 250 related investigation reasonably possible settlement investigation could involve amounts materially excess accrual could material adverse impact company’s financial condition cash flows operations required us gaap since company cannot reasonably estimate potential final resolution company recognized estimated minimum liability nitrodur investigation august 2003 company received civil investigative subpoena issued office inspector general us department health human services seeking documents concerning company’s classification nitrodur medicaid rebate purposes company’s use nominal pricing bundling product sales company cooperating investigation appears subpoena one number addressed pharmaceutical companies concerning inquiry issues relating payment government rebates pricing matters awp investigations company continues respond investigations department health human services department justice certain states industry company practices regarding average wholesale price awp investigations include department justice review merits federal action filed private entity behalf us district court southern district florida well investigation us attorney’s office district massachusetts regarding inter alia whether awp set pharmaceutical companies certain drugs improperly exceeds average prices paid dispensers consequence results unlawful inflation certain government drug reimbursements based awp march 2001 company received subpoena massachusetts attorney general’s office seeking documents concerning use awp pricing andor marketing practices company also responded subpoenas attorney general california concerning matters company cooperating investigations outcome investigations could include imposition substantial fines penalties injunctive administrative remedies prescription access litigation december 2001 prescription access litigation project pal bostonbased group formed 2001 litigate drug companies filed class action suit federal court massachusetts company september 2002 consolidated complaint filed court result coordination multidistrict litigation panel federal court awp cases throughout country consolidated complaint alleges company warrick pharmaceuticals notes consolidated financial statements continued company’s generic subsidiary conspired providers defraud consumers reporting fraudulently high awps prescription medications reimbursed medicare thirdparty payers complaint seeks declaratory judgment unspecified damages including treble damages included litigation described prior paragraph lawsuits allege company warrick reported inflated awps prescription pharmaceuticals thereby caused state federal entities thirdparty payers make excess reimbursements providers actions also allege company warrick failed report accurate prices medicaid rebate program thereby underpaid rebates states cases filed state attorneys general also seek recover behalf citizens state entities located state excess payments result inflated awps actions began october 2001 brought state attorneys general private plaintiffs nonprofit organizations employee benefit funds allege violations federal state law including fraud antitrust racketeer influenced corrupt organizations act rico claims first quarter 2004 company warrick among five groups companies put accelerated discovery track proceeding addition warrick company defendants number lawsuits state courts actions generally brought states andor political subdivisions seek unspecified damages including treble punitive damages securities class action litigation february 15 2001 company stated press release fda conducting inspections company’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices primarily relating production processes controls procedures next day february 16 2001 lawsuit filed us district court district new jersey company certain named officers alleging violations sections 10b 20a securities exchange act 1934 rule 10b5 promulgated thereunder additional lawsuits tenor followed complaints consolidated one action us district court district new jersey lead plaintiff florida state board administration appointed court july 2 2001 october 11 2001 consolidated amended complaint filed alleging violations described second sentence paragraph purporting represent class shareholders purchased shares company stock may 9 2000 february 15 2001 complaint seeks compensatory damages behalf class company’s motion dismiss consolidated amended complaint denied may 24 2002 october 10 2003 court certified shareholder class discovery ongoing addition lawsuits described immediately preceding paragraph two lawsuits filed us district court district new jersey two lawsuits filed new jersey state court company nominal defendant certain officers directors former director seeking damages behalf company including disgorgement trading profits made defendants allegedly obtained basis material nonpublic information complaints four lawsuits relate issues described company’s february 15 2001 press release allege failure disclose material information breach fiduciary duty directors one federal court lawsuits also includes allegations related investigations us attorney’s offices eastern district pennsylvania district massachusetts ftc’s administrative proceeding company lawsuit state texas warrick company’s generic subsidiary us attorney’s investigations ftc proceeding described herein texas litigation described previously filed 10ks 10qs lawsuits shareholder derivative action purports assert claims behalf company demand made board directors decision made whether company pursue claims august 2001 plaintiffs new jersey state court shareholder derivative actions moved dismiss voluntarily complaints actions motions granted two shareholder derivative actions pending us district court district new jersey consolidated one action notes consolidated financial statements continued early stages january 2 2002 company received demand letter dated december 26 2001 law firm involved derivative actions described behalf shareholder also involved derivative actions demanding board directors bring claims behalf company based allegations substantially similar alleged derivative actions january 22 2002 board directors adopted board resolution establishing evaluation committee consisting three directors investigate review analyze facts circumstances surrounding allegations made demand letter consolidated amended derivative action complaint described reserving full board authority discretion exercise business judgment respect proper disposition demand committee engaged independent outside counsel advise issued report findings investigation independent directors board late october 2002 report determined shareholder demand refused finding liability part officers directors november 2002 full board adopted recommendation evaluation committee company defendant number purported nationwide state class action lawsuits plaintiffs seek refund purchase price laxatives phenylpropanolaminecontaining coughcold remedies ppa products purchased pharmaceutical manufacturers codefendants lawsuits general plaintiffs claim would purchased would paid less products known certain defects medical risks attendant use litigation claims relating company’s ppa products courts national class action suit several state class action suits denied certification dismissed suits similar application deny class certification new jersey remaining statewide class action suit involving company granted september 30 2004 approximately 96 individual lawsuits relating laxative products ppa products recalled albuterolvancerilvancenase inhalers also pending company seeking recovery personal injuries death number lawsuits punitive damages claimed litigation filed 2003 us district court new jersey alleging company richard jay kogan company’s employee savings plan administrator several current former directors certain corporate officers breached fiduciary obligations certain participants plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs’ appeal pending 2003 lawsuit filed new jersey superior court chancery division union county alleging breach fiduciary duty outside directors relating company’s receipt boston target letter described investigations section note dismissed september 2004 upon consent parties antitrust ftc matters kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle related generic versions kdur lederle upsher smith filed abbreviated new drug applications andas april 2 2001 ftc started administrative proceeding scheringplough upshersmith lederle complaint alleged anticompetitive effects settlements june 2002 administrative law judge overseeing case issued decision patent litigation settlements complied law respects dismissed claims company ftc staff appealed decision full commission december 18 2003 full commission issued opinion reversed 2002 decision ruled settlements violate antitrust laws full commission issued cease desist order imposing various injunctive restraints opinion filed march 8 2005 federal court appeals set aside 2003 commission ruling vacated cease desist order notes consolidated financial statements continued following commencement ftc administrative proceeding alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits allege essentially facts claim violations federal state antitrust laws well state statutory andor common law causes action suits seek unspecified damages discovery ongoing sec inquiries related litigation september 9 2003 sec company announced settlement sec enforcement proceeding company richard jay kogan former chairman chief executive officer regarding meetings held investors week september 30 2002 communications without admitting denying allegations company agreed commit future violations regulation fd related securities laws paid civil penalty 1 million mr kogan paid civil penalty 50 thousand september 25 2003 lawsuit filed new jersey superior court union county richard jay kogan company’s outside directors alleging breach fiduciary duty fraud deceit negligent misrepresentation relating alleged disclosures made meetings mentioned company removed case federal court case remanded state court company filed motion dismiss matters emea pharmacovigilance matter 2003 pharmacovigilance inspections officials british french medicines agencies conducted request european agency evaluation medicinal products emea serious deficiencies reporting processes identified scheringplough continues work action plan rectify deficiencies provides regular updates emea company know action emea national authorities take response findings possible actions include inspections demands improvements reporting systems criminal sanctions company andor responsible individuals changes conditions marketing authorizations company’s products biopharma contract dispute biopharma srl filed claim civil court rome july 21 2004 docket 573972004 9th chamber certain scheringplough subsidiaries matter relates certain contracts dated november 15 1999 distribution supply agreements biopharma scheringplough subsidiary distribution scheringplough generic products manufactured biopharma hospitals pharmacists france july 26 2002 letter agreement among biopharma scheringplough subsidiary medipha sante sa appointing medipha distribute products france biopharma alleges scheringplough fulfill duties contracts tax matters october 2001 irs auditors asserted reports company liable additional tax 1990 1992 tax years reports allege two interest rate swaps company entered unrelated party recharacterized loans affiliated companies april 2004 company received formal notice deficiency statutory notice irs asserting additional federal income tax due company received bills related matter irs september 7 2004 payment amount 194 income tax 279 interest made september 13 2004 company filed refund claims tax interest irs december 23 2004 company notified february 16 2005 refund claims denied irs company believes complied applicable rules regulations intends file suit refund full amount tax interest company’s tax reserves adequate cover abovementioned payments notes consolidated financial statements continued environmental company responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law company alleged potentially responsible party prp except site separately disclosed company believes remote time material liability relation sites company estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps company records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated report independent registered public accounting firm board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries “company” december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2004 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 8 2005 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp parsippany new jersey march 8 2005 scheringplough corporation subsidiaries quarterly data unaudited see special charges footnote notes consolidated financial statements additional information relating special charges company’s common shares listed principally traded new york stock exchange approximate number holders record common shares january 31 2005 41000 item 9item 8 financial statements supplementary data scheringplough corporation subsidiaries statements consolidated operations accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity accompanying notes integral part consolidated financial statements notes consolidated financial statements 1 summary significant accounting policies overview scheringplough company discovers develops manufactures markets medical therapies treatments enhance human health company also markets leading consumer brands overthecounter otc foot care sun care markets operates global animal health business principles consolidation consolidated financial statements include scheringplough corporation subsidiaries company intercompany balances transactions eliminated certain prior year amounts reclassified conform current year presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates use assumptions affect certain reported amounts disclosures actual amounts may differ equity method accounting company accounts share activity merck scheringplough cholesterol joint venture partnership joint venture merck co inc merck using equity method accounting company significant influence joint venture’s operating financial policies accordingly company’s share earnings joint venture included consolidated net incomeloss revenue sales vytorin zetia recognized joint venture title risk loss passed customer equity income joint venture excludes profit arising transactions company joint venture time underlying profit realized joint venture transaction party company merck see note 3 “equity income cholesterol joint venture” information regarding joint venture cash equivalents cash equivalents include operating cash highly liquid investments original maturities three months less shortterm investments shortterm investments carried fair value classified available sale investments consist time deposits certificates deposit commercial paper maturities less year inventories valued lower cost market cost determined using lastin firstout lifo method substantial portion inventories located us cost inventories determined firstin firstout method fifo depreciation property equipment depreciation provided estimated useful lives properties generally use straightline method notes consolidated financial statements continued useful lives property generally follows company reviews carrying value property equipment indications impairment accordance statement financial accounting standard sfas 144 “accounting impairment disposal longlived assets” depreciation expense 362 million 340 million 304 million 2005 2004 2003 respectively foreign currency translation net assets company’s international subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included comprehensive income remaining international subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation account transactional exchange gains losses included income revenue recognition company’s pharmaceutical products sold direct purchasers eg wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies well indirect purchasers market participants eg managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers company recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue company estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period estimates recorded prior periods reevaluated part process reliable estimates items cannot made company defers recognition revenue earnings per common share 2005 diluted earnings per common share computed dividing income available common shareholders sum weighted average number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options impact notes consolidated financial statements continued conversion mandatory convertible preferred shares excluded calculation since including securities earnings per share calculation would antidilutive 2004 diluted loss per common share excludes effect shares issuable deferred stock units exercise stock options impact conversion mandatory convertible preferred shares including securities earnings per share calculation would antidilutive would result lower loss per share 2003 diluted loss per common share excludes effect shares issuable deferred stock units exercise stock options including securities would antidilutive periods presented basic earningsloss per common share computed dividing incomeloss available common shareholders weighted average number common shares outstanding goodwill intangible assets sfas 142 “goodwill intangible assets” requires intangible assets acquired either individually group assets initially recognized measured based fair value intangible finite life amortized useful life intangible indefinite life including goodwill amortized company evaluates goodwill impairment using fairvaluebased test goodwill determined impaired written estimated fair value company’s goodwill primarily related animal health business income taxes deferred income taxes recognized future tax effects temporary differences financial income tax reporting basis company’s assets liabilities based enacted tax laws rates accounting stockbased compensation december 31 2005 company accounted stockbased compensation arrangements using intrinsic value method stockbased employee compensation cost reflected net incomeloss company’s deferred stock units performance plans stock options granted plans exercise price equal market value underlying common stock date grant december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” sfas 123r sfas 123r effective company january 1 2006 sfas 123r requires companies recognize compensation costs related sharebased transactions compensation based market performance company’s shares determined fair value basis company adopt sfas 123r first quarter 2006 using modified prospective method modified prospective method requires company recognize compensation costs sharebased grants made january 1 2006 well unrecognized cost unvested awards date adoption upon adoption sfas 123r company recognize sharebased compensation costs service period earlier employees retirement eligibility date stated vesting period award grants issued retirement eligible employees prior adoption sfas 123r company recognize compensation costs stated vesting period acceleration unrecognized compensation costs upon retirement employee sfas 123r also amends sfas 95 “statement cash flows” require excess tax benefits reflected operating cash flows reflected financing cash flows notes consolidated financial statements continued addition company two compensation plans accounted sfas 123r liabilitybased plans ultimate cash payout liabilitybased plans based company’s stock price performance compared stock price performance peer group change accounting required sfas 123r result cumulative effect 26 million income january 1 2006 order recognize difference company’s previously accrued liability reported accounting principles board apb opinion number 25 “accounting stock issued employees” fair value liability plans future operating results impacted fluctuation fair value liability plans required remeasured reporting date following table reconciles net incomeloss available common shareholders basicdiluted earningsloss per common share reported pro forma net incomeloss available common shareholders basicdiluted earningsloss per common share company expensed grantdate fair value stock options deferred stock units permitted sfas 123 “accounting stockbased compensation” weightedaverage fair value options granted 2005 2004 2003 704 615 529 respectively fair values estimated using blackscholes optionpricing model based following assumptions impact recently issued accounting pronouncements november 2004 fasb issued sfas 151 “inventory costs” sfas requires abnormal spoilage expensed period incurred opposed inventoried amortized income notes consolidated financial statements continued inventory usage fixed production facility overhead costs allocated normal production level facility company implemented sfas 151 fourth quarter 2005 implementation sfas material impact company’s financial statements march 2005 fasb issued interpretation 47 fin 47 sfas 143 “accounting conditional asset retirement obligations” clarify term “conditional asset retirement obligations” used sfas 143 term refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control entity accordingly company required recognize liability fair value conditional asset retirement obligation fair value liability reasonably estimated interpretation effective later end fiscal year ending december 15 2005 retroactive application required company implemented fin 47 fourth quarter 2005 implementation fin 47 material impact company’s financial statements 2 special charges components special charges year ended december 31 follows litigation charges 2005 litigation reserves increased 250 million resulting total reserve 500 million massachusetts investigation well investigations disclosed “awp investigations” state litigation disclosed “awp litigation” note 19 “legal environmental regulatory matters” 2003 litigation reserves increased 350 million primarily result investigations company’s sales marketing practices see note 19 “legal environmental regulatory matters” additional information employee termination costs august 2003 company announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program retired december 31 2005 total cost program approximately 191 million comprised increased pension costs 108 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million amounts recognized relating program years ended december 31 2005 2004 2003 7 million 20 million 164 million respectively employee termination costs associated verp totaled 21 million 99 million 15 million 2005 2004 2003 respectively notes consolidated financial statements continued following summarizes activity accounts related employee termination costs asset impairment charges asset impairment charges recognized accordance sfas 142 “goodwill intangible assets” sfas 144 “accounting impairment disposal longlived assets” year ended december 31 2005 company recognized asset impairment charges 16 million related primarily consolidation company’s us biotechnology organizations year ended december 31 2004 company recognized asset impairment charges 27 million based discounted cash flows charges 7 million related primarily shutdown small european research development facility year ended december 31 2003 company recognized asset impairment charges related following • asset impairment charges totaling 26 million recognized based discounted cash flow analysis related facilities equipment two company’s manufacturing sites • asset impairment charge 27 million based discounted cash flows recognized related intangible asset licensed cancer therapy drug sold countries outside us • impairment charge 17 million related trade name company’s highend sun care brand recognized based discounted cash flows 3 equity income cholesterol joint venture may 2000 company merck co inc merck entered two separate sets agreements jointly develop market certain products us including 1 two cholesterollowering drugs 2 allergyasthma drug december 2001 cholesterol agreements expanded include countries world except japan general companies agreed collaborative activities agreements would operate virtual joint venture maximum degree possible relying respective infrastructures two companies agreements notes consolidated financial statements continued generally provide equal sharing development costs copromotion approved products company cholesterol agreements provide company merck jointly develop ezetimibe marketed zetia us asia ezetrol europe oncedaily monotherapy ii coadministration statin drug iii oncedaily fixedcombination tablet ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine combination medication ezetimibesimvastatin marketed vytorin us inegy many international countries zetia ezetrol ezetimibe vytorin inegy combination ezetimibesimvastatin approved use us launched several international markets company utilizes equity method accounting recording share activity merck scheringplough cholesterol joint venture company’s net sales include sales joint venture cholesterol joint venture agreements provide sharing operating income generated joint venture based upon percentages vary product sales level country us market company receives greater share profits first 300 million annual zetia sales 300 million annual zetia sales merck scheringplough partners generally share profits equally scheringplough’s allocation joint venture income increased milestones recognized either partner’s share joint venture’s income operations subject reduction partner fails perform specified minimum number physician details particular country partners agree annually minimum number physician details country partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement partner physician details set annual basis reimbursed amount equal partner’s physician details multiplied contractual fixed fee scheringplough reports reimbursement part equity income cholesterol joint venture amount represent reimbursement specific incremental identifiable costs company’s detailing cholesterol products markets addition reimbursement amount reflective company’s sales effort related joint venture company’s sales force related costs associated joint venture generally estimated higher year ended december 31 2005 company recognized milestones 20 million milestones related certain european approvals vytorin ezetimibesimvastatin 2005 2004 company recognized milestone 7 million related approval ezetimibesimvastatin mexico 2004 2003 company recognized milestones 20 million related certain european approvals zetia 2003 certain conditions specified joint venture agreements merck company could earn additional milestones totaling 105 million costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners notes consolidated financial statements continued following information provides summary components company’s equity income cholesterol joint venture year ended december 31 equity income joint venture excludes profit arising transactions company joint venture time underlying profit realized joint venture transaction party company merck due virtual nature cholesterol joint venture company incurs substantial costs selling general administrative costs reflected equity income borne overall cost structure company costs reported respective line items statements consolidated operations cholesterol agreements provide jointly owned facilities products resulting joint venture manufactured facilities owned either company merck allergyasthma agreements provide joint development marketing partners oncedaily fixedcombination tablet containing claritin singulair merck’s oncedaily leukotriene receptor antagonist treatment asthma seasonal allergic rhinitis january 2002 merck scheringplough respiratory joint venture reported results phase iii clinical trials fixedcombination tablet containing claritin singulair phase iii study demonstrate sufficient added benefits treatment seasonal allergic rhinitis claritin singulair combination tablet approval country remains clinical development new phase iii clinical trials planned 4 expenseincome net components expenseincome net follows notes consolidated financial statements continued 5 income taxes components consolidated incomeloss income taxes years ended december 31 follows income cholesterol joint venture included table based jurisdiction income earned components income tax expense years ended december 31 follows company’s tax provision year ended december 31 2005 includes us federal income tax benefit approximately 42 million result irs notice issued august 2005 provisions notice resulted reduction previously accrued tax liability attributable american jobs creation act ajca repatriation also reduced 2005 us net operating loss nol carried forward subsequent years fourth quarter 2004 company made decision repatriate approximately 94 billion provisions ajca maximum amount foreign earnings qualified reduced tax rate 525 percent intended repatriation earnings resulted us federal tax liability approximately 417 million state income tax liability approximately 6 million recorded 2004 income tax expense 2005 company repatriated approximately 94 billion accordance planned repatriation ajca company continue use repatriated funds qualified spending prior ajca company’s intent permanently reinvest unremitted earnings international subsidiaries except amounts repatriated ajca company maintains intent permanently reinvest earnings international subsidiaries company provided deferred taxes approximately 31 billion undistributed foreign earnings december 31 2005 determining tax liability would arise earnings remitted practicable notes consolidated financial statements continued liability would depend number factors including amount earnings distributed whether us operations generating taxable profits losses fourth quarter 2004 due changes tax planning strategies triggered company’s intent repatriate earnings ajca management longer able conclude likely would realize benefit net us deferred tax assets including benefit related us nols therefore general company established valuation allowance net us deferred tax asset december 31 2004 company continues maintain valuation allowance net us deferred tax asset december 31 2005 deferred income taxes provided temporary differences financial reporting basis tax basis company’s assets liabilities company’s deferred tax assets result principally recording certain items currently deductible tax purposes net operating loss tax credit carryforwards company’s deferred tax liabilities principally result use accelerated depreciation tax purposes components company’s deferred tax assets liabilities december 31 follows change valuation allowance 2004 2005 primarily due increase us nol deferred taxes net operating losses carryforwards principally relate us nols research development rd tax credits us foreign tax credits federal alternative minimum tax amt credit carryforwards december 31 2005 company approximately 15 billion us nols income tax purposes available offset future us taxable income us nols expire varying amounts 2024 2025 unused december 31 2005 company approximately 66 million rd tax credits carryforwards expire 2022 2025 155 million foreign tax credit carryforwards expire 2011 2015 44 million amt tax credit carryforwards indefinite life approximately 300 million 15 billion us nols generated 2004 2003 respectively eligible carryback benefits provision us tax law accordance provision company able notes consolidated financial statements continued recoup previous us taxes paid resulted income tax benefits 52 million 452 million 2004 2003 respectively difference income taxes based us statutory tax rate company’s income tax expense years ending december 31 due following lower tax rates jurisdictions 2005 2004 2003 net primarily attributable company’s manufacturing subsidiaries puerto rico singapore ireland operate various incentive tax grants begin expire 2011 overall income tax expense primarily relates foreign taxes include benefit related us nols net consolidated income tax paymentsrefunds exclusive payments related tax examinations litigation discussed 2005 2004 2003 592 million 144 million 196 million respectively january 2006 internal revenue service irs completed examination company’s 19931996 federal income tax returns company made cash payment third quarter 2005 form tax deposit approximately 239 million anticipation settlement 19931996 tax examination prevent additional irs interest charges payment fully satisfied liability associated tax examination consistent previously recorded reserves irs currently examining company’s 19972002 federal income tax returns company’s potential tax exposures result varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property although company’s cross border arrangements affiliates based upon internationally accepted standards tax authorities various jurisdictions may disagree subsequently challenge amount profits taxed country reasonably possible ultimate resolution tax matters could materially affect shareholders’ equity liquidity andor cash flows company believes accrual tax contingencies adequate open years based past experience interpretations tax law judgments potential actions taxing authorities company accrues liabilities identified tax contingencies result tax positions taken could challenged tax authorities company believes tax reserves reflect notes consolidated financial statements continued probable outcome identified tax contingencies reasonably possible ultimate resolution tax matters may materially greater less amount accrued october 2001 irs auditors asserted two interest rate swaps company entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 company made payments irs amount 194 million income tax 279 million interest company filed refund claims tax interest irs december 2004 following irs’s denial company’s claims refund company filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently discovery phase company’s tax reserves adequate cover mentioned payments 6 retirement plans postretirement benefits plan descriptions company defined benefit pension plans covering eligible employees us certain foreign countries us plan benefits normal retirement primarily based upon participant’s average final earnings years service social security income modified early retirement death disability benefits also available plan benefits become fully vested five years service plan provides continued accrual credited service employees opt postpone retirement remain employed company reaching normal retirement age nonus pension plans offer benefits competitive local market conditions addition company provides postretirement medical life insurance benefits eligible us retirees dependents postretirement benefit plans measurement date majority plans’ liabilities december 31 net pension postretirement benefit costs totaled 165 million 2005 compared 155 million 2004 181 million 2003 actuarial assumptions consolidated weighted average assumptions used determine benefit obligations december 31 assumptions used develop benefit obligations yearend consolidated weighted average assumptions used determine net benefit costs years ended december 31 notes consolidated financial statements continued assumptions used determine net periodic benefit costs year established end previous year assumptions used determine benefit obligations established yearend net periodic benefit costs actuarial present value benefit obligations based actuarial assumptions determined annually based evaluation longterm trends well market conditions may impact cost providing retirement benefits longterm expected rates return plan assets derived return assumptions determined major asset classes equities fixed income real estate proportional basis return expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weighted average assumed healthcare cost trend rate used postretirement measurement purposes 91 percent 2006 trending 48 percent 2013 one percent increase assumed healthcare cost trend rate would increase combined postretirement service interest cost 8 million postretirement benefit obligation 65 million one percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 6 million postretirement benefit obligation 51 million average retirement age assumed based annual rates retirement experienced company components net periodic benefit costs components net pension postretirement benefits expense follows 1 termination benefits curtailment settlement costs primarily relate matters discussed note 2 “special charges” notes consolidated financial statements continued benefit obligations funded status components changes benefit obligations follows 1 termination benefits curtailment costs primarily relate matters discussed note 2 “special charges” components changes plan assets follows addition plan assets indicated december 31 2005 2004 securities investments 70 million 71 million respectively held nonqualified trust designated provide pension benefits certain underfunded plans december 31 2005 2004 accumulated benefit obligations abo retirement plans 1844 million 1672 million respectively aggregated accumulated benefit obligations notes consolidated financial statements continued fair values plan assets retirement plans accumulated benefit obligations excess plan assets 1671 million 1232 million respectively december 31 2005 1331 million 1029 million respectively december 31 2004 accordance fasb staff position 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 medicare act company began accounting effect federal subsidy medicare act third quarter 2004 result company’s accumulated postretirement benefit obligation reduced 48 million company’s net postretirement benefits expense reduced 7 million 2004 reduction postretirement benefits expense consists reductions service cost interest cost net amortization 2 million 3 million 2 million respectively following reconciliation funded status plans net assetliability unrecognized actuarial gains losses primarily represent cumulative difference actuarial assumptions actual returns plan assets changes discount rates plans’ experience december 31 2005 company unrecognized net actuarial loss 669 million retirement plans 203 million postretirement benefit plans total unrecognized net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees components net assetliability recorded consolidated balance sheet follows december 31 2005 2004 company’s additional minimum pension liability 416 million 335 million respectively primarily related domestic retirement plans resulted adjustment accumulated comprehensive incomeloss net tax 56 million 14 million 2005 2004 respectively notes consolidated financial statements continued plan assets fair value asset allocation consolidated retirement plans december 31 2005 2004 target allocation 2006 follows asset allocation postretirement benefit trusts december 31 2005 2004 target allocation 2006 follows company’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns consistent acceptable level overall portfolio market value risk assets periodically rebalanced back target allocations estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid 1 expected benefit payments reduced expected subsidy payments medicare act 2 million 3 million 3 million 3 million 3 million 21 million 2006 2007 2008 2009 2010 20112015 respectively company’s practice fund qualified pension plans least sufficient amounts meet minimum requirements set forth applicable laws notes consolidated financial statements continued company expects contribute approximately 100 million retirement plans 2006 including 50 million us retirement plan contribution us may change based outcome pending funding reform legislation defined contribution plans 2003 company defined contribution profitsharing plan covering substantially fulltime domestic employees completed one year service annual contribution determined formula based company’s income shareholders’ equity participants’ compensation profit sharing contribution 2003 determined formula described company longer makes contributions plan beginning 2004 company makes contributions existing defined contribution savings plan equal three percent eligible employee earnings plus matching two percent eligible employee earnings based employee contributions plan total company contributions plan 2005 2004 58 million 48 million respectively 7 earnings per common share following table reconciles components basic diluted earningsloss per share computations equivalent common shares issuable company’s stock incentive plans excluded computation diluted eps effect would antidilutive 39 million 89 million 77 million respectively years ended december 31 2005 2004 2003 respectively also years ended december 31 2005 2004 69 million 27 million common shares respectively obtainable upon conversion company’s 6 percent mandatory convertible preferred stock excluded computation diluted earnings per share effect would antidilutive 8 comprehensive incomeloss components accumulated comprehensive incomeloss december 31 notes consolidated financial statements continued gross unrealized pretax gains investments 2005 2004 0 5 million respectively unrealized losses immaterial 9 inventories consisted following december 31 inventories valued lastin firstout basis comprised approximately 19 percent total inventories december 31 2005 2004 estimated replacement cost total inventories december 31 2005 2004 1652 million 1624 million respectively 10 intangible assets components intangible assets net follows december 31 included pension assets 61 million 49 million 2005 2004 respectively patents licenses trademarks amortized straightline method respective useful lives residual value intangible assets estimated zero 2005 company recorded 11 million base technology intangibles related acquisition neogenesis’ assets amount amortized five years 2005 company restructured integrilin copromotion agreement millennium pharmaceuticals inc millennium result 36 million included intangible assets amortized approximately nine years included intangible assets approximately 120 million related license copromotion agreements bayer amounts amortized effective useful lives agreements ranging seven 14 years see note 11 “product licenses acquisitions” additional information transactions 2004 net carrying amount patents licenses reduced approximately 118 million result bristolmyers squibb’s reacquisition copromotion rights tequin us amortization expense related intangible assets 2005 2004 2003 49 million 42 million 55 million respectively intangible assets reviewed determine notes consolidated financial statements continued recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review 11 product licenses acquisitions february 14 2005 company acquired assets neogenesis pharmaceuticals approximately 18 million 11 million recorded intangible asset related base technology neogenesis applies novel screening chemistry technologies discover new drug candidates august 2005 company announced exercised right develop commercialize centocor inc centocor golimumab fully human monoclonal antibody developed therapy treatment rheumatoid arthritis immunemediated inflammatory diseases pursuant exercise company receives exclusive worldwide marketing rights golimumab excluding us japan china including hong kong taiwan indonesia exchange rights agreement company made upfront payment amount 124 million centocor tax benefit 6 million payment expensed reported research development year ended december 31 2005 statements consolidated operations company sharing development costs centocor effective september 1 2005 company restructured integrilin copromotion agreement millennium terms restructured agreement company acquired exclusive us development commercialization rights integrilin exchange upfront payment 36 million royalties integrilin sales company agreed pay minimum royalties 85 million per year millennium 2006 2007 company also purchased existing integrilin inventory millennium 36 million upfront payment capitalized included intangible assets 2004 company entered collaboration license agreement toyama chemical co ltd toyama terms agreement company acquired exclusive worldwide rights excluding japan korea china develop use sell garenoxacin human veterinary uses excluding topical ophthalmic applications garenoxacin toyama’s quinolone antibacterial agent currently regulatory review us connection execution agreement company incurred charge second quarter 2004 upfront fee 80 million toyama amount expensed reported research development year ended december 31 2004 statements consolidated operations 2004 company entered strategic agreement bayer intended enhance company’s pharmaceutical resources terms agreement company exclusive rights us puerto rico market sell distribute avelox cipro antibiotics uses excluding certain topical formulations administration eye ear company pays bayer royalties generally excess 50 percent products based sales agreement company also undertook bayer’s us commercialization activities erectile dysfunction medicine levitra bayer’s copromotion agreement glaxosmithkline plc japanese market bayer comarket company’s cholesterolabsorption inhibitor zetia approved company received recorded deferred revenue 120 million related sale zetia copromotion rights bayer deferred revenue begin recognized upon regulatory approval japan zetia currently regulatory review japan certain circumstances zetia receive regulatorymarketing approval japan certain date amount required repaid bayer agreement bayer potentially restricts company marketing products us would compete products agreement result company expects notes consolidated financial statements continued sublicense rights garenoxacin quinolone antibacterial agent company licensed toyama 2004 12 shortterm borrowings longterm debt commitments short longterm borrowings general shortterm borrowings consist bank loans commercial paper issued us shortterm borrowings december 31 2005 2004 totaled 13 billion 16 billion respectively included shortterm borrowings commercial paper outstanding december 31 2005 2004 298 million 15 billion respectively weighted average interest rate shortterm borrowings december 31 2005 2004 47 percent 26 percent respectively november 26 2003 company issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 interest payable semiannually net proceeds offering 237 billion upon issuance notes rated a3 moody’s investors service inc moody’s standard poor’s rating services sp interest rates payable notes subject adjustment follows rating assigned particular series notes either moody’s sp changes rating set forth interest rate payable series notes initial interest rate 53 percent notes due 2013 65 percent notes due 2033 plus additional interest rate set forth moody’s sp event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade either moody’s sp a3 respectively notes subsequently rated baa1 moody’s bbb sp july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 therefore effective december 1 2004 interest rate payable notes due 2013 increased 53 percent 555 percent interest rate payable notes due 2033 increased 65 percent 675 percent december 31 2005 notes rated baa1 moody’s sp notes redeemable whole part company’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes credit facilities company revolving credit facility syndicate major financial institutions march 2005 company negotiated increase commitment facility 125 billion 15 billion changes basic terms preexisting credit facility concurrently notes consolidated financial statements continued increase commitments facility company terminated early separate 250 million line credit would matured may 2006 outstanding balance facility time terminated existing 15 billion credit facility matures may 2009 requires company maintain total debt capital ratio 60 percent credit line available general corporate purposes management considers facility support company’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2005 325 million drawn facility whollyowned international subsidiary fund ajca repatriations addition aforementioned credit facility company entered 575 million credit facility fourth quarter 2005 drawn december 31 2005 credit facility utilized whollyowned international subsidiary fund repatriations ajca credit facility requires company maintain total debt total capital ratio 60 percent borrowings payable later november 4 2008 funds borrowed facility subsequently repaid may reborrowed credit facility borrowings classified shortterm borrowings company intends repay amounts next twelve months addition company’s international subsidiaries approximately 173 million available unused lines credit various financial institutions december 31 2005 commitments total rent expense amounted 110 million 2005 100 million 2004 91 million 2003 future annual minimum rental commitments noncancelable operating leases december 31 2005 follows 2006 76 million 2007 63 million 2008 45 million 2009 21 million 2010 12 million aggregate minimum lease obligations 32 million due thereafter december 31 2005 capital lease obligations 1 million 6 million included current portion longterm debt longterm debt respectively december 31 2005 company commitments totaling 175 million related capital expenditures made 2006 13 financial instruments sfas 133 “derivative instruments financial hedging activities” amended requires derivatives recorded balance sheet fair value accounting standard also provides effective portion qualifying cash flow hedges recognized income hedged item affects income changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized income occur risks policy objectives company exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes time company hedge selective foreign currency risks derivatives currently management deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments company’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory notes consolidated financial statements continued related payables rate inventory turnover provide natural level protection adverse changes exchange rates furthermore risk adverse exchange rate change somewhat mitigated fact company’s international operations widespread limited basis company hedge selective foreign currency contract exposures mitigate exchange rate risks company mitigates credit risk derivative instruments dealing counterparties considered financially sound accordingly company anticipate loss nonperformance company enter derivative instruments generate trading profits table presents carrying values estimated fair values certain company’s financial instruments december 31 estimated fair values determined based market prices available dealer quotes carrying values financial instruments including cash equivalents approximated estimated fair values december 31 2005 2004 longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related liabilities interest rate swap contract prior march 2005 company interest rate swap arrangement effect counterparty bank arrangement utilized two longterm interest rate swap contracts one foreignbased subsidiary company bank us subsidiary company bank two contracts equal offsetting terms covered master netting arrangement contract involving foreignbased subsidiary permitted subsidiary prepay portion future obligation bank contract involving us subsidiary permitted bank prepay portion future obligation us subsidiary prepayments totaling 19 billion made contracts december 31 2004 terms swap contracts amended called phased termination swaps based agreed repayment schedule begin later march 31 2005 termination would require company counterparty repay prepayments pursuant agreed repayment schedule company option allowed accelerate termination arrangement associated scheduled repayments nominal fee february 28 2005 company’s foreignbased subsidiary us subsidiary gave notice counterparty intent terminate arrangement march 21 2005 company terminated swap agreements associated repayments made respective obligors notes consolidated financial statements continued termination arrangement material impact company’s statement consolidated operations 14 shareholders’ equity company authorized 50000000 shares preferred stock consists 12000000 preferred shares designated series junior participating preferred stock 28750000 preferred shares designated 6 percent mandatory convertible preferred stock 9250000 preferred shares whose designations yet determined percent mandatory convertible preferred stock shelf registration august 10 2004 company issued 28750000 shares 6 percent mandatory convertible preferred stock preferred stock face value 144 billion net proceeds company 14 billion deducting commissions discounts underwriting expenses preferred stock automatically convert 22451 27840 common shares company depending average closing price company’s common shares period immediately preceding mandatory conversion date september 14 2007 defined prospectus preferred shareholders may elect convert time prior september 14 2007 minimum conversion ratio 22451 common shares per share preferred stock additionally time prior mandatory conversion date closing price company’s common shares exceeds 3341 least 20 trading days within period 30 consecutive trading days company may elect cause conversion less preferred stock outstanding minimum conversion ratio 22451 common shares preferred share preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent company legally permitted pay dividends board directors declares dividend payable company pay dividends dividend payment date dividend payment dates march 15 june 15 september 15 december 15 first dividend paid december 15 2004 december 31 2005 company ability issue 563 million principal amount securities currently effective securities exchange commission sec shelf registration treasury stock summary treasury share transactions years ended december 31 follows preferred share purchase rights company preferred share purchase rights outstanding attached presently trade company’s common shares exercisable rights become exercisable person group acquires 20 percent company’s common stock announces tender offer completed would result ownership person group 20 percent company’s common stock person group acquire 20 percent company’s outstanding common stock merger business combination transaction right notes consolidated financial statements continued entitle holder acquirer purchase common shares scheringplough market value twice exercise price right exercise price rights 100 following acquisition person group beneficial ownership 20 percent less 50 percent company’s common stock board directors may call exchange rights owned acquirer whole part exchange ratio one common share one twohundredth share series junior participating preferred stock per right also prior acquisition person group beneficial ownership 20 percent company’s common stock rights redeemable 005 per right option board directors rights expire july 10 2007 unless earlier redeemed exchanged board directors also authorized reduce 20 percent thresholds referred less greater sum 001 percent largest percentage outstanding shares common stock known company beneficially owned person group affiliated associated persons ii 10 percent except following acquisition person group beneficial ownership 20 percent company’s common stock reduction may adversely affect interests holders rights 15 stock incentive plans terms company’s 2002 stock incentive plan approved company’s shareholders 72 million company’s common shares may granted stock options awarded deferred stock units officers certain employees company december 2007 december 31 2005 11 million options deferred stock units remain available future year grants 2002 stock incentive plan option exercise prices equal market price common shares grant dates options expire later 10 years date grant options granted 2005 2004 generally threeyear vesting term granted 2003 prior generally oneyear vesting term option grants vest longer periods ranging three nine years deferred stock units payable equivalent number common shares distributable single installment three five equal annual installments generally commencing three years date award following table summarizes stock option activity past three years current prior plans incentive plans approved company’s shareholders notes consolidated financial statements continued summarized information stock options outstanding exercisable december 31 2005 follows 2005 2004 2003 company awarded deferred stock units totaling 73 million units 34 million units 32 million units respectively weighted average fair values deferred stock units granted 2005 2004 2003 2065 1811 1759 respectively 16 insurance coverage company maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly result recent external events availability insurance become restrictive management considers impact changes continually assesses best way provide insurance needs future company selfinsures substantial proportion risk relates products’ liability 17 segment information company three reportable segments prescription pharmaceuticals consumer health care animal health segment sales profit data follow consistent company’s current management reporting structure prescription pharmaceuticals segment discovers develops manufactures markets human pharmaceutical products consumer health care segment develops manufactures markets overthecounter foot care sun care products primarily us animal health segment discovers develops manufactures markets animal health products net sales segment notes consolidated financial statements continued profit segment “corporate other” includes interest income expense foreign exchange gains losses headquarters expenses special charges miscellaneous items accounting policies used segment reporting described note 1 “summary significant accounting policies” 2005 “corporate other” includes special charges 294 million including 28 million employee termination costs 16 million asset impairment charges increase litigation reserves 250 million resulting total reserve 500 million representing company’s current estimate resolve massachusetts investigation well investigations disclosed “awp investigations” state litigation disclosed “awp litigation” note 19 “legal environmental regulatory matters” estimated charges relate reportable segments follows prescription pharmaceuticals 289 million consumer health care 2 million animal health 1 million corporate 2 million 2004 “corporate other” includes special charges 153 million including 119 million employee termination costs well 27 million asset impairment charges 7 million closure costs primarily related exit small european research development facility estimated charges relate reportable segments follows prescription pharmaceuticals 135 million consumer health care 3 million animal health 2 million corporate 13 million 2003 “corporate other” includes special charges 599 million including 179 million employee termination costs 350 million provision increase litigation reserves 70 million asset impairment charges estimated charges relate reportable segments follows prescription pharmaceuticals 515 million consumer health care 25 million animal health 4 million corporate 55 million notes consolidated financial statements continued net sales major product net sales geographic area company subsidiaries 50 countries outside us single foreign country except france italy japan accounted 5 percent consolidated net sales notes consolidated financial statements continued past three years net sales presented geographic area company’s customers located net sales customer single customer except mckesson corporation major pharmaceutical health care products distributor accounted 10 percent consolidated net sales past three years longlived assets geographic location longlived assets shown geographic location primarily property supplemental sales information sales products comprising 10 percent company’s us international sales year ended december 31 2005 follows notes consolidated financial statements continued scheringplough’s net sales include sales vytorin zetia marketed partnership merck company accounts joint venture equity method accounting see note 3 “equity income cholesterol joint venture” company disaggregate assets segment basis internal management reporting therefore information presented 18 consent decree may 2002 company agreed fda entry consent decree resolve issues related compliance current good manufacturing practices cgmp certain company’s facilities new jersey puerto rico “consent decree” “decree” summary decree required company make payments totaling 500 million two equal installments 250 million paid 2002 2003 addition decree required company complete revalidation programs manufacturing processes used produce bulk active pharmaceutical ingredients finished drug products covered facilities well implement comprehensive cgmp work plan facility decree required foregoing completed accordance strict schedules provided possible imposition additional payments event company adhere approved schedules final completion work made subject certification independent experts whose certifications turn made subject fda acceptance september 30 2005 company completed revalidation third party certification bulk active pharmaceutical ingredients december 31 2005 company completed revalidation third party certification finished drug products company also completed 212 significant steps cgmp work plan december 31 2005 requirements completed accordance schedules required decree terms decree provided fda notified company significant violation fda law regulations decree five year period since decree’s entry may 2002 may 2007 company may petition court decree dissolved fda oppose company’s petition although company reported fda completed revalidation programs cgmp work plan third party certification work plan still pending possible third party expert may certify completion work plan significant step fda may disagree expert’s certification event possible fda may assess additional payments permitted decree described detail general cgmp work plan contained 212 significant steps whose timely satisfactory completion subject payments 15 thousand per business day deadline missed payments may exceed 25 million 2002 50 million years 2003 2004 2005 payments subject overall cap 175 million company would expense additional payments assessed decree incurred 19 legal environmental regulatory matters background company involved various claims investigations legal proceedings company records liability contingencies probable liability incurred amount reasonably estimated company adjusts liabilities contingencies reflect current best estimate probable loss minimum liability case may best estimate determinable company records minimum amount within probable range notes consolidated financial statements continued liability expected insurance recoveries considered determining amounts recorded liabilities environmentalrelated matters company believes loss contingency reasonably possible rather probable amount loss cannot estimated liability recorded however liability reasonably possible disclosure loss contingency made company reviews status claims investigations legal proceedings ongoing basis including related insurance coverages time company may settle otherwise resolve matters terms conditions management believes best interests company resolution claims investigations legal proceedings individually aggregate could material adverse effect company’s results operations cash flows financial condition resolution including settlements matters types set forth remainder note particular investigations frequently involve fines penalties amount would material results operations cash flows financial condition resolution matters may also involve injunctive administrative remedies would adversely impact business exclusion government reimbursement programs turn would material adverse impact business future financial condition cash flows results operations assurances company prevail matters discussed remainder note settlements reached acceptable terms including scope release provided absence injunctive administrative remedies would adversely impact business exclusion government reimbursement programs amounts exceed amounts reserved even acceptable settlement reached assurance investigations litigations commenced raising similar issues potentially exposing company additional material liabilities outcome matters discussed investigations could include commencement civil andor criminal proceedings involving imposition substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs total liabilities reserved reflect estimate case investigations current estimate liability final settlement adjudication matters could possibly less could materially exceed liabilities recorded financial statements could material adverse impact company’s financial condition cash flows operations company cannot predict timing resolution matters outcomes except matters discussed remainder note recorded liabilities contingencies december 31 2005 related expenses incurred year ended december 31 2005 material opinion management based advice legal counsel ultimate outcome matters except matters discussed remainder note material impact company’s results operations cash flows financial condition patent matters dr scholl’s freeze away patent july 26 2004 orasure technologies filed action us district court eastern district pennsylvania alleging patent infringement scheringplough healthcare products sale dr scholl’s freeze away wart removal product complaint seeks permanent injunction unspecified damages including treble damages investigations massachusetts investigation us attorney’s office district massachusetts investigating broad range company’s sales marketing clinical trial practices programs along warrick pharmaceuticals warrick company’s generic subsidiary investigation focused following alleged practices providing remuneration managed care notes consolidated financial statements continued organizations physicians others induce purchase schering pharmaceutical products offlabel marketing drugs submitting false pharmaceutical pricing information government purposes calculating rebates required paid medicaid program company cooperating investigation outcome investigation could include commencement civil andor criminal proceedings involving imposition substantial fines penalties injunctive administrative remedies including exclusion government reimbursement programs company recorded liability 500 million related investigation well investigations described “awp investigations” state litigation described “awp litigation” company able reach settlement current estimate resolution matter could material adverse impact company’s results operations beyond reflected date company able reach settlement current estimate cash flows financial condition andor business awp investigations company continues respond existing new investigations department health human services department justice several states industry company practices regarding average wholesale price awp investigations relate whether awp used pharmaceutical companies certain drugs improperly exceeds average prices paid providers consequence results unlawful inflation certain government drug reimbursements based awp company cooperating investigations outcome investigations could include imposition substantial fines penalties injunctive administrative remedies nitrodur investigation august 2003 company received civil investigative subpoena issued office inspector general us department health human services seeking documents concerning company’s classification nitrodur medicaid rebate purposes company’s use nominal pricing bundling product sales company cooperating investigation appears subpoena one number addressed pharmaceutical companies concerning inquiry issues relating payment government rebates pricing matters awp litigation company continues respond existing new litigation certain states private payors industry company practices regarding average wholesale price awp litigations relate whether awp used pharmaceutical companies certain drugs improperly exceeds average prices paid providers consequence results unlawful inflation certain reimbursements drugs state programs private payors based awp complaints allege violations federal state law including fraud medicaid fraud consumer protection violations among claims majority cases plaintiffs seeking class certifications cases classes certified outcome litigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies securities class action litigation federal securities litigation following company’s announcement fda conducting inspections company’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices several lawsuits filed company certain named officers lawsuits allege defendants violated federal securities law allegedly failing disclose material information making material misstatements specifically allege company failed disclose alleged serious risk new drug application clarinex would delayed result manufacturing issues allege company failed disclose alleged depth severity notes consolidated financial statements continued manufacturing issues complaints consolidated one action us district court district new jersey consolidated amended complaint filed october 11 2001 purporting represent class shareholders purchased shares company stock may 9 2000 february 15 2001 complaint seeks compensatory damages behalf class court certified shareholder class october 10 2003 discovery ongoing shareholder derivative actions two lawsuits filed us district court district new jersey company certain officers directors former director seeking damages behalf company including disgorgement trading profits made defendants allegedly obtained basis material nonpublic information complaints allege failure disclose material information breach fiduciary duty directors relating fda inspections investigations company’s pricing practices sales marketing clinical trials practices lawsuits shareholder derivative actions purport assert claims behalf company two shareholder derivative actions pending us district court district new jersey consolidated one action august 20 2001 early stages product liability company previously disclosed defendant putative class action lawsuits involving alleged claims personal injuries arising plaintiffs’ ingestion phenylpropanolaminecontaining coughcold remedies “ppa” products class action lawsuits plaintiffs asserted claims personal injuries arising use laxative products sought refund purchase price laxatives purchased lawsuits dismissed resolved amounts paid resolve matters immaterial class action lawsuits currently exist concerning ppa claims individual lawsuits involving ppa products still pending company deems pending lawsuits immaterial aggregate company also previously disclosed defendant individual lawsuits relating recalled albuterol vanceril vancenase inhalers lawsuits dismissed resolved amounts paid resolve lawsuits immaterial erisa litigation march 31 2003 company served putative class action complaint filed us district court new jersey alleging company retired chairman ceo president richard jay kogan company’s employee savings plan administrator several current former directors certain corporate officers messrs larosa moore breached fiduciary obligations certain participants plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs appealed august 19 2005 us court appeals third circuit reversed dismissal district court matter remanded back district court proceedings kdur antitrust litigation kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients following commencement ftc administrative proceeding described alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages discovery ongoing antitrust matters kdur scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle related generic versions kdur lederle upsher smith filed abbreviated new drug applications andas april 2 2001 ftc started administrative proceeding scheringplough upshersmith lederle alleging anticompetitive effects settlements administrative law judge issued decision patent litigation settlements complied law respects dismissed claims company ftc staff appealed decision full commission full commission reversed decision notes consolidated financial statements continued administrative law judge ruling settlements violate antitrust laws full commission issued cease desist order imposing various injunctive restraints federal court appeals set aside commission ruling vacated cease desist order august 29 2005 ftc filed petition seeking hearing us supreme court pending administrative obligations connection settlement investigation us department justice us attorney’s office eastern district pennsylvania company entered fiveyear corporate integrity agreement cia disclosed note 18 “consent decree” company subject obligations consent decree fda failure comply obligations cia consent decree result financial penalties matters biopharma contract dispute biopharma srl filed claim civil court rome july 21 2004 docket 573972004 9th chamber certain scheringplough subsidiaries complaint alleges company fulfill duties distribution supply agreements biopharma scheringplough subsidiary distribution scheringplough generic products manufactured biopharma hospitals pharmacists france tax matters october 2001 irs auditors asserted two interest rate swaps company entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 company made payments irs amount 194 million income tax 279 million interest company filed refund claims tax interest irs december 2004 following irs’s denial company’s claims refund company filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently discovery phase company’s tax reserves adequate cover mentioned payments environmental company responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law company alleged potentially responsible party prp company believes remote time material liability relation sites company estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps company records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated report independent registered public accounting firm board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries “company” december 31 2005 2004 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 28 2006 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp parsippany new jersey february 28 2006 scheringplough corporation subsidiaries quarterly data unaudited see note 2 “special charges” consolidated financial statements additional information relating special charges company’s common shares listed principally traded new york stock exchange approximate number holders record common shares january 31 2006 37000 item 9item 8 financial statements supplementary data scheringplough corporation subsidiaries statements consolidated operations amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows amounts millions accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity amounts millions accompanying notes integral part consolidated financial statements notes consolidated financial statements 1 summary significant accounting policies overview scheringplough innovationdriven sciencecentered global health care company biopharmaceutical research collaborations partners scheringplough creates therapies help save improve lives around world scheringplough applies researchanddevelopment platform human prescription consumer products well animal health products november 2007 scheringplough acquired organon biosciences nv obs company discovers develops manufactures human prescription animal health products see note 2 “acquisitions’’ additional information principles consolidation consolidated financial statements include scheringplough corporation subsidiaries scheringplough intercompany balances transactions eliminated accounts obs included part scheringplough’s results date acquisition november 19 2007 use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis scheringplough evaluates estimates based historical experience various assumptions believed reasonable circumstances actual results could differ estimates equity method accounting scheringplough accounts share activity merckscheringplough joint venture joint venture merck co inc merck using equity method accounting scheringplough significant influence joint venture’s operating financial policies accordingly scheringplough’s net sales include sales joint venture scheringplough’s share earnings joint venture included equity income determining consolidated net incomeloss equity income joint venture included human prescription pharmaceuticals segment revenue sales vytorin zetia recognized joint venture title risk loss passed customer equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck see note 4 “equity income” additional information regarding joint venture cash equivalents cash equivalents include operating cash highly liquid investments original maturities three months less including highlyrated money market accounts shortterm investments shortterm investments carried fair value classified availableforsale investments consist certificates deposit commercial paper maturities less year notes consolidated financial statements continued inventories valued lower cost market cost determined using lastin firstout lifo method substantial portion inventories located us cost inventories determined firstin firstout method fifo depreciation property equipment depreciation provided estimated useful lives properties generally use straightline method useful lives new property acquisitions generally follows scheringplough reviews carrying value property equipment indications impairment accordance statement financial accounting standard sfas 144 “accounting impairment disposal longlived assets” depreciation expense 404 million 2007 443 million 2006 362 million 2005 depreciation expense 2006 included accelerated depreciation related manufacturing streamlining 93 million foreign currency translation net assets scheringplough’s international subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included comprehensive incomeloss reflected separate component shareholders’ equity remaining international subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included statements consolidated operations exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation account transactional exchange gains losses included incomeexpense net revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business notes consolidated financial statements continued recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process earnings per common share diluted earningsloss per common share computed dividing net incomeloss available common shareholders plus preferred stock dividends dilutive effect mandatory convertible preferred stock sum weighted average number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options dilutive effect shares issuable upon conversion scheringplough’s mandatory convertible preferred stock basic earningsloss per common share computed dividing net incomeloss available common shareholders weighted average number common shares outstanding goodwill intangible assets financial accounting standards board fasb statement financial accounting standard sfas 142 “goodwill intangible assets” requires intangible assets acquired either individually group assets initially recognized measured based fair value intangible finite life amortized useful life intangible indefinite life including goodwill amortized company assesses recoverability carrying value goodwill intangible assets indefinite useful lives annually whenever events changes circumstances indicate carrying amount asset may fully recoverable recoverability goodwill measured reporting unit level based twostep approach first carrying amount reporting unit compared fair value estimated future net discounted cash flows expected generated reporting unit extent carrying value reporting unit exceeds fair value reporting unit second step would performed wherein reporting unit’s assets liabilities fair valued extent reporting unit’s carrying value goodwill exceeds implied fair value goodwill impairment exists would recognized recoverability intangible assets indefinite useful lives measured comparison carrying amount intangible assets fair value respective intangible assets excess carrying value intangible assets fair value intangible assets would recognized impairment loss scheringplough conducts annual impairment testing goodwill october 1 year based impairment tests performed impairment goodwill 2007 2006 2005 however assurance future goodwill indefinite lived assets impairment tests result charge statement consolidated operations 2007 scheringplough’s goodwill intangible asset balances increased significantly due acquisition obs see note 2 “acquisition” note 12 “goodwill intangible assets” additional information assets included assets capitalized software 278 million 246 million december 31 2007 2006 respectively amortization expense 89 million 76 million 71 million 2007 2006 2005 respectively notes consolidated financial statements continued income taxes scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 fin 48 order recognize uncertain tax benefit taxpayer must likely sustaining position measurement benefit calculated largest amount 50 percent likely realized upon resolution benefit deferred income taxes recognized future tax effects temporary differences financial income tax reporting basis scheringplough’s assets liabilities based enacted tax laws rates accounting sharebased compensation prior january 1 2006 scheringplough accounted stockbased compensation arrangements using intrinsic value method sharebased employee compensation cost reflected statements consolidated operations scheringplough’s deferred stock units performance plans stock options granted plans exercise price equal market value underlying common stock date grant effective january 1 2006 scheringplough accounts sharebased compensation accordance sfas 123 revised 2004 “sharebased payment” sfas 123r see note 5 “sharebased compensation” additional information shipping handling expenses shipping expenses classified selling general administrative expenses consolidated statement operations impact recently issued accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” standard defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements standard codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions calendar year companies standard effective beginning january 1 2008 except nonfinancial items measured nonrecurring basis effective beginning january 1 2009 based scheringplough’s current financial position impact standard consolidated financial statements expected material november 2006 fasb issued emerging issues task force issue eitf 0610 “accounting deferred compensation postretirement benefits aspects collateral assignment splitdollar life insurance arrangements” effective calendar year companies january 1 2008 task force concluded employer recognize liability postretirement benefit related collateral assignment splitdollar life insurance arrangement accordance either fasb statement 106 apb opinion 12 based substantive agreement employee task force also concluded employer recognize measure asset based nature substance collateral assignment splitdollar life insurance arrangement impact standard consolidated financial statements expected material february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also notes consolidated financial statements continued includes amendment sfas 115 “accounting certain investments debt equity securities” applies entities availableforsale trading securities statement effective beginning entity’s first fiscal year begins november 15 2007 based scheringplough’s current financial position impact standard consolidated financial statements expected material june 2007 fasb issued eitf issue 073 “accounting nonrefundable advance payments goods services received use future research development activities” effective calendar year companies january 1 2008 task force concluded nonrefundable advance payments goods services used rendered future research development activities deferred capitalized amounts recognized expense related goods delivered services performed goods services longer expected provided impact standard consolidated financial statements expected material december 2007 fasb issued eitf issue 071 “accounting collaborative arrangements” effective calendar year companies january 1 2009 task force clarified manner costs revenues sharing payments made received partner collaborative arrangements presented income statement set forth certain disclosures required partners’ financial statements scheringplough currently assessing potential impacts implementing standard december 2007 securities exchange commission sec issued staff accounting bulletin 110 sab 110 permits entities certain circumstances continue use “simplified” method estimating expected term plain options discussed sab 107 accordance sfas 123r guidance release effective january 1 2008 impact standard consolidated financial statements expected material december 2007 fasb issued sfas 141 revised 2007 “business combinations” sfas 141r calendar year companies standard applicable new business combinations occurring january 1 2009 sfas 141r requires acquiring entity recognize assets acquired liabilities assumed transaction acquisitiondate fair value limited exceptions significantly sfas 141r require acquisition costs generally expensed incurred certain acquired contingent liabilities recorded fair value acquired inprocess research development recorded fair value indefinitelived intangible asset acquisition date standard also impact certain unresolved matters related purchase transactions consummated prior effective date standard scheringplough currently assessing potential impacts implementing standard december 2007 fasb also issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” effective fiscal years interim periods within fiscal years beginning december 15 2008 standard establishes new accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary scheringplough currently assessing potential impacts implementing standard 2 acquisition scheringplough acquired obs purchase price approximately euro 11 billion cash approximately 161 billion including legal professional fees november 19 2007 acquisition date acquisition added diversification marketed products including two new therapeutic areas women’s health central nervous system well significant strength animal health products rd pipeline purchase method accounting used account transaction accordance sfas 141 “business combinations” operating results obs included scheringplough’s consolidated financial statements period subsequent acquisition date notes consolidated financial statements continued following table provides pro forma financial information years ended december 31 2007 2006 acquisition occurred beginning period presented pro forma financial information periods presented includes amortization stepup inventory 11 billion acquired inprocess research development charge 38 billion nonrecurring charges directly attributable accounting acquisition pro forma financial information also includes effect purchase accounting adjustments additional amortization expense acquired identifiable intangible assets depreciation stepup property effect given pro forma financial information synergistic benefits may realized costs related integration obs pro forma financial information considered indicative actual results would achieved acquisition consummated dates indicated purport indicate results operations future date future period preliminary allocation purchase price obs november 19 2007 follows allocation purchase price subject finalization scheringplough’s management analysis fair value assets acquired including assets related pension plans liabilities assumed obs acquisition date final allocation purchase price may result additional adjustments recorded amounts assets liabilities may also result adjustments depreciation amortization acquired inprocess research development adjustments arising finalization purchase price allocation impact cash flows however adjustments could result material increases decreases net incomeloss available common shareholders revisions purchase price allocation made additional information becomes available final allocation expected completed soon practicable later 12 months acquisition date notes consolidated financial statements continued 1 preliminary purchase price allocation identifiable intangible assets follows weighted average life 68 billion total intangibles approximately 15 years intangible assets significant residual value acquired intangible assets determined indefinite life 2 18 billion goodwill assigned human prescription pharmaceuticals segment 888 million assigned animal health segment none goodwill deductible income tax purposes 3 preliminary value 38 billion assigned acquired iprd charged operations fourth quarter 2007 charge associated research projects animal health research projects women’s health central nervous system anesthesia therapeutic areas human health amount determined using discounted cash flow projections identified research projects technological feasibility established alternative future use discount rates used ranged 14 percent 18 percent projected launch dates following fda regulatory approval years 2008 2013 time scheringplough expects projects begin generate cash flows cost complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2007 estimated cost complete projects near final stages development excess 700 million research development projects considered valuation subject normal risks uncertainties associated demonstrating safety efficacy required obtain fda regulatory approvals 4 included acquisition related liabilities involuntary termination benefits costs exit certain activities obs conjunction obs acquisition scheringplough agreed divest certain assets part regulatory reviews us europe assets classified held sale included current assets consolidated balance sheet material 3 special acquisition related charges manufacturing streamlining special acquisition related charges year ended december 31 2007 scheringplough incurred 84 million special acquisitionrelated charges comprised 61 million integrationrelated costs obs acquisition 23 million severance charges part integration activities manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamlined global supply chain enhanced scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new notes consolidated financial statements continued jersey total actions resulted elimination 1000 positions actions yielded annualized cost savings approximately 100 million special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 special charge activities special charges incurred 2005 follows litigation charges 2005 litigation reserves increased 250 million increase resulted total reserve 500 million massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 20 “legal environmental regulatory matters” representing scheringplough’s current estimate resolve matter august 29 2006 scheringplough announced reached agreement us attorney’s office district notes consolidated financial statements continued massachusetts us department justice settle massachusetts investigation aggregate amount 435 million paid 2007 settlement amount relates massachusetts investigation awp investigations litigation ongoing employee termination costs employee termination costs 2005 consisted 7 million associated voluntary early retirement program verp us 2003 21 million employee termination costs asset impairment charges year ended december 31 2005 scheringplough recognized asset impairment charges 16 million related primarily consolidation scheringplough’s us biotechnology organizations 4 equity income may 2000 scheringplough merck co inc merck entered two separate sets agreements jointly develop market certain products us including 1 two cholesterollowering drugs 2 allergyasthma drug december 2001 cholesterol agreements expanded include countries world except japan general companies agreed collaborative activities agreements would operate virtual joint venture maximum degree possible relying respective infrastructures two companies agreements generally provide equal sharing development costs copromotion approved products company cholesterol agreements provide scheringplough merck jointly develop commercialize ezetimibe cholesterol management field oncedaily monotherapy managed zetia us asia ezetrol europe ii coadministration various approved statin drugs iii fixedcombination tablet ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine combination medication ezetimibesimvastatin managed vytorin us inegy many international countries zetiaezetrol ezetimibe vytorininegy combination ezetimibesimvastatin approved use us launched many international markets scheringplough utilizes equity method accounting recording share activity merckscheringplough cholesterol joint venture scheringplough’s net sales include sales joint venture cholesterol joint venture agreements provide sharing operating income generated joint venture based upon percentages vary product sales level country us market scheringplough receives greater share profits first 300 million annual zetia sales 300 million annual zetia sales merck scheringplough generally share profits equally scheringplough’s allocation joint venture income increased milestones recognized either company’s share joint venture’s income operations subject reduction company fails perform specified minimum number physician details particular country companies agree annually minimum number physician details country companies bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement company physician details set annual basis italy contractual amount included profit sharing calculation reimbursed us canada puerto rico amount equal company’s physician details multiplied contractual fixed fee scheringplough reports amounts part equity income cholesterol joint venture amounts represent reimbursement specific incremental identifiable costs schering notes consolidated financial statements continued plough’s detailing cholesterol products markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher year ended december 31 2005 scheringplough recognized milestones 20 million milestones related certain european approvals vytorin ezetimibesimvastatin 2005 costs joint venture companies contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally scheringplough merck certain conditions specified joint venture agreements merck scheringplough could entitled receive reimbursements future research development expenses 105 million following information provides summary components scheringplough’s equity income cholesterol joint venture year ended december 31 equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck due virtual nature cholesterol joint venture scheringplough incurs substantial costs selling general administrative costs reflected equity income borne overall cost structure scheringplough costs reported respective line items statements consolidated operations separately identifiable cholesterol agreements provide jointly owned facilities products resulting joint venture manufactured facilities owned either scheringplough merck allergyasthma agreements provide joint development marketing companies oncedaily fixedcombination tablet containing claritin singulair merck’s oncedaily leukotriene receptor antagonist treatment asthma seasonal allergic rhinitis 2007 new drug application filing combination tablet accepted us food drug administration fda standard review 2007 scheringplough announced agreed merck commence development singletablet combination ezetimibe atorvastatin treatment elevated cholesterol levels see note 20 “legal environmental regulatory matters” discussion enhance matter 5 sharebased compensation prior january 1 2006 scheringplough accounted stock compensation arrangements using intrinsic value method followed recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations prior 2006 stockbased employee compensation cost reflected statement consolidated operations notes consolidated financial statements continued scheringplough’s deferred stock units stock options granted plans exercise price equal market value underlying common stock date grant scheringplough adopted sfas 123r effective january 1 2006 sfas 123r requires companies recognize compensation expense amount equal fair value sharebased payments granted employees scheringplough elected modified prospective transition method therefore adjustments prior periods required result adopting sfas 123r method provisions sfas 123r apply awards granted date adoption unrecognized expense awards unvested date adoption based grant date fair value sfas 123r also amended sfas 95 “statement cash flows” require excess tax benefits reflected operating cash flows reflected financing cash flows grants issued retirementeligible employees prior adoption sfas 123r scheringplough recognized compensation costs stated vesting period stock option deferred stock unit acceleration unrecognized compensation costs upon retirement employee upon adoption sfas 123r scheringplough recognizes compensation costs sharebased grants made january 1 2006 service period earlier one year employee becomes retirement eligible first year grant ii employees’ retirement eligibility date first year grant iii service period award november 10 2005 financial accounting standards board fasb issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” scheringplough elected adopt transition method provided fasb staff position purposes calculating pool excess tax benefits available absorb tax deficiencies recognized subsequent adoption sfas 123r 2006 stock incentive plan 2006 plan approved scheringplough’s shareholders terms 2006 plan 92 million scheringplough’s authorized common shares may granted stock options awarded deferred stock units officers certain employees scheringplough december 2011 scheringplough intends utilize unissued authorized shares satisfy stock option exercises issuance deferred stock units expensed related sharebased compensation classified line item associated employees’ function 2007 scheringplough granted performancebased deferred stock units 2006 stock incentive plan provide certain senior managers opportunity earn shares scheringplough common stock units earned specific preestablished levels performance service achieved three year performance period 20072009 implementation sfas 123r first quarter 2006 scheringplough recognized benefit income 22 million cumulative effect change accounting principle related two longterm compensation plans required accounted liability plans sfas 123r tax benefits recognized related stockbased compensation related cash flow impacts material 2007 2006 scheringplough us net operating loss position stock options stock options granted employees exercise prices equal fair market value scheringplough’s stock dates grant stock options 2006 plan generally vest three years term seven years certain options granted previous plans vest longer periods ranging three nine years term 10 years compensation costs stock options recognized notes consolidated financial statements continued requisite service period separately vesting portion stock option award expense recognized net estimated forfeitures vesting period options using accelerated method expense recognized 2007 2006 approximately 72 56 million respectively weightedaverage assumptions used blackscholes optionpricing model 2007 2006 2005 follows dividend yields based historical dividend yields expected volatilities based historical volatilities scheringplough’s common stock expected differ materially future volatility riskfree interest rate based us treasury yield curve effect time grant periods corresponding expected life options expected term options represents weighted average period time options granted expected outstanding giving consideration vesting schedules scheringplough utilizes simplified method calculating expected term stock options allowed sab 107 amended sab 110 amount cash received exercise stock options 2007 2006 2005 225 million 83 million 60 million respectively stockbased compensation prior january 1 2006 determined using intrinsic value method following table provides supplemental information 2005 stockbased compensation computed sfas 123 notes consolidated financial statements continued summarized information stock options outstanding exercisable december 31 2007 follows weightedaverage fair value stock options granted 2007 2006 2005 806 522 704 respectively intrinsic value stock options exercised 2007 2006 2005 132 million 21 million 24 million respectively total fair value options vested 2007 2006 2005 80 million 73 million 69 million respectively december 31 2007 total remaining unrecognized compensation cost related nonvested stock options amounted 52 million amortized weightedaverage remaining requisite service period 21 years following table summarizes stock option activity december 31 2007 changes year ended current prior plans aggregate intrinsic value stock options outstanding december 31 2007 326 million aggregate intrinsic value stock options currently exercisable december 31 2007 253 million intrinsic value stock options calculated based exercise price underlying awards quoted price scheringplough’s common stock reporting date notes consolidated financial statements continued following table summarizes nonvested stock option activity december 31 2007 changes year ended current prior plans deferred stock units fair value deferred stock units determined based number shares granted quoted price scheringplough’s common stock date grant deferred stock units generally vest end three years provided employee remains service scheringplough expense recognized straightline basis vesting period deferred stock units payable equivalent number common shares expense recognized 2007 2006 2005 125 million 112 million 89 million respectively summarized information deferred stock units outstanding december 31 2007 follows weightedaverage fair value deferred stock units granted 2007 2006 2005 3119 1927 2065 respectively total fair value deferred stock units vested 2007 2006 2005 17 million 68 million 39 million respectively december 31 2007 total remaining unrecognized compensation cost related deferred stock units amounted 185 million amortized weightedaverage remaining requisite service period 20 years notes consolidated financial statements continued following table summarizes deferred stock unit activity december 31 2007 changes year ended current prior plans performancebased deferred stock units distribution performancebased deferred stock units contingent scheringplough meeting either performance andor market conditions one half performancebased stock unit grant performance condition fair value units based closing stock price date grant half grant market condition fair value units determined using lattice valuation model expected volatility assumptions appropriate determining fair value weighted average grantdate fair value performancebased deferred stock units granted 2007 2347 represented approximately 1397000 underlying shares december 31 2007 none units vested compensation expense performancebased stock units based fair values awards expected vest based performance measures recognized performance period compensation expense recognized year ended 2007 14 million december 31 2007 unrecognized compensation cost related performancebased deferred stock units 34 million amortized remaining weighted average requisite service period 20 years remaining unrecognized compensation cost performancebased deferred stock units may vary reporting period based changes expected achievement performance measures liability plans scheringplough two compensation plans classified liability plans sfas 123r ultimate cash payout plans based scheringplough’s stock performance compared stock performance peer group upon adoption sfas 123r january 1 2006 scheringplough recognized cumulative income effect change accounting principle 22 million order recognize liability plans fair value service period income expense amounts related liability plans based change fair value reporting date fair value plans estimated using lattice valuation model using expected volatility assumptions appropriate determining fair value one liability plans service period concluded december 31 2006 value plan became fixed expense recognized liability plans statements consolidated operations exclusive impact cumulative effect change accounting principle 22 million 24 million 2007 2006 respectively december 31 2007 total remaining unrecognized compensation cost related liability plans amounted 12 million amortized weightedaverage remaining requisite service period 1 year amount vary reporting period based changes fair value plan remaining service requirement notes consolidated financial statements continued 6 incomeexpense net components incomeexpense net follows net foreign exchange gains 37 million 2007 includes 101 million foreign currency transaction exchange losses related eurodenominated debt instruments prior accounted economic hedges net investment foreign operation currency exchange losses noncash items included adjustments reconcile net loss net cash provided operating activities statement consolidated cash flows 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options derivatives aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 “accounting derivative instruments hedging activities” amended sfas 133 accordingly gain derivatives recognized statement consolidated operations derivatives shortterm trading nature hedge specific financing investing transaction accordingly cash impacts derivatives classified operating cash flows statement consolidated cash flows 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest rate payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 14 “borrowings commitments” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations 2007 effective portion swaps 12 million recorded comprehensive income 2007 recognized interest expense life related debt cash flow impacts interest rate swaps classified operating cash flows statement consolidated cash flows 2006 2007 scheringplough participated healthcare refinancing programs adopted local government fiscal authorities major european market year ended december 31 2007 scheringplough transferred 173 million trade accounts receivables owned foreign subsidiaries thirdparty financial institutions without recourse year ended december 31 2006 scheringplough transferred 38 million trade accounts receivables owned foreign subsidiary thirdparty financial institutions without recourse transfer trade accounts receivable qualified sales accounts receivable sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” years ended december 31 2007 2006 transfer trade accounts receivable notes consolidated financial statements continued material impact scheringplough’s statement consolidated operations cash flows transactions included change accounts receivable operating activities 7 income taxes components consolidated lossincome income taxes years ended december 31 follows 2007 loss included acquired inprocess research development charge amortization fair values certain assets acquired part obs acquisition income cholesterol joint venture included table based jurisdiction income earned components income tax expense years ended december 31 follows 2004 scheringplough established valuation allowance net us deferred tax assets including benefit us operating losses management concluded likely benefit us net deferred tax assets realized december 31 2007 scheringplough continues maintain valuation allowance us net deferred tax assets 2005 scheringplough repatriated approximately 94 billion accordance planned repatriation provisions american jobs creation act ajca maximum amount foreign earnings qualified effectively reduced tax rate 525 percent tax provision related ajca recorded 2004 scheringplough’s tax provision year ended december 31 2005 includes us federal income tax benefit approximately 42 million result irs notice issued august 2005 provisions notice resulted reduction previously accrued tax liability attributable ajca repatriation also reduced 2005 us net operating loss nol carried forward subsequent years notes consolidated financial statements continued prior ajca scheringplough’s intent indefinitely reinvest unremitted earnings international subsidiaries except amounts repatriated ajca scheringplough maintains intent indefinitely reinvest earnings international subsidiaries scheringplough provided deferred taxes approximately 58 billion undistributed foreign earnings december 31 2007 determining tax liability would arise earnings remitted practicable liability would depend number factors including amount earnings distributed whether us operations generating taxable profits losses deferred income taxes provided temporary differences financial reporting basis tax basis scheringplough’s assets liabilities scheringplough’s deferred tax assets result principally recording certain items currently deductible tax purposes net operating loss tax credit carryforwards scheringplough’s deferred tax liabilities principally result book tax basis difference resulting obs acquisition use accelerated depreciation tax purposes components scheringplough’s deferred tax assets liabilities december 31 follows change valuation allowance 2006 2007 principally related increase deferred tax liabilities related acquisition obs deferred tax assets net operating losses tax credit carryforwards principally relate us nols research development rd tax credits us foreign tax credits federal alternative minimum tax amt credit carryforwards december 31 2007 scheringplough approximately 17 billion us nols income tax purposes available offset future us taxable income us nols us operating losses adjusted differences financial tax reporting us nols expire varying amounts 2024 2027 unused state nols related us nols well incremental amount related obs’s state nols expire varying amounts 2008 2027 december 31 2007 scheringplough approximately 164 million rd tax credits notes consolidated financial statements continued carryforwards expire 2022 2027 189 million foreign tax credit carryforwards expire 2011 2017 49 million amt tax credit carryforwards indefinite life us nol carryforward could materially reduced examination scheringplough’s income tax returns internal revenue service irs scheringplough reduced deferred tax assets related valuation allowance recorded us nols tax credit carryforwards reflect estimated resolution examinations difference income taxes based us statutory tax rate scheringplough’s income tax expense years ending december 31 due following permanent differences 2007 largely attributable acquired inprocess research development charge 38 billion related acquisition obs tax benefit recorded lower tax rates jurisdictions 2007 2006 2005 net primarily attributable scheringplough’s manufacturing subsidiaries singapore ireland puerto rico operate various incentive tax grants begin expire 2011 additionally major countries schering plough conducts operations statutory tax rates less us tax rate overall income taxes primarily relate foreign taxes include benefit related us operating losses scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 20 “legal environmental regulatory matters” january 1 december 31 2007 total amount unrecognized tax benefits 924 million 859 million respectively includes reductions deferred tax assets carrying full valuation allowance potential refund claims tax liabilities january 1 december 31 2007 approximately 645 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period 615 million would primarily attributable decision tax matter currently litigated newark district court possible final resolution scheringplough’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment receipt related cash dependent number factors many outside scheringplough’s control notes consolidated financial statements continued scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations total amount accrued interest related uncertain tax positions january 1 december 31 2007 193 million 197 million respectively included accrued liabilities tabular reconciliation scheringplough’s fin 48 unrecognized tax benefits january 1 december 31 2007 follows 1 schering plough considering filing refund claims based court decisions involving claim right doctrine two recent courts appeal decision clarifying law area made clear schering plough would prevail claims amount unrecognized tax benefits reduced accordingly impact net loss 2007 net consolidated income tax payments exclusive payments related tax examinations litigation discussed 2007 2006 2005 389 million 234 million 592 million respectively january 2006 irs completed examination scheringplough’s 19931996 federal income tax returns scheringplough made cash payment third quarter 2005 form tax deposit approximately 239 million anticipation settlement 19931996 tax examination prevent additional irs interest charges payment fully satisfied liability associated tax examination consistent previously recorded reserves second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns scheringplough seeking resolution issue raised examination irs administrative appeals process scheringplough remains open irs 1997 2007 tax years significant tax jurisdictions us state foreign scheringplough’s income tax returns open examination period 2000 2007 july 2007 scheringplough made payment 98 million irs pertaining 19972002 examination october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently tried newark district court scheringplough’s tax reserves adequate cover abovementioned payments notes consolidated financial statements continued 8 retirement plans postretirement benefits plan descriptions scheringplough defined benefit pension plans covering eligible employees us certain foreign countries largest us plan scheringplough retirement plan benefits normal retirement primarily based upon participant’s average final earnings years service social security income modified early retirement death disability benefits also available plan benefits become fully vested five years service plan provides continued accrual credited service employees opt postpone retirement remain employed scheringplough reaching normal retirement age nonus pension plans offer benefits competitive local market conditions defined benefit plans assumed scheringplough part obs acquisition included scheringplough’s results operations acquisition date financial position december 31 2007 see note 2 “acquisition” addition scheringplough provides postretirement medical life insurance benefits primarily eligible us retirees dependents postretirement benefit plans effective december 31 2006 scheringplough accounts retirement plans postretirement benefit plans accordance sfas 158 “employers’ accounting defined benefit pension postretirement plans” sfas 158 amendment sfas 87 88 106 132r sfas 158 requires recognition asset overfunded plans liability underfunded plans scheringplough’s consolidated balance sheets statement also requires recognition changes funded status plans year changes occur sfas 158 allows extended adoption date requirement scheringplough’s yearend date measurement date defined benefit pension postretirement plans measurement dates yearend prior adoption sfas 158 scheringplough adopted yearend measurement date effective 2007 impact consolidated financial statements related measurement date change material incremental effects resulting implementation sfas 158 individual line items scheringplough’s consolidated balance sheets december 31 2006 follows included scheringplough’s accumulated comprehensive loss december 31 2007 2006 689 million 553 million net tax effects 841 million 692 million net tax effects respectively costs recognized components net periodic benefit costs pursuant notes consolidated financial statements continued sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” components costs december 31 2007 2006 follows actuarial losses primarily represent cumulative difference actuarial assumptions actual returns plan assets changes discount rates plans’ experience total loss amounts net excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees amounts accumulated comprehensive loss expected recognized components net periodic costs 2008 follows actuarial assumptions consolidated weighted average assumptions used determine benefit obligations december 31 assumptions used develop benefit obligations yearend consolidated weighted average assumptions used determine net benefit costs years ended december 31 assumptions used determine net periodic benefit costs year established end previous year assumptions used determine benefit obligations established yearend net periodic benefit costs actuarial present value benefit obligations based actuarial assumptions determined annually based evaluation longterm trends well market conditions may impact cost providing retirement benefits longterm expected rates return plan assets derived return assumptions determined major asset classes equities fixed income real estate proportional basis return notes consolidated financial statements continued expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weighted average assumed healthcare cost trend rate used postretirement measurement purposes 106 percent 2008 trending 52 percent 2017 one percent increase assumed healthcare cost trend rate would increase combined postretirement service interest cost 11 million postretirement benefit obligation 92 million one percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 9 million postretirement benefit obligation 74 million average retirement age assumed based annual rates retirement experienced scheringplough components net periodic benefit costs net pension postretirement benefit costs totaled 223 million 204 million 165 million 2007 2006 2005 respectively components net pension postretirement benefits expense follows notes consolidated financial statements continued benefit obligations components changes benefit obligations follows funded status balance sheet presentation components changes plan assets follows notes consolidated financial statements continued increase benefit obligations retirement plan assets december 31 2007 primarily due acquisition andor plan transfers related scheringplough’s acquisition obs november 2007 obs benefit obligations retirement plan assets based preliminary estimate fair value addition plan assets indicated december 31 2007 2006 securities investments 75 million 71 million respectively held nonqualified trust designated provide pension benefits certain underfunded plans accordance sfas 158 december 31 2007 2006 net asset overfunded plans 42 million 21 million respectively related scheringplough’s retirement plans included longterm assets net liability underfunded plans december 31 2007 2006 totaled 12 billion 10 billion respectively follows december 31 2007 2006 accumulated benefit obligations abo retirement plans 36 billion 20 billion respectively aggregated accumulated benefit obligations fair values plan assets retirement plans accumulated benefit obligations excess plan assets 27 billion 22 billion respectively december 31 2007 18 billion 14 billion respectively december 31 2006 plan assets fair value asset allocation consolidated retirement plans december 31 2007 2006 target allocation 2008 follows asset allocation postretirement benefit trusts december 31 2007 2006 target allocation 2008 follows scheringplough’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns notes consolidated financial statements continued consistent acceptable level overall portfolio market value risk assets periodically rebalanced back target allocations estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid scheringplough’s practice fund qualified pension plans least sufficient amounts meet minimum requirements set forth applicable laws scheringplough expects contribute approximately 215 million retirement plans 2008 including minimum approximately 55 million us scheringplough retirement plan defined contribution plans scheringplough maintains defined contribution savings plans us including plan acquired part obs acquisition largest us plan scheringplough makes contributions plan equal three percent eligible employee earnings plus matching contribution two percent eligible employee earnings based employee contributions total scheringplough contributions plan 2007 2006 77 million 70 million respectively scheringplough also maintains defined contribution retirement plans various jurisdictions scheringplough’s contributions plans 2007 2006 material 9 earnings per common share following table reconciles components basic diluted earningsloss per share computations third quarter 2007 scheringplough’s 2004 mandatory convertible preferred stock converted 65 million common shares common shares included weighted average shares calculation period conversion notes consolidated financial statements continued years ended december 31 2007 2006 2005 45 million 65 million 69 million common shares respectively obtainable upon conversion 2004 mandatory convertible preferred stock excluded computation diluted lossearnings per common share effect would antidilutive weighted average basis period prior conversion addition year ended december 31 2007 approximately 91 million common shares obtainable upon conversion 2007 mandatory convertible preferred stock excluded computation diluted lossearnings common per share effect would antidilutive equivalent common shares issuable scheringplough’s stock incentive plans excluded computation diluted lossearnings per common share effect would antidilutive 100 million 48 million 39 million respectively years ended december 31 2007 2006 2005 respectively scheringplough issued 57500000 common shares august 15 2007 common shares included weightedaverage shares calculation period issuance see note 16 “shareholders’ equity” additional information 10 accumulated comprehensive loss components accumulated comprehensive loss december 31 2007 2006 follows 1 see note 8 “retirement plans postretirement benefits” additional information regarding impacts scheringplough’s financial statements upon adoption sfas 158 included foreign currency translation adjustment 2007 23 million charge comprehensive loss scheringplough’s eurodenominated debt instruments designated effective economic hedges net investment foreign operation effective december 31 2006 scheringplough accounts retirement postretirement benefit plans accordance sfas 158 implementation sfas 158 resulted increase 521 million net tax effects accumulated comprehensive loss reduced shareholders’ equity 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest rate payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations effective portion swaps 12 million recorded comprehensive income recognized interest expense life related debt year ended december 31 2007 1 million effective portion interest rate swaps recognized interest expense 2 million expected recognized interest expense 2008 notes consolidated financial statements continued gross unrealized pretax gains investments 2007 2006 1 million 4 million respectively unrealized losses immaterial 11 inventories consisted following december 31 included assets december 31 2007 2006 96 million 71 million respectively inventory expected sold within one year inventories valued lastin firstout lifo basis comprised approximately 9 percent 20 percent total inventories december 31 2007 2006 respectively estimated replacement cost total inventories december 31 2007 2006 42 billion 18 billion respectively cost inventories determined firstin firstout method fifo 12 goodwill intangible assets 2007 part purchase accounting acquisition obs scheringplough recorded 27 billion goodwill 18 billion assigned human prescription pharmaceuticals segment 888 million assigned animal health segment none goodwill related obs acquisition deductible income tax purposes following table summarizes goodwill activity years ending december 31 notes consolidated financial statements continued components intangible assets net follows december 31 patents trademarks licenses amortized straightline method respective useful lives residual value intangible assets estimated zero 2007 part purchase accounting acquisition obs scheringplough recorded 68 billion intangible assets see note 2 “acquisition” additional information amortization expense related intangible assets 2007 2006 2005 107 million 47 million 49 million respectively included cost sales statement consolidated operations intangible assets reviewed determine recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review annual amortization expenses related intangible assets years 2008 2013 expected approximately 570 million 13 product licenses august 2005 scheringplough exercised right develop commercialize centocor inc centocor golimumab new antitnfalpha monoclonal antibody developed therapy treatment rheumatoid arthritis immunemediated inflammatory diseases pursuant exercise scheringplough received exclusive worldwide marketing rights golimumab excluding us japan china including hong kong taiwan indonesia exchange rights agreement scheringplough made upfront payment amount 124 million centocor tax benefit 6 million payment included research development expenses year ended december 31 2005 scheringplough sharing development costs centocor december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade golimumab extending scheringplough’s rights exclusively market remicade match duration scheringplough’s exclusive marketing rights golimumab effective upon regulatory approval golimumab eu scheringplough’s marketing rights products extend 15 years first commercial sale golimumab within eu centocor receive progressively increased share profits scheringplough’s distribution products scheringplough marketing territory 2010 2014 share profits remain fixed thereafter remainder term changes duration remicade marketing rights profit sharing arrangement products conditioned approval golimumab granted prior september 1 2014 scheringplough may independently develop market golimumab crohn’s disease indication territories option centocor participate addition scheringplough centocor agreed utilize autoinjector device commercialization golimumab agreed share development costs rights device scheringplough made upfront payment 21 million included research development expenses year ended december 31 2007 effective september 1 2005 scheringplough restructured integrilin copromotion agreement millennium terms restructured agreement scheringplough acquired exclusive notes consolidated financial statements continued us development commercialization rights integrilin exchange upfront payment 36 million royalties integrilin sales scheringplough agreed pay minimum royalties 85 million per year millennium 2006 2007 scheringplough also purchased existing integrilin inventory millennium 36 million upfront payment capitalized included intangible assets 14 borrowings commitments short longterm borrowings scheringplough’s outstanding borrowings december 31 2007 2006 follows scheringplough’s shortterm borrowings consist primarily bank loans commercial paper issued us weighted average interest rate shortterm borrowings 79 percent 64 percent december 31 2007 2006 respectively senior unsecured notes october 1 2007 scheringplough issued euro 500 million aggregate principal amount 500 percent senior unsecured eurodenominated notes due 2010 euro 15 billion aggregate principal amount 5375 percent senior unsecured eurodenominated notes due 2014 net proceeds offering approximately 28 billion interest notes payable annually effective interest rate 500 percent senior unsecured eurodenominated notes 5375 percent senior unsecured eurodenominated notes incorporates initial discount debt issuance fees impact interest rate hedges 510 percent 546 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price specified prospectus change control triggering event occurs defined prospectus holders notes right require scheringplough repurchase part notes cash notes consolidated financial statements continued payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase september 17 2007 scheringplough issued 10 billion aggregate principal amount 600 percent senior unsecured notes due 2017 10 billion aggregate principal amount 655 percent senior unsecured notes due 2037 net proceeds offering approximately 20 billion interest notes payable semiannually effective interest rate 600 percent senior unsecured notes 655 percent senior unsecured notes incorporates initial discount debt issuance fees 613 percent 667 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted redemption date semiannual basis using rate treasury notes comparable remaining terms plus 25 basis points 2017 notes 30 basis points 2037 notes change control triggering event occurs defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase scheringplough used net proceeds issuance senior unsecured notes fund portion purchase price obs acquisition see note 2 “acquisition” november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 net proceeds offering 237 billion interest notes payable semiannually subject rate adjustment follows rating assigned particular series notes either moody’s investors service inc moody’s standard poor’s rating services sp changes rating set forth interest rate payable series notes initial interest rate 53 percent notes due 2013 65 percent notes due 2033 plus additional interest rate set forth moody’s sp event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade either moody’s sp a3 a− respectively notes subsequently rated baa1 moody’s bbb sp upon issuance notes rated a3 moody’s sp july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 resulted 555 percent interest rate payable notes due 2013 675 percent interest rate payable notes due 2033 increased december 31 2007 notes rated baa1 moody’s a− sp notes consolidated financial statements continued senior unsecured notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes term loan october 24 2007 scheringplough entered fiveyear senior unsecured eurodenominated term loan facility syndicate banks october 31 2007 scheringplough drew euro 11 billion 16 billion term loan fund portion purchase price obs acquisition see note 2 “acquisition” additional information new term loan floating interest rate 495 weighted average rate 2007 requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing term loan term loan also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets addition scheringplough’s international subsidiaries approximately 608 million available unused lines credit various financial institutions december 31 2007 aggregate amount maturities aggregate amount maturities longterm debt next five years thereafter follows credit facilities august 9 2007 scheringplough entered 20 billion revolving credit agreement syndicate banks terminated 15 billion credit facility mature may 2009 credit facility floating interest rate matures august 2012 requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing credit facility credit facility also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets credit line available general corporate purposes considered support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2007 borrowings outstanding facility scheringplough 15 billion credit facility terminated august 2007 december 31 2005 325 million drawn facility whollyowned international subsidiary purposes notes consolidated financial statements continued funding repatriations ajca 2006 borrowing amount fully repaid december 31 2006 borrowings outstanding facility addition credit facility scheringplough entered 575 million credit facility fourth quarter 2005 purposes funding repatriations ajca december 31 2005 entire amount drawn whollyowned international subsidiary fund repatriations facility paid full terminated 2006 commitments total rent expense amounted 156 million 118 million 110 million 2007 2006 2005 respectively future annual minimum rental commitments next five years noncancelable operating leases december 31 2007 follows 2008 338 million 2009 199 million 2010 131 million 2011 95 million 2012 73 million aggregate minimum lease obligations 71 million due thereafter december 31 2007 scheringplough commitments totaling 232 million 3 million related capital expenditures made 2008 2009 respectively 15 financial instruments sfas 133 requires derivatives recorded balance sheets fair value addition statement also requires 1 effective portion qualifying cash flow hedges recognized income hedged item affects income 2 changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur 3 changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized statements consolidated operations occur risks policy objectives scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes currently scheringplough deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments limited basis scheringplough hedge selective foreign currency risks derivatives scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide natural level protection adverse changes exchange rates furthermore risk adverse exchange rate change somewhat mitigated fact scheringplough’s international operations widespread scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 “foreign currency translation” foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options mitigate exposure event significant strengthening euro compared us dollar scheringplough purchased options aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 accordingly gain derivatives recognized statement consolidated operations derivatives shortterm trading nature hedge specific financing notes consolidated financial statements continued investment transaction accordingly cash impacts derivatives classified operating cash flows statement consolidated cash flows see note 6 “other incomeexpense net” december 31 2007 open foreign currency option contracts 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 14 “borrowings commitments” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations effective portion swaps 12 million recorded comprehensive income recognized interest expense life related debt cash flows related interest rate swaps classified operating cash flows statement consolidated cash flows see note 6 “other incomeexpense net” december 31 2007 open interest rate swaps scheringplough mitigates credit risk derivative instruments dealing counterparties considered high credit quality accordingly scheringplough anticipate loss nonperformance scheringplough enter derivative instruments manner generate trading profits scheringplough classifies cash flows derivatives accounted hedges category item hedged table presents carrying values estimated fair values certain scheringplough’s financial instruments december 31 2007 2006 estimated fair values determined based market prices available dealer quotes carrying values financial instruments including cash equivalents approximated estimated fair values december 31 2007 2006 longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related employee benefit obligations 16 shareholders’ equity preferred shares december 31 2007 scheringplough authorized 50000000 shares preferred stock consists 11500000 preferred shares designated 6 percent mandatory convertible preferred stock notes consolidated financial statements continued 38500000 preferred shares whose designations yet determined december 31 2007 10000000 shares 6 percent mandatory convertible preferred stock issued outstanding mandatory convertible preferred stock august 15 2007 scheringplough issued 10000000 shares 6 percent mandatory convertible preferred stock 2007 preferred stock face value 25 billion net proceeds scheringplough approximately 24 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale 2007 preferred stock fund portion purchase price obs acquisition see note 2 “acquisition” additional information share 2007 preferred stock automatically convert 74206 90909 common shares scheringplough depending average closing price scheringplough’s common shares 20 trading day period ending third trading day prior mandatory conversion date august 13 2010 defined prospectus preferred shareholders may elect convert time prior august 13 2010 minimum conversion ratio 74206 common shares per share 2007 preferred stock additionally time prior mandatory conversion date closing price scheringplough’s common shares exceeds 5053 least 20 trading days within period 30 consecutive trading days scheringplough may elect cause conversion less 2007 preferred stock outstanding minimum conversion ratio 74206 common shares share 2007 preferred stock 2007 preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent scheringplough legally permitted pay dividends board directors declares dividend payable scheringplough pay dividends dividend payment date dividend payment dates february 15 may 15 august 15 november 15 year first dividend paid november 15 2007 mandatory convertible preferred stock year ended december 31 2007 shares 6 percent mandatory convertible preferred stock issued august 10 2004 preferred stock converted 64584929 shares scheringplough common stock following conversion 28750000 shares 2004 preferred stock resumed status authorized unissued preferred stock undesignated series available future issuance equity issuance treasury shares august 15 2007 scheringplough issued 57500000 common shares treasury shares 2750 per share net proceeds scheringplough approximately 15 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale common shares fund portion purchase price obs acquisition see note 2 “acquisition” additional information summary treasury share transactions years ended december 31 follows included treasury share balance 702 million shares acquired subsidiary scheringplough openmarket purchase program 19941995 shares considered notes consolidated financial statements continued treasury shares new jersey law however like treasury shares may voted considered outstanding shares determining necessary votes approve matter submitted stockholder vote subsidiary receive dividends shares effective september 17 2007 board directors scheringplough adopted amended restated certificate incorporation reflecting automatic conversion 2004 preferred stock issued shares common stock september 14 2007 terms 2007 preferred stock 17 insurance coverage scheringplough maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly scheringplough selfinsures substantial proportion risk relates products’ liability availability commercial insurance become restrictive scheringplough continually assesses best way provide insurance needs 18 segment information scheringplough three reportable segments human prescription pharmaceuticals animal health consumer health care segment sales lossprofit data follow consistent scheringplough’s current management reporting structure human prescription pharmaceuticals segment discovers develops manufactures markets human pharmaceutical products animal health segment discovers develops manufactures markets animal health products consumer health care segment develops manufactures markets overthecounter foot care sun care products primarily us notes consolidated financial statements continued net sales major product segment net sales geographic area notes consolidated financial statements continued scheringplough subsidiaries 55 countries outside us net sales presented geographic area scheringplough’s customers located following foreign countries accounted 5 percent consolidated net sales past three years net sales customer sales single customer accounted 10 percent scheringplough’s consolidated net sales past three years follows lossprofit segment 1 2007 human prescription pharmaceuticals segment’s loss includes 34 billion purchase accounting items including acquired inprocess research development 32 billion 2007 animal health segment’s loss includes 721 million purchase accounting items including acquired inprocess research development 600 million scheringplough’s net sales include sales vytorin zetia managed joint venture merck scheringplough accounts joint venture equity method accounting see note 4 “equity income” additional information human prescription pharmaceuticals segment includes equity income merckscheringplough joint venture “corporate other” includes interest income expense foreign exchange gains losses currency option gains headquarters expenses special charges miscellaneous items accounting policies notes consolidated financial statements continued used segment reporting described note 1 “summary significant accounting policies” 2007 “corporate other” includes special acquisition related charges 84 million comprised 61 million integrationrelated costs obs acquisition 23 million severance charges part integration activities estimated charges relate reportable segments follows human prescription pharmaceuticals 27 million animal health 11 million corporate 46 million 2006 “corporate other” includes special charges 102 million primarily related changes scheringplough’s manufacturing operations us puerto rico announced june 2006 related human prescription pharmaceuticals segment included 2006 cost sales charges approximately 146 million manufacturing streamlining actions primarily related human prescription pharmaceuticals segment 2005 “corporate other” includes special charges 294 million including 28 million employee termination costs 16 million asset impairment charges increase litigation reserves 250 million resulting total reserve 500 million representing scheringplough’s current estimate resolve massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 20 “legal environmental regulatory matters” estimated charges relate reportable segments follows human prescription pharmaceuticals 289 million consumer health care 2 million animal health 1 million corporate 2 million supplemental sales information sales products comprising 10 percent scheringplough’s us international sales year ended december 31 2007 follows longlived assets geographic location longlived assets shown geographic location primarily intangibles property significant increase longlived assets december 31 2007 due obs acquisition scheringplough disaggregate assets segment basis internal management reporting therefore information presented notes consolidated financial statements continued 19 consent decree may 2002 scheringplough agreed fda entry consent decree resolve issues related compliance current good manufacturing practices cgmp certain scheringplough’s facilities new jersey puerto rico “consent decree” “decree” summary decree required scheringplough make payments totaling 500 million two equal installments 250 million paid 2002 2003 addition decree required scheringplough complete revalidation programs manufacturing processes used produce bulk active pharmaceutical ingredients finished drug products covered facilities well implement comprehensive cgmp work plan facility scheringplough completed requirements accordance schedules required decree obtained thirdparty certification completion work plan required decree august 2 2007 scheringplough announced dissolution consent decree us district court district new jersey 20 legal environmental regulatory matters background scheringplough involved various claims investigations legal proceedings scheringplough records liability contingencies probable liability incurred amount reasonably estimated scheringplough adjusts liabilities contingencies reflect current best estimate probable loss minimum liability case may best estimate determinable scheringplough records minimum amount within probable range liability expected insurance recoveries considered determining amounts recorded liabilities environmental related matters scheringplough believes loss contingency reasonably possible rather probable amount loss cannot estimated liability recorded however liability reasonably possible disclosure loss contingency made scheringplough reviews status claims investigations legal proceedings ongoing basis including related insurance coverages time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s consolidated results operations cash flows financial condition except matters discussed remainder note recorded liabilities contingencies december 31 2007 related expenses incurred year ended december 31 2007 material opinion management based advice legal counsel ultimate outcome matters except matters discussed remainder note material impact scheringplough’s consolidated results operations cash flows financial condition enhance matter january 14 2008 merck scheringplough cholesterol joint venture announced primary endpoint results enhance effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia clinical trial scheringplough encountered challenge results enhance trial joint venture products zetia vytorin became subject much media scrutiny prior fuller discussions trial results appropriate medical forums discussion scheduled american college cardiology meeting march 30 2008 scheringplough joint venture andor joint venture partner merck co inc “merck” received several letters congress including house committee energy commerce house subcommittee oversight investigations ranking minority member senate finance notes consolidated financial statements continued committee collectively seeking combination witness interviews documents information variety issues related merckscheringplough cholesterol joint venture’s enhance clinical trial companies’ sale promotion vytorin well sales stock companies’ corporate officers since april 2006 several subpoenas state officials state attorney general state department justice several states including connecticut new york oregon seeking similar information documents scheringplough cooperating investigations working merck respond inquiries addition since midjanuary 2008 scheringplough become aware served litigation including civil class action lawsuits alleging common law state consumer fraud claims connection scheringplough’s sale promotion merckscheringplough jointventure products’ vytorin zetia several putative shareholder securities class action lawsuits several officers also named defendants alleging false misleading statements omissions scheringplough representatives related timing disclosures concerning enhance results allegedly violation sections 10b 20a securities exchange act 1934 shareholder derivative action alleging board directors breached fiduciary obligations relating timing release enhance results letter behalf single shareholder requesting board directors investigate allegations putative securities class actions warranted bring appropriate legal action behalf scheringplough cooperating fully government investigations intends vigorously defend lawsuits filed related enhance study patent matters described “patents trademarks intellectual property rights” item business 10k intellectual property protection critical scheringplough’s ability successfully commercialize product innovations potential litigation regarding scheringplough’s intellectual property rights always exists may initiated third parties attempting abridge scheringplough’s rights well scheringplough protecting rights patent matters described potential material effect scheringplough dr scholl’s freeze away july 26 2004 orasure technologies filed action us district court eastern district pennsylvania alleging patent infringement scheringplough healthcare products sale dr scholl’s freeze away wart removal product matter settled material impact scheringplough’s financial statements stipulation dismissing action filed parties february 15 2008 awp litigation investigations scheringplough continues respond existing new litigation certain states private payors investigations department health human services department justice several states industry scheringplough practices regarding average wholesale price awp scheringplough cooperating investigations litigations investigations relate whether awp used pharmaceutical companies certain drugs improperly exceeds average prices paid providers consequence results unlawful inflation certain reimbursements drugs state programs private payors based awp complaints allege violations federal state law including fraud medicaid fraud consumer protection violations among claims majority cases plaintiffs seeking class certifications cases classes certified outcome litigations investigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies notes consolidated financial statements continued securities class action litigation federal securities litigation following scheringplough’s announcement fda conducting inspections scheringplough’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices several lawsuits filed scheringplough certain named officers lawsuits allege defendants violated federal securities law allegedly failing disclose material information making material misstatements specifically allege scheringplough failed disclose alleged serious risk new drug application clarinex would delayed result manufacturing issues allege scheringplough failed disclose alleged depth severity manufacturing issues complaints consolidated one action us district court district new jersey consolidated amended complaint filed october 11 2001 purporting represent class shareholders purchased shares scheringplough stock may 9 2000 february 15 2001 complaint seeks compensatory damages behalf class court certified shareholder class october 10 2003 notice pendency class action sent members class july 2007 discovery completed motions summary judgment briefed pending erisa litigation march 31 2003 scheringplough served putative class action complaint filed us district court new jersey alleging scheringplough retired chairman ceo president richard jay kogan scheringplough’s employee savings plan administrator several current former directors certain corporate officers messrs larosa moore breached fiduciary obligations certain participants plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs appealed august 19 2005 us court appeals third circuit reversed dismissal district court matter remanded back district court proceedings kdur antitrust litigation scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upsher smith filed abbreviated new drug applications following commencement ftc administrative proceeding alleging anticompetitive effects settlements resolved scheringplough’s favor alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages discovery ongoing thirdparty payor actions several purported class action litigations filed following announcement settlement massachusetts investigation plaintiffs actions seek damages behalf thirdparty payors resulting allegations offlabel promotion improper payments physicians issue massachusetts investigation tax matters october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s notes consolidated financial statements continued claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently tried newark district court scheringplough’s tax reserves adequate cover abovementioned payments pending administrative obligations connection settlement investigation us department justice us attorney’s office eastern district pennsylvania scheringplough entered fiveyear corporate integrity agreement cia amended august 2006 connection settlement massachusetts investigation commencing new fiveyear term failure comply obligations cia could result financial penalties matters products liability beginning may 2007 number complaints filed various jurisdictions asserting claims organon usa inc organon pharmaceuticals usa inc andor organon international “organon” arising scheringplough’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages heart attacks strokes majority cases currently pending united states district court district new jersey cases pending wisconsin missouri new york georgia french matter based complaint french competition authority competitor france pursuant court order french competition authority obtained documents french subsidiary scheringplough relating subutex one products subsidiary markets sells resolution matter adverse french subsidiary could result imposition civil fines injunctive administrative remedies july 17 2007 juge des libertés et de la détention ordered annulment search seizure procedural grounds july 19 2007 french authority appealed order french supreme court april 2007 competitor also requested interim relief portion granted french competition authority december 2007 interim relief required scheringplough’s french subsidiary publish two specialized newspapers information including generic quantitative qualitative composition pharmaceutical form substitutable subutex february 2008 paris court appeal confirmed decision french competition authority environmental scheringplough responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law scheringplough alleged potentially responsible party prp scheringplough believes remote time material liability relation sites scheringplough estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps scheringplough records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated report independent registered public accounting firm board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries “company” december 31 2007 2006 related statements consolidated operations shareholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements effective january 1 2006 company adopted statement financial accounting standards “sfas” 123 revised 2004 sharebased payment discussed note 8 consolidated financial statements effective december 31 2006 company adopted sfas 158 employers’ accounting defined benefit pension postretirement plans discussed note 1 consolidated financial statements effective january 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 29 2008 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp parsippany new jersey february 29 2008 scheringplough corporation subsidiaries quarterly data unaudited operating results three month period ended december 31 2007 reflects closing obs acquisition november 19 2007 including impacts purchase accounting accordance sfas 141 “business combinations” net sales third quarter 2006 included favorable impact approximately 47 million resulting reversal previously accrued rebate amounts tricare retail pharmacy program us federal court appeals ruled pharmaceutical manufacturers obligated pay diluted earnings per common share three month period ended september 30 2007 calculated using numerator 731 million arithmetic sum net income available common shareholders 713 million plus dividends 18 million related 2004 preferred stock dilutive denominator 1622 represents average diluted shares outstanding third quarter 2007 see note 3 “special acquisition related charges manufacturing changes” consolidated financial statements additional information relating special acquisitionrelated charges scheringplough’s announced manufacturing changes scheringplough’s approximate number holders record common shares january 31 2008 34185 item 9item 8 financial statements supplementary data scheringplough corporation subsidiaries statements consolidated operations amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows amounts millions accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity amounts millions accompanying notes integral part consolidated financial statements notes consolidated financial statements 1 summary significant accounting policies overview scheringplough innovationdriven sciencecentered global health care company biopharmaceutical research collaborations partners scheringplough creates therapies help save improve lives around world scheringplough applies research development platform prescription pharmaceutical consumer health care products well animal health products november 2007 scheringplough acquired organon biosciences nv obs company discovers develops manufactures human prescription animal health products see note 2 “acquisitions” additional information principles consolidation consolidated financial statements include scheringplough corporation subsidiaries scheringplough intercompany balances transactions eliminated accounts obs included part scheringplough’s results date acquisition november 19 2007 see note 2 “acquisition” additional information use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis scheringplough evaluates estimates based historical experience various assumptions believed reasonable circumstances actual results could differ estimates equity method accounting scheringplough accounts share activity merckscheringplough joint venture joint venture merck co inc merck using equity method accounting scheringplough significant influence joint venture’s operating financial policies accordingly scheringplough’s net sales include sales joint venture scheringplough’s share earnings joint venture included equity income determining consolidated net incomeloss equity income joint venture included prescription pharmaceuticals segment revenue sales vytorin zetia recognized joint venture title risk loss passed customer reasonable assurance collection sales proceeds equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck see note 5 “equity income” additional information regarding joint venture cash equivalents cash equivalents include operating cash highly liquid investments original maturities three months less including highly rated money market accounts shortterm investments shortterm investments carried fair value classified availableforsale investments consist certificates deposit commercial paper maturities less year notes consolidated financial statements continued inventories valued lower cost market cost determined using lastin firstout lifo method substantial portion inventories located us cost inventories determined firstin firstout method fifo depreciation property equipment depreciation provided estimated useful lives properties generally use straightline method useful lives property acquisitions generally follows scheringplough reviews carrying value property equipment indications impairment accordance statement financial accounting standard sfas 144 “accounting impairment disposal longlived assets” depreciation expense 603 million 2008 404 million 2007 443 million 2006 depreciation expense 2006 included accelerated depreciation related manufacturing streamlining 93 million foreign currency translation net assets scheringplough’s international subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included comprehensive incomeloss reflected separate component shareholders’ equity remaining international subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included statements consolidated operations exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation account transactional exchange gains losses included expenseincome net revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business revenue recognition also requires reasonable assurance collection sales process notes consolidated financial statements continued recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process earnings per common share diluted earningsloss per common share computed dividing net incomeloss available common shareholders plus preferred stock dividends dilutive effect mandatory convertible preferred stock sum weighted average number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options dilutive effect shares issuable upon conversion scheringplough’s mandatory convertible preferred stock basic earningsloss per common share computed dividing net incomeloss available common shareholders weighted average number common shares outstanding goodwill intangible assets financial accounting standards board fasb sfas 142 “goodwill intangible assets” requires intangible assets acquired either individually group assets initially recognized measured based fair value intangible finite life amortized useful life intangible indefinite life including goodwill amortized company assesses recoverability carrying value goodwill intangible assets indefinite useful lives annually whenever events changes circumstances indicate carrying amount asset may fully recoverable recoverability goodwill measured reporting unit level based twostep approach first carrying amount reporting unit compared fair value estimated future net discounted cash flows expected generated reporting unit extent carrying value reporting unit exceeds fair value reporting unit second step would performed whereby reporting unit’s assets liabilities fair valued extent reporting unit’s carrying value goodwill exceeds implied fair value goodwill impairment exists would recognized recoverability intangible assets indefinite useful lives measured comparison carrying amount intangible assets fair value respective intangible assets excess carrying value intangible assets fair value intangible assets would recognized impairment loss scheringplough conducts annual impairment testing goodwill october 1 year based impairment tests performed impairment goodwill 2008 2007 2006 2007 scheringplough’s goodwill intangible asset balances increased significantly due acquisition obs see note 2 “acquisition” note 13 “goodwill intangible assets” additional information assets included assets capitalized software 246 million 278 million december 31 2008 2007 respectively amortization expense 101 million 89 million 76 million 2008 2007 2006 respectively assets december 31 2008 included 80 million restricted cash primarily letter credit related certain international tax matters notes consolidated financial statements continued income taxes scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 fin 48 order recognize uncertain tax benefit taxpayer must likely sustaining position measurement benefit calculated largest amount 50 percent likely realized upon resolution position scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations deferred income taxes recognized future tax effects temporary differences financial income tax reporting basis scheringplough’s assets liabilities based enacted tax laws rates accounting sharebased compensation prior january 1 2006 scheringplough accounted stockbased compensation arrangements using intrinsic value method sharebased employee compensation cost reflected statements consolidated operations scheringplough’s deferred stock units performance plans stock options granted plans exercise price equal market value underlying common stock date grant effective january 1 2006 scheringplough accounts sharebased compensation accordance sfas 123 revised 2004 “sharebased payment” sfas 123r see note 6 “sharebased compensation” additional information shipping handling expenses shipping expenses classified selling general administrative expenses consolidated statement operations impact recently issued accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” standard defines fair value establishes framework measuring fair value accordance us generally accepted accounting principles expands disclosures fair value measurements standard codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions calendaryear companies standard became effective january 1 2008 see note 17 “fair value measurements” except nonfinancial items measured nonrecurring basis effective beginning january 1 2009 implementation standard material impact scheringplough’s financial statements based scheringplough’s current financial position impact provisions standard effective january 1 2009 expected material february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” sfas 159 permits entities choose measure many financial instruments certain items fair value sfas 159 also includes amendment sfas 115 “accounting certain investments debt equity securities” applies entities availableforsale trading securities calendaryear companies standard became effective january 1 2008 scheringplough chose elect fair value option prescribed sfas 159 result implementation standard material impact scheringplough’s financial statements notes consolidated financial statements continued december 2007 fasb issued eitf issue 071 “accounting collaborative arrangements” effective calendaryear companies beginning january 1 2009 task force clarified manner costs revenues sharing payments made received partner collaborative arrangement presented income statement set forth certain disclosures required partners’ financial statements impact standard consolidated financial statements expected material december 2007 fasb issued sfas 141 revised 2007 “business combinations” sfas 141r calendaryear companies standard applicable new business combinations occurring january 1 2009 sfas 141r requires acquiring entity recognize assets acquired liabilities assumed transaction acquisitiondate fair value limited exceptions significantly sfas 141r require acquisition costs generally expensed incurred certain acquired contingent liabilities recorded fair value acquired inprocess research development recorded fair value indefinitelived intangible asset acquisition date standard also impact certain unresolved matters related purchase transactions consummated prior effective date standard impact standard consolidated financial statements expected material standard may effect accounting future business combinations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” effective calendaryear companies beginning january 1 2009 standard establishes new accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary impact standard consolidated financial statements expected material march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” effective calendaryear companies beginning january 1 2009 standard enhances required disclosures regarding derivatives hedging activities impact standard consolidated financial statements expected material april 2008 fasb issued fasb staff position fsp fas 1423 “determination useful life intangible assets” fsp 1423 fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 fsp 1423 effective calendaryear companies beginning january 1 2009 requirement determining useful lives must applied prospectively intangible assets acquired effective date disclosure requirements must applied prospectively intangible assets recognized subsequent effective date impact standard consolidated financial statements expected material may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” standard identifies sources accounting principles framework selecting principles used preparation financial statements presented conformity generally accepted accounting principles gaap united states gaap hierarchy sfas 162 became effective november 15 2008 implementation standard material impact scheringplough’s consolidated financial statements june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp addresses whether instruments granted sharebased payment transactions participating securities prior vesting therefore need included earnings allocation calculating earnings per share twoclass method described sfas 128 “earnings per share” fsp requires companies treat unvested sharebased payment awards nonforfeitable rights dividend equivalents separate class securities calculating earnings per share fsp effective calendaryear companies beginning january 1 2009 impact standard consolidated financial statements expected material notes consolidated financial statements continued october 2008 fasb issued fsp 1573 “determining fair value financial asset market active” fsp 1573 fsp 1573 clarified application sfas 157 inactive market demonstrated fair value financial asset determined market financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued implementation standard material impact scheringplough’s consolidated financial statements december 2008 fasb issued fsp fas 1404 fin 46r8 “disclosures public entities enterprises transfers financial assets interest variable interest entities” fsp fas 1404 fin 46r8 requires enhanced disclosures transfers financial assets interests variable interest entities fsp effective interim annual periods ending december 15 2008 since fsp requires additional disclosures concerning transfers financial assets interest variable interest entities adoption fsp affect scheringplough’s disclosures 2 acquisition scheringplough acquired obs purchase price approximately euro 11 billion cash approximately 161 billion including legal professional fees november 19 2007 acquisition date acquisition added diversification marketed products including two new therapeutic areas women’s health central nervous system well significant strength animal health products rd pipeline purchase method accounting used account transaction accordance sfas 141 “business combinations” operating results obs included scheringplough’s consolidated financial statements period subsequent acquisition date following table provides unaudited pro forma financial information years ended december 31 2007 2006 acquisition occurred beginning period presented unaudited pro forma financial information periods presented includes amortization stepup inventory 11 billion acquired inprocess research development charge 38 billion nonrecurring charges directly attributable accounting acquisition unaudited pro forma financial information also includes effect purchase accounting adjustments additional amortization expense acquired identifiable intangible assets depreciation stepup property effect given unaudited pro forma financial information synergistic benefits may realized costs related integration obs unaudited pro forma financial information considered indicative actual results would achieved acquisition consummated dates indicated purport indicate results operations future date future period preliminary allocation purchase price obs made acquisition date final allocation purchase price resulted net decrease goodwill 44 million compared preliminary allocation acquisition date adjustment preliminary purchase price allocation primarily related updated valuations identifiable intangible assets property inventories well notes consolidated financial statements continued updates acquired liabilities deferred taxes final allocation purchase price obs follows 1 final purchase price allocation identifiable intangible assets follows weightedaverage life total acquired intangible assets approximately 15 years intangible assets significant residual value acquired intangible assets determined indefinite life 2 18 billion goodwill assigned prescription pharmaceuticals segment 873 million assigned animal health segment none goodwill deductible income tax purposes notes consolidated financial statements continued 3 38 billion assigned acquired iprd charged operations fourth quarter 2007 charge associated research projects animal health research projects women’s health central nervous system anesthesia therapeutic areas human health amount determined using discounted cash flow projections identified research projects technological feasibility established alternative future use discount rates used ranged 14 percent 18 percent projected launch dates following us food drug administration fda regulatory approval years 2008 2013 time scheringplough expects projects begin generate cash flows cost complete research projects depend whether projects brought final stages development ultimately submitted fda regulatory agencies approval december 31 2007 estimated cost complete projects near final stages development excess 700 million research development projects considered valuation subject normal risks uncertainties associated demonstrating safety efficacy required obtain fda regulatory approvals 4 included acquisition related liabilities costs exit certain activities obs conjunction obs acquisition scheringplough agreed divest certain assets part regulatory reviews us europe see note 7 expenseincome net 3 special acquisition related charges manufacturing streamlining special acquisitionrelated charges special acquisitionrelated charges relate productivity transformation program ptp activities include ongoing integration obs business see note 4 “obs integration productivity transformation program additional information special acquisitionrelated charges 2008 329 million costs 2008 included 275 million employee termination costs remaining charges related integration activities special acquisitionrelated charges year ended december 31 2007 scheringplough incurred 84 million special acquisitionrelated charges comprised 61 million integrationrelated costs obs acquisition 23 million employee termination costs part integration activities manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamlined global supply chain enhanced scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new jersey special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico notes consolidated financial statements continued following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 4 obs integration productivity transformation program part purchase price allocation obs acquisition date scheringplough recorded acquisitionrelated liabilities 151 million related involuntary termination benefits april 2008 scheringplough announced major new program productivity transformation program ptp includes ongoing integration obs designed reduce avoid costs increase productivity targeted savings envisioned program include resulting previously announced obs integration synergies following table summarizes charges cash payments liabilities related productivity transformation program includes ongoing integration obs december 31 2008 recorded special acquisitionrelated charges b recorded part purchase accounting included acquisitionrelated liabilities december 31 2008 costs exit certain activities obs 5 equity income may 2000 scheringplough merck entered two separate sets agreements jointly develop market certain products us including 1 two cholesterollowering drugs 2 allergyasthma notes consolidated financial statements continued drug december 2001 cholesterol agreements expanded include countries world except japan general companies agreed collaborative activities agreements would operate virtual joint venture maximum degree possible relying respective infrastructures two companies agreements generally provide equal sharing development costs copromotion approved products company cholesterol agreements provide scheringplough merck jointly develop commercialize ezetimibe cholesterol management field oncedaily monotherapy managed zetia us asia ezetrol europe ii coadministration various approved statin drugs iii fixedcombination tablet ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine combination medication ezetimibesimvastatin managed vytorin us inegy many international countries zetiaezetrol ezetimibe vytorininegy combination ezetimibesimvastatin approved use us launched many international markets scheringplough utilizes equity method accounting recording share activity merckscheringplough cholesterol joint venture scheringplough’s net sales include sales joint venture cholesterol joint venture agreements provide sharing operating income generated joint venture based upon percentages vary product sales level country us market scheringplough receives greater share profits first 300 million annual zetia sales 300 million annual zetia sales merck scheringplough generally share profits equally scheringplough’s allocation joint venture income increased milestones recognized either company’s share joint venture’s income operations subject reduction company fails perform specified minimum number physician details particular country companies agree annually minimum number physician details country companies bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement company physician details set annual basis italy contractual amount included profit sharing calculation reimbursed us canada puerto rico amount equal company’s agreed physician details multiplied contractual fixed fee scheringplough reports amounts part equity income cholesterol joint venture amounts represent reimbursement specific incremental identifiable costs schering plough’s detailing cholesterol products markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher costs joint venture companies contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally scheringplough merck allergyasthma agreements provided joint development marketing companies oncedaily fixedcombination tablet containing loratadinemontelukast april 2008 merckscheringplough joint venture received notapprovable letter fda proposed fixed combination loratadinemontelukast second quarter 2008 respiratory joint venture terminated accordance agreements action impact cholesterol joint venture result notes consolidated financial statements continued termination respiratory joint venture schering plough received payments totaling 105 million scheringplough recognized 2008 equity income following information provides summary components scheringplough’s equity income cholesterol joint venture years ended december 31 december 31 2008 2007 scheringplough net receivables including undistributed income merckscheringplough joint venture 130 million 287 million respectively equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck due virtual nature cholesterol joint venture scheringplough incurs substantial costs selling general administrative costs reflected equity income borne overall cost structure scheringplough costs reported respective line items statements consolidated operations separately identifiable cholesterol agreements provide jointly owned facilities products resulting joint venture manufactured facilities owned either scheringplough merck scheringplough merck developing singletablet combination ezetimibe atorvastatin treatment elevated cholesterol levels see note 21 “legal environmental regulatory matters” “litigation investigations relating merckscheringplough cholesterol joint venture” 6 sharebased compensation prior january 1 2006 scheringplough accounted stock compensation arrangements using intrinsic value method followed recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations prior 2006 stockbased employee compensation cost reflected statement consolidated operations scheringplough’s deferred stock units stock options granted plans exercise price equal market value underlying common stock date grant scheringplough adopted sfas 123r effective january 1 2006 sfas 123r requires companies recognize compensation expense amount equal fair value sharebased payments granted employees scheringplough elected modified prospective transition method therefore adjustments prior periods required result adopting sfas 123r method provisions sfas 123r apply awards granted date adoption unrecognized expense awards unvested date adoption based grant date fair value sfas 123r also amended sfas 95 “statement cash flows” require excess tax benefits reflected operating cash flows reflected financing cash flows grants issued retirementeligible employees prior adoption sfas 123r scheringplough recognized compensation costs stated vesting period stock option deferred stock unit acceleration unrecognized compensation costs upon retirement employee upon adoption notes consolidated financial statements continued sfas 123r scheringplough recognizes compensation costs sharebased grants made january 1 2006 service period earlier one year employee becomes retirementeligible first year grant ii employee’s retirement eligibility date first year grant iii service period award november 10 2005 fasb issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” scheringplough elected adopt transition method provided fasb staff position purposes calculating pool excess tax benefits available absorb tax deficiencies recognized subsequent adoption sfas 123r 2006 stock incentive plan 2006 plan approved scheringplough’s shareholders terms 2006 plan 92 million scheringplough’s authorized common shares may granted stock options awarded deferred stock units officers certain employees scheringplough december 2011 scheringplough intends utilize unissued authorized shares satisfy stock option exercises issuance deferred stock units expenses related sharebased compensation classified line item associated employee’s function 2008 2007 scheringplough granted performancebased deferred stock units 2006 stock incentive plan provide certain senior managers opportunity earn shares scheringplough common stock units earned specific preestablished levels performance service achieved applicable threeyear performance period implementation sfas 123r first quarter 2006 scheringplough recognized benefit income 22 million cumulative effect change accounting principle related two longterm compensation plans required accounted liability plans sfas 123r tax benefits recognized related stockbased compensation related cash flow impacts material 2008 2007 2006 scheringplough us net operating loss position stock options stock options granted employees exercise prices equal fair market value scheringplough’s stock dates grant stock options 2006 plan generally vest three years term seven years certain options granted previous plans vest longer periods ranging three nine years term 10 years compensation costs stock options recognized requisite service period separately vesting portion stock option award expense recognized net estimated forfeitures vesting period options using accelerated method expense recognized 2008 2007 2006 approximately 65 million 72 million 56 million respectively weightedaverage assumptions used blackscholes optionpricing model 2008 2007 2006 follows dividend yields based historical dividend yields expected volatilities based historical volatilities scheringplough’s common stock expected differ materially future notes consolidated financial statements continued volatility riskfree interest rate based us treasury yield curve effect time grant periods corresponding expected life options expected term options represents weighted average period time options granted expected outstanding giving consideration vesting schedules scheringplough utilizes simplified method calculating expected term stock options allowed staff accounting bulletin sab 107 amended sab 110 historical experience expected reasonable basis estimated expected term due various changes business amount cash received exercise stock options 2008 2007 2006 15 million 225 million 83 million respectively summarized information stock options outstanding exercisable december 31 2008 follows weightedaverage fair value stock options granted 2008 2007 2006 535 806 522 respectively intrinsic value stock options exercised 2008 2007 2006 2 million 132 million 21 million respectively total fair value options vested 2008 2007 2006 67 million 80 million 73 million respectively december 31 2008 total remaining unrecognized compensation cost related nonvested stock options amounted 48 million amortized weightedaverage remaining requisite service period 23 years following table summarizes stock option activity december 31 2008 changes year ended current prior plans aggregate intrinsic value stock options outstanding december 31 2008 2 million aggregate intrinsic value stock options currently exercisable december 31 2008 2 million intrinsic value stock options calculated based exercise price underlying awards quoted price scheringplough’s common stock reporting date notes consolidated financial statements continued following table summarizes nonvested stock option activity december 31 2008 changes year ended current prior plans deferred stock units fair value deferred stock units determined based number shares granted quoted price scheringplough’s common stock date grant deferred stock units generally vest end three years provided employee remains service scheringplough expense recognized straightline basis vesting period deferred stock units payable equivalent number common shares expense recognized 2008 2007 2006 134 million 125 million 112 million respectively summarized information deferred stock units outstanding december 31 2008 follows weightedaverage fair value deferred stock units granted 2008 2007 2006 1889 3119 1927 respectively total fair value deferred stock units vested 2008 2007 2006 127 million 17 million 68 million respectively december 31 2008 total remaining unrecognized compensation cost related deferred stock units amounted 124 million amortized weightedaverage remaining requisite service period 18 years notes consolidated financial statements continued following table summarizes deferred stock unit activity december 31 2008 changes year ended current prior plans performancebased deferred stock units distribution performancebased deferred stock units contingent scheringplough meeting either performance andor market conditions one half performancebased stock unit grant performance condition fair value units based closing stock price date grant half grant market condition fair value units determined using lattice valuation model expected volatility assumptions appropriate determining fair value compensation expense performancebased stock units excludes dividend equivalents based fair values awards expected vest based performance measures recognized performance period total compensation expense recognized years ended 2008 2007 20 million 14 million respectively weighted average grantdate fair value performancebased deferred stock units granted 2008 2007 1935 2347 respectively represented approximately 1063036 1397000 underlying shares respectively december 31 2008 none units vested december 31 2008 unrecognized compensation cost related deferred stock units 31 million amortized remaining weighted average requisite service period 15 years remaining unrecognized compensation cost performancebased deferred stock units may vary reporting period based changes expected achievement performance measures following table summarizes performancebased deferred stock unit activity december 31 2008 changes year ended liability plans scheringplough two compensation plans performance vesting periods ended december 31 2008 plans classified liability plans sfas 123r ultimate cash payout plans based scheringplough’s stock performance compared stock notes consolidated financial statements continued performance peer group upon adoption sfas 123r january 1 2006 scheringplough recognized cumulative income effect change accounting principle 22 million order recognize liability plans fair value service period income expense amounts related liability plans based change fair value reporting date fair value plans prior end service period estimated using lattice valuation model using expected volatility assumptions appropriate determining fair value first liability plans service period concluded december 31 2006 value plan became fixed second liability plans service period concluded december 31 2008 income expense recognized liability plans statements consolidated operations exclusive impact cumulative effect change accounting principle income 30 million 2008 expense 22 million 24 million 2007 2006 respectively december 31 2008 remaining unrecognized compensation cost related liability plans 7 expenseincome net components expenseincome net follows september 2008 scheringplough completed previously announced divestitures certain animal health products required regulatory agencies us europe connection acquisition obs result divestitures scheringplough recognized gain 160 million 149 million tax addition 2008 scheringplough recognized gain 17 million 12 million tax sale manufacturing site net cash proceeds divested animal health products 210 million 2008 2007 scheringplough participated health care refinancing programs adopted local government fiscal authorities major european market 2008 2007 scheringplough transferred 47 million 173 million respectively trade accounts receivables owned foreign subsidiary thirdparty financial institutions without recourse transfer trade accounts receivable qualified sales accounts receivable sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” 2008 2007 transfer trade accounts receivable material impact scheringplough’s statements consolidated operations cash flows transactions included change accounts receivable operating activities net foreign exchange gains 37 million 2007 includes 101 million foreign currency transaction exchange losses related eurodenominated debt instruments prior accounted economic hedges net investment foreign operation currency exchange losses noncash items notes consolidated financial statements continued included adjustments reconcile net loss net cash provided operating activities statement consolidated cash flows 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options derivatives aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 “accounting derivative instruments hedging activities” amended sfas 133 accordingly gain derivatives recognized statement consolidated operations derivatives shortterm trading nature hedge specific financing investing transaction accordingly cash impacts derivatives classified operating cash flows statement consolidated cash flows derivatives terminated fourth quarter 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest rate payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 15 “borrowings commitments” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations 2007 effective portion swaps 12 million recorded comprehensive income 2007 recognized interest expense life related debt cash flow impacts interest rate swaps classified operating cash flows statement consolidated cash flows 8 income taxes components consolidated incomeloss income taxes years ended december 31 follows net incomeloss 2008 2007 include amortization fair values certain assets acquired part obs acquisition net loss 2007 includes charge acquired inprocess research development 38 billion connection acquisition obs income cholesterol joint venture included table based jurisdiction income earned notes consolidated financial statements continued components income tax expense years ended december 31 follows 2004 scheringplough established valuation allowance net us deferred tax assets including benefit us operating losses management concluded likely benefit us net deferred tax assets realized december 31 2008 scheringplough continues maintain valuation allowance us net deferred tax assets scheringplough maintains intent indefinitely reinvest earnings international subsidiaries scheringplough provided deferred taxes approximately 75 billion undistributed foreign earnings december 31 2008 determining tax liability would arise earnings remitted practicable liability would depend number factors including amount earnings distributed whether us operations generating taxable profits losses deferred income taxes provided temporary differences financial reporting basis tax basis scheringplough’s assets liabilities scheringplough’s deferred tax assets result principally recording certain items currently deductible tax purposes net operating loss tax credit carryforwards scheringplough’s deferred tax liabilities principally result book tax basis differences resulting obs acquisition use accelerated depreciation tax purposes notes consolidated financial statements continued components scheringplough’s deferred tax assets liabilities december 31 follows deferred tax assets net operating losses tax credit carryforwards principally relate us nols research development rd tax credits us foreign tax credits federal alternative minimum tax amt credit carryforwards december 31 2008 scheringplough approximately 13 billion us nols income tax purposes available offset future us taxable income us nols us operating losses adjusted differences financial tax reporting us nols expire varying amounts 2024 2028 unused state nols related us nols expire varying amounts 2009 2028 december 31 2008 scheringplough approximately 215 million rd tax credits carryforwards expire 2022 2028 227 million foreign tax credit carryforwards expire 2011 2018 46 million amt tax credit carryforwards indefinite life us nol carryforward could materially reduced examination scheringplough’s income tax returns internal revenue service irs scheringplough reduced deferred tax assets related valuation allowance recorded us nols tax credit carryforwards reflect estimated resolution examinations notes consolidated financial statements continued difference income taxes based us statutory tax rate scheringplough’s income tax expense years ended december 31 due following permanent differences 2007 largely attributable acquired inprocess research development charge 38 billion related acquisition obs tax benefit recorded lower tax rates jurisdictions 2008 2007 2006 net primarily attributable scheringplough’s manufacturing subsidiaries singapore ireland puerto rico operate various incentive tax grants begin expire 2011 additionally major countries schering plough conducts operations statutory tax rates less us tax rate overall income taxes primarily relate foreign taxes include benefit related us operating losses scheringplough implemented provisions fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 required fin 48 cumulative effect applying provisions interpretation reported adjustment scheringplough’s retained earnings balance january 1 2007 scheringplough reduced january 1 2007 retained earnings 259 million result adoption fin 48 scheringplough’s unrecognized tax benefits result primarily varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property well scheringplough’s tax matters litigation see note 21 “legal environmental regulatory matters” december 31 2008 2007 total amount unrecognized tax benefits 994 million 859 million respectively includes tax liabilities well reductions deferred tax assets carrying full valuation allowance december 31 2008 2007 approximately 596 million 535 million respectively total unrecognized tax benefits recognized would affect effective tax rate management believes reasonably possible total unrecognized tax benefits could decrease next twelvemonth period approximately 625 million would primarily attributable decision tax matter currently litigated newark district court decision yet rendered possible final resolution scheringplough’s 1997 2002 examination irs appeals possible resolutions various matters however timing ultimate resolution scheringplough’s tax matters payment receipt related cash dependent number factors many outside scheringplough’s control scheringplough includes interest expense income well potential penalties uncertain tax positions component income tax expense statement consolidated operations total amount interest expense related uncertain tax positions years ended december 31 2008 2007 63 million 50 million respectively total amount accrued interest related uncertain tax positions december 31 2008 2007 245 million 197 million respectively included accrued liabilities notes consolidated financial statements continued tabular reconciliation scheringplough’s fin 48 unrecognized tax benefits years ended december 31 follows 1 scheringplough considering filing refund claims based court decisions involving claim right doctrine two courts appeal decisions clarifying law area made clear scheringplough would prevail claims amount unrecognized tax benefits reduced accordingly impact net loss 2007 net consolidated income tax payments exclusive payments related tax examinations litigation discussed 2008 2007 2006 444 million 389 million 234 million respectively second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns scheringplough seeking resolution issue raised examination irs administrative appeals process july 2007 scheringplough made payment 98 million irs pertaining 19972002 examination scheringplough remains open irs 1997 2008 tax years 2008 irs commenced examination 2003 2006 federal income tax returns examination expected completed 2010 significant tax jurisdictions us state foreign scheringplough’s income tax returns open examination period 2000 2008 october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation tried newark district court decision yet rendered scheringplough’s tax reserves adequate cover abovementioned payments 9 retirement plans postretirement benefits plan descriptions scheringplough defined benefit pension plans covering eligible employees us certain foreign countries largest us plan scheringplough retirement plan benefits normal retirement primarily based upon participant’s average final earnings years service social security income modified early retirement death disability benefits also available plan benefits become fully vested five years service plan provides continued accrual notes consolidated financial statements continued credited service employees opt postpone retirement remain employed scheringplough reaching normal retirement age largest international definedbenefit plan dutch plan scheringplough pension fund provides benefits normal retirement age 65 based primarily participant’s average earnings years service benefit takes account social security equivalent income postponement retirement option local dutch regulation benefits modified early retirement death disability benefits also available plan nonus pension plans offer benefits competitive local market conditions defined benefit plans assumed scheringplough part obs acquisition included scheringplough’s consolidated results operations consolidated financial position acquisition date financial position december 31 2007 see note 2 “acquisition” addition scheringplough provides postretirement medical life insurance benefits primarily eligible us retirees dependents postretirement benefit plans certain countries also provide postretirement benefit plans effective december 31 2006 scheringplough accounts retirement plans postretirement benefit plans accordance sfas 158 “employers’ accounting defined benefit pension postretirement plans” sfas 158 sfas 158 requires recognition asset overfunded plans liability underfunded plans scheringplough’s consolidated balance sheets statement also requires recognition changes funded status plans year changes occur 2007 scheringplough’s definedbenefit pension postretirement plans december 31 measurement date included scheringplough’s accumulated comprehensive loss december 31 2008 2007 16 billion 13 billion net tax effects 689 million 553 million net tax effects respectively costs recognized components net periodic benefit costs pursuant sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” components costs december 31 2008 2007 follows actuarial losses primarily represent cumulative difference actuarial assumptions actual returns plan assets changes discount rates plans’ experience total loss amounts net excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees amounts accumulated comprehensive loss expected recognized components net periodic costs 2009 follows notes consolidated financial statements continued actuarial assumptions consolidated weighted average assumptions used determine benefit obligations december 31 1 scheringplough’s international postretirement benefit plans argentina brazil canada south africa assumptions used develop benefit obligations yearend consolidated weighted average assumptions used determine net benefit costs years ended december 31 assumptions used determine net periodic benefit costs year established end previous year assumptions used determine benefit obligations established yearend net periodic benefit costs actuarial present value benefit obligations based actuarial assumptions determined annually based evaluation longterm trends well market conditions may impact cost providing retirement benefits longterm expected rates return plan assets derived return assumptions determined major asset classes equities fixed income real estate proportional basis return expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weighted average assumed healthcare cost trend rate used postretirement measurement purposes 106 percent 2009 trending 52 percent 2018 1 percent increase assumed healthcare cost trend rate would increase combined postretirement service interest cost 11 million postretirement benefit obligation 90 million 1 percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 9 million postretirement benefit obligation 73 million average retirement age assumed based annual rates retirement experienced scheringplough notes consolidated financial statements continued components net periodic benefit costs net pension postretirement periodic benefit costs totaled 304 million 223 million 204 million 2008 2007 2006 respectively components net pension postretirement periodic benefit costs follows net pension postretirement periodic benefit cost attributable us retirement postemployment benefit plans 180 million 2008 157 million 2007 153 million 2006 benefit obligations components changes benefit obligations follows benefit obligations us plans retirement benefits postretirement benefits 26 billion 2008 25 billion 2007 notes consolidated financial statements continued funded status balance sheet presentation components changes plan assets follows fair value us pension postretirement benefits plan assets 11 billion 2008 16 billion 2007 reduction fair value plan assets december 31 2008 compared december 31 2007 due conditions worldwide debt equity markets deteriorated significantly 2008 conditions negative effect fair value plan assets addition plan assets indicated december 31 2008 2007 securities investments 42 million 75 million respectively held nonqualified trust designated provide pension benefits certain underfunded plans accordance sfas 158 december 31 2008 2007 net asset overfunded plans 3 million 42 million respectively related scheringplough’s retirement plans included longterm assets accompanying consolidated balance sheets net liability underfunded plans december 31 2008 2007 totaled 21 billion 12 billion respectively follows december 31 2008 2007 accumulated benefit obligations abo retirement plans 37 billion 36 billion respectively aggregated accumulated benefit obligations fair values plan assets retirement plans accumulated benefit obligations excess plan assets notes consolidated financial statements continued 34 billion 22 billion respectively december 31 2008 27 billion 22 billion respectively december 31 2007 plan assets fair value asset allocation consolidated retirement plans december 31 2008 2007 target allocation 2009 follows asset allocation postretirement benefit trusts december 31 2008 2007 target allocation 2009 follows scheringplough’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns consistent acceptable level overall portfolio market value risk assets periodically rebalanced back target allocations estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid scheringplough’s practice fund qualified pension plans least sufficient amounts meet minimum requirements set forth applicable laws scheringplough expects contribute approximately 350 million retirement plans 2009 including approximately 200 million us scheringplough retirement plan notes consolidated financial statements continued defined contribution plans scheringplough maintains defined contribution savings plans us including plan acquired part obs acquisition largest us plan scheringplough makes contributions plan equal 3 percent eligible employee earnings plus matching contribution 2 percent eligible employee earnings based employee contributions total scheringplough contributions plans 2008 2007 2006 96 million 77 million 70 million respectively scheringplough also maintains defined contribution retirement plans various jurisdictions scheringplough’s contributions plans 2008 2007 material 10 earningsloss per common share following table reconciles components basic diluted earningsloss per share computations years ended december 31 2008 2007 approximately 91 million common shares obtainable upon conversion 2007 mandatory convertible preferred stock excluded computation diluted earningsloss per common share effect would antidilutive third quarter 2007 scheringplough’s 2004 mandatory convertible preferred stock converted 65 million common shares common shares included weighted average shares calculation period conversion years ended december 31 2007 2006 45 million 65 million common shares respectively obtainable upon conversion 2004 mandatory convertible preferred stock excluded computation diluted earningsloss per common share effect would antidilutive weighted average basis period prior conversion common shares issuable scheringplough’s stock incentive plans excluded computation diluted earningsloss per common share antidilutive effect would 61 million 100 million 48 million respectively years ended december 31 2008 2007 2006 respectively scheringplough issued 57500000 common shares august 15 2007 common shares included weightedaverage shares calculation period issuance see note 18 “shareholders’ equity” additional information notes consolidated financial statements continued 11 accumulated comprehensive loss components accumulated comprehensive loss december 31 2008 2007 follows included foreign currency translation adjustment 2008 2007 gains 161 million loss 23 million respectively scheringplough’s eurodenominated debt instruments designated effective economic hedges net investment foreign operation 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest rate payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations effective portion swaps 12 million recorded comprehensive income recognized interest expense life related debt years ended december 31 2008 2007 2 million 1 million respectively effective portion interest rate swaps recognized interest expense 2 million expected recognized interest expense 2009 gross unrealized pretax loss investments 2008 37 million 2007 gain 1 million 12 inventories consisted following december 31 overall decrease total inventories primarily due amortization fair value stepup recorded part obs acquisition 889 million 258 million 2008 2007 respectively included depreciation amortization consolidated statements cash flows included assets december 31 2008 2007 205 million 96 million respectively inventory expected sold within one year inventories valued lastin firstout lifo basis comprised approximately 13 percent 9 percent total inventories december 31 2008 2007 respectively estimated replacement cost total inventories december 31 2008 2007 34 billion 42 billion respectively cost inventories determined firstin firstout method fifo notes consolidated financial statements continued 13 goodwill intangible assets part purchase accounting acquisition obs scheringplough recorded 27 billion goodwill 18 billion assigned prescription pharmaceuticals segment 873 million assigned animal health segment none goodwill related obs acquisition deductible income tax purposes following table summarizes goodwill activity years ending december 31 components intangible assets net follows december 31 patents trademarks licenses amortized straightline method respective useful lives residual value intangible assets estimated zero 2007 part purchase accounting acquisition obs scheringplough recorded 68 billion intangible assets see note 2 “acquisition” additional information amortization expense related intangible assets 2008 2007 2006 570 million 107 million 47 million respectively included cost sales statement consolidated operations intangible assets reviewed determine recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review annual amortization expenses related intangible assets years 2009 2013 expected approximately 570 million 14 product licenses december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade golimumab extending scheringplough’s rights exclusively market remicade match duration scheringplough’s exclusive marketing rights golimumab effective upon regulatory approval golimumab eu scheringplough’s marketing rights products extend 15 years first commercial sale golimumab within eu centocor receive progressively increased share profits scheringplough’s distribution products scheringplough marketing territory 2010 2014 notes consolidated financial statements continued share profits remain fixed thereafter remainder term changes duration remicade marketing rights profit sharing arrangement products conditioned approval golimumab granted prior september 1 2014 scheringplough may independently develop market golimumab crohn’s disease indication territories option centocor participate addition scheringplough centocor agreed utilize autoinjector device commercialization golimumab agreed share development costs rights device scheringplough made upfront payment 21 million included research development expenses accompanying statement consolidated operations year ended december 31 2007 15 borrowings commitments short longterm borrowings scheringplough’s outstanding borrowings december 31 2008 2007 follows scheringplough’s shortterm borrowings consist primarily bank loans commercial paper issued us weighted average interest rate shortterm borrowings 71 percent 79 percent december 31 2008 2007 respectively senior unsecured notes october 1 2007 scheringplough issued euro 500 million aggregate principal amount 500 percent senior unsecured eurodenominated notes due 2010 euro 15 billion aggregate principal amount 5375 percent senior unsecured eurodenominated notes due 2014 net proceeds offering approximately 28 billion interest notes payable annually effective interest rate 500 percent senior unsecured eurodenominated notes 5375 percent senior unsecured eurodenominated notes incorporates initial discount debt issuance fees impact interest rate hedges 510 percent 546 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related notes consolidated financial statements continued sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price specified prospectus change control triggering event occurs certain circumstances defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase september 17 2007 scheringplough issued 10 billion aggregate principal amount 600 percent senior unsecured notes due 2017 10 billion aggregate principal amount 655 percent senior unsecured notes due 2037 net proceeds offering approximately 20 billion interest notes payable semiannually effective interest rate 600 percent senior unsecured notes 655 percent senior unsecured notes incorporates initial discount debt issuance fees 613 percent 667 percent respectively interest rate payable notes subject adjustment notes generally restrict scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 10 percent consolidated net tangible assets notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted redemption date semiannual basis using rate treasury notes comparable remaining terms plus 25 basis points 2017 notes 30 basis points 2037 notes change control triggering event occurs certain circumstances defined prospectus holders notes right require scheringplough repurchase part notes cash payment equal 101 percent aggregate principal amount notes repurchased plus accrued unpaid interest date purchase scheringplough used net proceeds issuance senior unsecured notes fund portion purchase price obs acquisition see note 2 “acquisition” november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 net proceeds offering 237 billion interest notes payable semiannually subject rate adjustment follows rating assigned particular series notes either moody’s investors service inc moody’s standard poor’s rating services sp changes rating set forth interest rate payable series notes initial interest rate 53 percent notes due 2013 65 percent notes due 2033 plus additional interest rate set forth moody’s sp event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade either moody’s sp a3 respectively notes subsequently rated baa1 moody’s bbb sp notes consolidated financial statements continued upon issuance notes rated a3 moody’s sp july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 resulting 555 percent interest rate payable notes due 2013 675 percent interest rate payable notes due 2033 december 31 2008 notes rated baa1 moody’s sp senior unsecured notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes term loan october 24 2007 scheringplough entered fiveyear senior unsecured eurodenominated term loan facility syndicate banks october 31 2007 scheringplough drew euro 11 billion 16 billion term loan fund portion purchase price obs acquisition see note 2 “acquisition” additional information term loan floating interest rate 506 495 weighted average rates 2008 2007 respectively requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing term loan term loan also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated net tangible assets 2008 scheringplough made early principal repayments euro 600 million prepayment penalty incurred relating principal repayments addition scheringplough’s international subsidiaries approximately 578 million available unused lines credit uncommitted various financial institutions december 31 2008 aggregate amount maturities aggregate amount maturities longterm debt december 31 2008 next five years thereafter follows credit facilities august 9 2007 scheringplough entered 20 billion revolving credit agreement syndicate banks terminated 15 billion credit facility mature may 2009 credit facility floating interest rate matures august 2012 requires scheringplough maintain net debt total capital ratio 65 percent 2009 60 percent thereafter net debt equals total debt less cash equivalents shortterm investments marketable securities total capital equals sum total debt total shareholders’ equity excluding cumulative effect acquired inprocess research development connection acquisition consummated closing credit facility credit facility also generally restricts scheringplough creating assuming liens entering sale leaseback transactions unless aggregate outstanding indebtedness secured liens related sale leaseback transactions exceed 12 percent consolidated notes consolidated financial statements continued net tangible assets credit line available general corporate purposes considered support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2008 2007 borrowings outstanding facility commitments total rent expense amounted 258 million 156 million 118 million 2008 2007 2006 respectively future annual minimum rental commitments next five years noncancelable operating leases december 31 2008 follows 2009 165 million 2010 130 million 2011 88 million 2012 55 million 2013 44 million aggregate minimum lease obligations 76 million due thereafter december 31 2008 scheringplough commitments totaling 106 million 1 million related capital expenditures made 2009 2010 respectively 16 financial instruments sfas 133 requires derivatives recorded balance sheets fair value addition statement also requires 1 effective portion qualifying cash flow hedges recognized income hedged item affects income 2 changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur 3 changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized statements consolidated operations occur risks policy objectives scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes currently scheringplough deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments limited basis scheringplough hedge selective foreign currency risks derivatives scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide natural level protection adverse changes exchange rates furthermore risk adverse exchange rate change somewhat mitigated fact scheringplough’s international operations widespread scheringplough’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordance sfas 52 “foreign currency translation” foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income 2007 part overall risk management strategy consideration various preliminary financing scenarios associated acquisition obs scheringplough purchased eurodenominated currency options mitigate exposure event significant strengthening euro compared us dollar scheringplough purchased options aggregate premiums approximately 165 million received proceeds 675 million upon termination options resulting net realized gain 510 million derivatives qualify hedge accounting accordance sfas 133 accordingly gain derivatives recognized statement consolidated operations derivatives shortterm trading nature hedge specific financing investment transaction accordingly cash impacts derivatives classified operating cash notes consolidated financial statements continued flows statement consolidated cash flows see note 7 “other incomeexpense net” december 31 2008 2007 open foreign currency option contracts 2007 scheringplough executed series interest rate swaps anticipation financing acquisition obs objective swaps hedge interest rate payments made future issuances debt swaps designated cash flow hedges future interest payments accordance sfas 133 effective portion gains losses hedges reported comprehensive income ineffective portion reported operations connection eurodenominated debt issuances described note 15 “borrowings commitments” portions swaps deemed ineffective scheringplough recognized 7 million loss statement consolidated operations effective portion swaps 12 million recorded comprehensive income 2007 recognized interest expense life related debt cash flows related interest rate swaps classified operating cash flows statement consolidated cash flows see note 7 “other expenseincome net” december 31 2008 2007 open interest rate swaps scheringplough mitigates credit risk derivative instruments dealing counterparties considered high credit quality accordingly scheringplough anticipate loss nonperformance scheringplough enter derivative instruments manner generate trading profits scheringplough classifies cash flows derivatives accounted hedges category item hedged fair value financial instruments table presents carrying values estimated fair values certain scheringplough’s financial instruments december 31 2008 2007 estimated fair values determined based market prices available dealer quotes carrying values financial instruments including cash equivalents approximated estimated fair values december 31 2008 2007 longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related employee benefit obligations notes consolidated financial statements continued 17 fair value measurements scheringplough’s consolidated balance sheet december 31 2008 includes following assets liabilities measured fair value recurring basis majority scheringplough’s assets liabilities measured fair value recurring basis measured using unadjusted quoted prices active markets identical items level 1 inputs multiplied number units held balance sheet date december 31 2008 assets liabilities fair values measured using significant observable inputs level 2 include measurements using quoted prices identical items markets active measurements using inputs derived principally corroborated observable market data 18 shareholders’ equity preferred shares december 31 2008 scheringplough authorized 50000000 shares preferred stock consists 11500000 preferred shares designated 6 percent mandatory convertible preferred stock 38500000 preferred shares whose designations yet determined december 31 2008 10000000 shares 6 percent mandatory convertible preferred stock issued outstanding mandatory convertible preferred stock august 15 2007 scheringplough issued 10000000 shares 6 percent mandatory convertible preferred stock 2007 preferred stock face value 25 billion net proceeds scheringplough approximately 24 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale 2007 preferred stock fund portion purchase price obs acquisition see note 2 “acquisition” additional information share 2007 preferred stock automatically convert 74206 90909 common shares scheringplough depending average closing price scheringplough’s common shares 20 trading day period ending third trading day prior mandatory conversion date august 13 2010 defined prospectus preferred shareholders may elect convert time prior august 13 2010 minimum conversion ratio 74206 common shares per share 2007 preferred stock additionally time prior mandatory conversion date closing price scheringplough’s common shares exceeds 5053 least 20 trading days within period 30 consecutive trading days scheringplough may elect cause conversion less notes consolidated financial statements continued 2007 preferred stock outstanding minimum conversion ratio 74206 common shares share 2007 preferred stock shares liquidation preference 250 per share plus amount equal sum accrued cumulated unpaid dividends 2007 preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent scheringplough legally permitted pay dividends board directors declares dividend payable scheringplough pay dividends dividend payment date dividend payment dates february 15 may 15 august 15 november 15 year first dividend paid november 15 2007 mandatory convertible preferred stock year ended december 31 2007 shares 6 percent mandatory convertible preferred stock issued august 10 2004 preferred stock converted 64584929 shares scheringplough common stock following conversion 28750000 shares 2004 preferred stock resumed status authorized unissued preferred stock undesignated series available future issuance equity issuance treasury shares august 15 2007 scheringplough issued 57500000 common shares treasury shares 2750 per share net proceeds scheringplough approximately 15 billion deducting commissions discounts underwriting expenses scheringplough used net proceeds sale common shares fund portion purchase price obs acquisition see note 2 “acquisition” additional information summary treasury share transactions years ended december 31 follows included treasury share balance 702 million shares acquired subsidiary scheringplough openmarket purchase program 19941995 shares considered treasury shares new jersey law however like treasury shares may voted considered outstanding shares determining necessary votes approve matter submitted stockholder vote subsidiary receive dividends shares effective september 17 2007 board directors scheringplough adopted amended restated certificate incorporation reflecting automatic conversion 2004 preferred stock issued shares common stock september 14 2007 terms 2007 preferred stock 19 insurance coverage scheringplough maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly scheringplough selfinsures substantially risk relates products’ liability availability commercial insurance become restrictive scheringplough continually assesses best way provide insurance needs notes consolidated financial statements continued 20 segment information scheringplough three reportable segments prescription pharmaceuticals animal health consumer health care segment sales profitloss data follow consistent scheringplough’s current management reporting structure prescription pharmaceuticals segment discovers develops manufactures markets human pharmaceutical products animal health segment discovers develops manufactures markets animal health products consumer health care segment develops manufactures markets overthecounter foot care sun care products primarily us net sales major product segment 1 products acquired obs acquisition november 19 2007 notes consolidated financial statements continued net sales geographic area scheringplough subsidiaries 55 countries outside us net sales presented geographic area scheringplough’s customers located following foreign countries accounted 5 percent consolidated net sales past three years net sales customer sales single customer accounted 10 percent scheringplough’s consolidated net sales past three years follows profitloss segment notes consolidated financial statements continued 1 2008 prescription pharmaceuticals segment’s profit includes charges arising purchase accounting items 808 million 2008 animal health segment’s profit includes charges arising purchase accounting items 641 million 2 2007 prescription pharmaceuticals segment’s loss includes 34 billion purchase accounting items including acquired inprocess research development 32 billion 2007 animal health segment’s loss includes 721 million purchase accounting items including acquired inprocess research development 600 million 3 2008 profits animal health segment include gain sale certain animal health products 160 million scheringplough’s net sales include sales vytorin zetia managed joint venture merck scheringplough accounts joint venture equity method accounting see note 5 “equity income” additional information prescription pharmaceuticals segment includes equity income merckscheringplough joint venture “corporate other” includes interest income expense foreign exchange gains losses currency option gains headquarters expenses special charges miscellaneous items accounting policies used segment reporting described note 1 “summary significant accounting policies” 2008 “corporate other” includes special acquisitionrelated charges 329 million comprised 54 million integrationrelated costs 275 million employee termination costs related productivity transformation program includes ongoing integration obs estimated charges relate reportable segments follows prescription pharmaceuticals 230 million animal health 30 million consumer health care 2 million corporate 67 million 2007 “corporate other” includes special acquisitionrelated charges 84 million comprised 61 million integrationrelated costs obs acquisition 23 million employee termination costs part integration activities estimated charges relate reportable segments follows prescription pharmaceuticals 27 million animal health 11 million corporate 46 million 2006 “corporate other” includes special charges 102 million primarily related changes scheringplough’s manufacturing operations us puerto rico announced june 2006 related prescription pharmaceuticals segment included 2006 cost sales charges approximately 146 million manufacturing streamlining actions primarily related prescription pharmaceuticals segment see note 3 “special acquisitionrelated charges manufacturing streamlining” additional information supplemental sales information sales products comprising 10 percent scheringplough’s us international sales year ended december 31 2008 follows notes consolidated financial statements continued longlived assets geographic location longlived assets shown geographic location primarily property significant increase longlived assets december 31 2007 due obs acquisition scheringplough disaggregate assets segment basis internal management reporting therefore information presented 21 legal environmental regulatory matters background scheringplough involved various claims investigations legal proceedings scheringplough records liability contingencies probable liability incurred amount reasonably estimated scheringplough adjusts liabilities contingencies reflect current best estimate probable loss minimum liability case may best estimate determinable scheringplough records minimum amount within probable range liability expected insurance recoveries considered determining amounts recorded liabilities environmental related matters scheringplough believes loss contingency reasonably possible rather probable amount loss cannot estimated liability recorded however liability reasonably possible disclosure loss contingency made scheringplough reviews status claims investigations legal proceedings ongoing basis including related insurance coverages time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s consolidated results operations cash flows financial condition except matters discussed remainder note recorded liabilities contingencies december 31 2008 related expenses incurred year ended december 31 2008 material opinion management based advice legal counsel ultimate outcome matters except matters discussed remainder note expected material impact scheringplough’s consolidated results operations cash flows financial condition patent matters intellectual property protection critical scheringplough’s ability successfully commercialize product innovations potential litigation regarding scheringplough’s intellectual property rights always exists may initiated third parties attempting abridge scheringplough’s rights well scheringplough protecting rights notes consolidated financial statements continued awp litigation investigations scheringplough continues respond existing new litigation certain states private payors investigations department health human services department justice several states industry scheringplough practices regarding average wholesale price awp scheringplough cooperating investigations litigations investigations relate whether awp used pharmaceutical companies certain drugs improperly exceeds average prices paid providers consequence results unlawful inflation certain reimbursements drugs state programs private payors based awp complaints allege violations federal state law including fraud medicaid fraud consumer protection violations among claims majority cases plaintiffs seeking class certifications cases classes certified outcome litigations investigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies securities class action litigation federal securities litigation following scheringplough’s announcement fda conducting inspections scheringplough’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices several lawsuits filed scheringplough certain named officers lawsuits allege defendants violated federal securities law allegedly failing disclose material information making material misstatements specifically allege scheringplough failed disclose alleged serious risk new drug application clarinex would delayed result manufacturing issues allege scheringplough failed disclose alleged depth severity manufacturing issues complaints consolidated one action us district court district new jersey consolidated amended complaint filed october 11 2001 purporting represent class shareholders purchased shares scheringplough stock may 9 2000 february 15 2001 complaint seeks compensatory damages behalf class court certified shareholder class october 10 2003 notice pendency class action sent members class july 2007 february 18 2009 court signed order preliminarily approving settlement agreement proposed settlement agreement scheduled presented final approval hearing june 1 2009 erisa litigation march 31 2003 scheringplough served putative class action complaint filed us district court new jersey alleging scheringplough retired chairman ceo president richard jay kogan scheringplough’s employee savings plan administrator several current former directors certain former corporate officers breached fiduciary obligations certain participants plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs appealed august 19 2005 us court appeals third circuit reversed dismissal district court matter remanded back district court proceedings kdur antitrust litigation scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upsher smith filed abbreviated new drug applications following commencement ftc administrative proceeding alleging anticompetitive effects settlements resolved scheringplough’s favor alleged class action notes consolidated financial statements continued suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages february 2009 special master recommended us district court district new jersey dismiss class action lawsuits summary judgment thirdparty payor actions several purported class action litigations filed following announcement settlement massachusetts investigation plaintiffs actions seek damages behalf thirdparty payors resulting allegations offlabel promotion improper payments physicians issue massachusetts investigation litigation investigations relating merckscheringplough cholesterol joint venture background january 2008 merckscheringplough cholesterol joint venture announced results enhance clinical trial effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia july 2008 merckscheringplough cholesterol joint venture announced results seas clinical trial simvastatin ezetimibe aortic stenosis litigation investigations respect matters relating clinical trials ongoing scheringplough cooperating fully various investigations responding requests information scheringplough intends vigorously defend lawsuits filed relating enhance study investigation inquiries february 27 2009 scheringplough joint venture andor joint venture partner merck received number governmental inquiries subject number investigations relating enhance clinical trial include several letters congress including subcommittee oversight investigation house committee energy commerce ranking minority member senate finance committee collectively seeking combination witness interviews documents information variety issues related merckscheringplough cholesterol joint venture’s enhance clinical trial also include several subpoenas state officials including state attorneys general requests information us attorneys department justice seeking similar information documents addition scheringplough received letters subcommittee oversight investigations house committee energy commerce seeking certain information documents related seas clinical trial matters scheringplough merck joint venture cooperating investigations responding inquiries january 2008 initial release enhance data fda stated would review results enhance trial january 8 2009 fda announced results review fda stated following two years treatment • carotid artery thickness increased 0011 mm vytorin group 0006 mm simvastatin group difference changes carotid artery thickness two groups statistically significant • levels ldl cholesterol decreased 56 vytorin group decreased 39 simvastatin group difference reductions ldl cholesterol two groups statistically significant fda also stated results enhance change position elevated ldl cholesterol risk factor cardiovascular disease lowering ldl cholesterol reduces risk notes consolidated financial statements continued cardiovascular disease fda also stated pending results improveit clinical trial patients stop taking vytorin cholesterol lowering medications talk doctors questions litigation scheringplough continues respond existing new litigation including civil class action lawsuits alleging common law state consumer fraud claims connection scheringplough’s sale promotion merckscheringplough jointventure products’ vytorin zetia several putative shareholder securities class action lawsuits several officers also named defendants alleging false misleading statements omissions scheringplough representatives related timing disclosures concerning enhance results allegedly violation sections 10b 20a securities exchange act 1934 putative shareholder securities class action lawsuit several officers directors also named alleging material misstatements omissions related enhance results offering documents connection scheringplough’s 2007 securities offerings allegedly violation securities act 1933 including section 11 several putative class action suits alleging scheringplough certain officers directors breached fiduciary duties erisa seeking damages amount losses allegedly suffered plans shareholder derivative action alleging board directors breached fiduciary obligations relating timing release enhance results letter behalf single shareholder requesting board directors investigate allegations litigation described warranted bring appropriate legal action behalf scheringplough tax matters october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation tried newark district court decision yet rendered scheringplough’s tax reserves adequate cover abovementioned payments pending administrative obligations connection settlement investigation us department justice us attorney’s office eastern district pennsylvania scheringplough entered fiveyear corporate integrity agreement cia amended august 2006 connection settlement massachusetts investigation commencing new fiveyear term failure comply obligations cia could result financial penalties date scheringplough believes complied obligations matters products liability beginning may 2007 number complaints filed various jurisdictions asserting claims organon usa inc organon pharmaceuticals usa inc organon international organon scheringplough corporation arising organon’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough failed adequately warn alleged increased risk venous thromboembolism vte posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation venued missouri new jersey state court cases pending states notes consolidated financial statements continued french matter based complaint french competition authority competitor france pursuant court order french competition authority obtained documents french subsidiary scheringplough relating subutex one products subsidiary markets sells resolution matter adverse french subsidiary could result imposition civil fines injunctive administrative remedies july 17 2007 juge des libertés et de la détention ordered annulment search seizure procedural grounds july 19 2007 french authority appealed order french supreme court april 2007 competitor also requested interim relief portion granted french competition authority december 2007 interim relief required scheringplough’s french subsidiary publish two specialized newspapers information including generic quantitative qualitative composition pharmaceutical form substitutable subutex february 2008 paris court appeal confirmed decision french competition authority january 2009 french supreme court confirmed decision french competition authority environmental scheringplough responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law scheringplough alleged potentially responsible party prp scheringplough believes remote time material liability relation sites scheringplough estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps scheringplough records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated report independent registered public accounting firm board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries “company” december 31 2008 2007 related statements consolidated operations shareholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed index item 15 schedule ii valuation qualifying accounts financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 9 consolidated financial statements effective december 31 2006 company adopted statement financial accounting standards 158 employers’ accounting defined benefit pension postretirement plans discussed note 1 consolidated financial statements effective january 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 27 2009 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp parsippany new jersey february 27 2009 scheringplough corporation subsidiaries quarterly data unaudited completing final analysis results 2008 scheringplough determined certain income tax effects relating accounting purchase obs reflected overstatement income tax expense first three quarterly periods 2008 totaling 74 million accordingly scheringplough revised quarterly information included change results reduction income tax expense corresponding increase net income net income available common shareholders along associated per share amounts revisions tax expense net income net income available common shareholders 2008 reflected table 23 million first quarter 26 million second quarter 25 million third quarter operating results three month period ended december 31 2007 reflects closing obs acquisition november 19 2007 including impacts purchase accounting accordance sfas 141 “business combinations” diluted earnings per common share three month period ended september 30 2007 calculated using numerator 731 million arithmetic sum net income available common shareholders 713 million plus dividends 18 million related 2004 preferred stock dilutive denominator 1622 represents average diluted shares outstanding third quarter 2007 see note 3 “special acquisitionrelated charges manufacturing changes” consolidated financial statements additional information relating special acquisitionrelated charges scheringplough’s approximate number holders record common shares january 31 2009 33252 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2009 2008 related consolidated statements income equity cash flows three years period ended december 31 2009 notes consolidated financial statements report dated february 26 2010 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations november 3 2009 merck co inc “old merck” scheringplough corporation “scheringplough” completed previouslyannounced merger “merger” merger scheringplough acquired shares old merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp scheringplough continued surviving public company renamed merck co inc “new merck” “company” however accounting purposes merger treated acquisition old merck considered accounting acquirer accordingly accompanying financial statements reflect old merck’s standalone operations existed prior completion merger references financial statements “merck” periods prior merger refer old merck periods completion merger new merck results scheringplough’s business included new merck’s financial statements periods subsequent completion merger therefore new merck’s financial results 2009 reflect full year legacy scheringplough operations merger resulted inclusion scheringplough’s assets liabilities merger date respective fair values limited exceptions accordingly merger materially affected merck’s results operations financial position see note 3 company global health care company delivers innovative health solutions medicines vaccines biologic therapies consumer animal products markets directly joint ventures company’s operations principally managed products basis comprised one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company’s professional representatives communicate effectiveness safety value pharmaceutical vaccine products health care professionals private practice group practices managed care organizations company also animal health operations discover develop manufacture market animal health products including vaccines company’s professional representatives communicate safety value company’s animal health products veterinarians distributors animal producers additionally company consumer health care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets united states canada 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions january 1 2009 new guidance issued financial accounting standards board “fasb” adopted changes way acquisition method applied business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements results operations date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation international subsidiaries local currencies determined functional currencies net assets subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products certain products awaiting regulatory approval evaluating recoverability inventories produced preparation product launches company considers probability revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair value company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax aoci declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investment april 1 2009 new guidance issued fasb adopted amended otherthantemporary recognition guidance debt securities pursuant new guidance otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized aoci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 1150 million 12576 million respectively december 31 2009 556 million 5607 million respectively december 31 2008 company recognizes revenue sales vaccines federal government placement stockpiles related pediatric vaccine stockpile accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning asset substantially ready use capitalized software costs associated company’s multiyear implementation enterprisewide resource planning system amortized 6 10 years december 31 2009 2008 approximately 428 million 330 million respectively remaining unamortized capitalized software costs associated initiative capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis using fair value based test goodwill increased substantially 2009 result merger see notes 3 9 acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 40 years see note 9 events circumstances warrant review company assess recoverability future operations acquired intangibles using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows acquired intangibles balances increased substantially 2009 result merger see notes 3 9 inprocess research development inprocess research development “iprd” represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility transactions closed prior 2009 fair value projects expensed upon acquisition transactions closed 2009 fair value research projects recorded intangible assets consolidated balance sheet rather expensed amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset begin amortization company tests indefinitelived intangibles including inprocess research development impairment least annually onestep test compares fair value indefinitelived intangible asset’s carrying value iprd increased result merger see notes 3 9 research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made sharebased compensation company expenses sharebased payments employees including grants stock options requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period employee termination costs primarily recorded actions probable estimable contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties exchange gains losses associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including fair value determinations assets liabilities additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards 2009 several new accounting standards issued fasb adopted january 1 2009 new guidance business combinations adopted changes way acquisition method applied business combination guidance requires acquirer recognize assets acquired liabilities assumed acquisition date fair values limited exceptions additionally guidance requires contingent consideration recorded fair value acquisition date acquired inprocess research development capitalized recorded intangible assets acquisition date also requires transaction costs restructure acquired company expensed april 1 2009 additional guidance issued amending accounting contingencies business combination company’s business combination transactions accounted new guidance including merger see note 3 january 1 2009 new guidance accounting reporting disclosure noncontrolling interests adopted requires among things noncontrolling interests recorded equity consolidated financial statements adoption new guidance resulted reclassification 24 billion noncontrolling interests formerly referred minority interests separate component equity consolidated balance sheet see note 13 additionally net income attributable noncontrolling interests shown separately parent net income consolidated statement income prior periods restated reflect presentation disclosure requirements new guidance january 1 2009 new guidance adopted requiring enhanced disclosures derivative instruments hedging activities allow better understanding effects entity’s financial position financial performance cash flows among things new guidance requires disclosure fair values derivative instruments associated gains losses tabular format see note 7 since new guidance requires additional disclosures derivatives hedging activities adoption affect merck’s financial position results operations january 1 2009 new guidance adopted clarifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid considered participating securities shall included computation earnings per share pursuant two class method effect adoption material merck’s results operations provisions guidance retrospective therefore prior periods restated see note 18 january 1 2009 new guidance adopted defines collaborative arrangements establishes reporting requirements transactions participants collaborative arrangement participants arrangement third parties effect adoption material merck’s financial position results operations see note 6 associated disclosures company’s collaborative arrangements january 1 2009 new guidance adopted clarifies accounting certain transactions impairment considerations involving equity method investments effective prospective basis january 1 2009 new guidance adopted clarifies defensive intangible asset intangible asset entity intend actively use intends hold prevent others obtaining access asset accounted separate unit accounting assigned useful life reflects entity’s consumption expected benefits related asset guidance effective prospective basis april 1 2009 new guidance adopted establishes general standards accounting disclosure events occur balance sheet date financial statements issued available issued guidance subsequently amended february 24 2010 longer require disclosure date entity evaluated subsequent events effect adoption material april 1 2009 new guidance adopted provides additional guidelines estimating fair value significant decrease volume level activity asset liability relation normal market activity asset liability similar assets liabilities addition new guidance includes guidelines identifying circumstances indicate transaction asset liability orderly case entity shall place little weight transaction price indicator fair value effect adoption merck’s financial position results operations material april 1 2009 new guidance adopted amended otherthantemporary recognition guidance debt securities impairment model equity securities affected impairment exists current fair value individual security less amortized cost basis pursuant new guidance otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized comprehensive income loss determining credit losses occurred company evaluates whether expected cash flows received sufficient recover amortized cost basis security new guidance material effect upon adoption period adoption december 31 2009 december 31 2009 company adopted new guidance amending existing authoritative literature provides guidance employer’s disclosures plan assets defined pension postretirement benefit plans amended guidance requires disclosures plan assets including investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fair value measurements using significant unobservable inputs level 3 changes plan assets period significant concentrations risk within plan assets since amended guidance required additional disclosures company’s pension postretirement plan assets see note 15 adoption affect company’s financial position results operations recently issued accounting standards 2009 fasb issued several new accounting pronouncements yet effective company june 2009 fasb issued amendment accounting disclosure requirements transfers financial assets effective january 1 2010 amendment eliminates concept qualifying specialpurpose entity changes requirements derecognizing financial assets requires enhanced disclosures provide financial statement users greater transparency transfers financial assets including securitization transactions entity’s continuing involvement exposure risks related transferred financial assets effect adoption company’s financial position results operations expected material also june 2009 fasb amended existing accounting disclosure guidance consolidation variable interest entities effective january 1 2010 amended guidance requires enhanced disclosures intended provide users financial statements transparent information enterprise’s involvement variable interest entity effect adoption company’s financial position results operations expected material october 2009 fasb issued new guidance revenue recognition multiple deliverables effective revenue arrangements entered materially modified fiscal years beginning june 15 2010 although early adoption permitted guidance eliminates residual method current guidance replaces “relative selling price” method allocating revenue multiple deliverable arrangement selling price deliverable shall determined using vendor specific objective evidence selling price exists otherwise thirdparty evidence selling price shall used neither exists deliverable vendor shall use best estimate selling price deliverable adoption guidance also require expanded qualitative quantitative disclosures company currently assessing impact adoption financial position results operations january 2010 fasb amended existing disclosure guidance fair value measurements effective january 1 2010 except disclosures purchases sales issuances settlements roll forward activity level 3 fair value measurements effective january 1 2011 among things updated guidance requires additional disclosure amounts significant transfers level 1 level 2 measurements requires certain level 3 disclosures gross basis additionally updates amend existing guidance require greater level disaggregated information robust disclosures valuation techniques inputs fair value measurements since amended guidance requires additional disclosures adoption impact company’s financial position results operations 3 merger scheringplough corporation november 3 2009 old merck scheringplough completed merger scheringplough acquired shares old merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp scheringplough continued surviving public company renamed merck co inc however accounting purposes merger treated acquisition old merck considered accounting acquirer terms merger agreement issued outstanding share scheringplough common stock converted right receive combination 1050 cash 05767 share common stock new merck issued outstanding share old merck common stock automatically converted share common stock new merck based closing price old merck stock november 3 2009 consideration received scheringplough shareholders valued 2819 per share 496 billion aggregate cash portion consideration funded combination existing cash including sale old merck’s interest merial limited sale redemption investments issuance debt see note 11 upon completion merger issued outstanding share scheringplough 6 mandatory convertible preferred stock “scheringplough 6 preferred stock” converted accordance terms preferred stock remained outstanding one share merck 6 mandatory convertible preferred stock “6 preferred stock” rights set forth new merck certificate incorporation see note 13 rights substantially similar rights scheringplough 6 preferred stock merger expanded company’s pipeline product candidates broadened company’s commercial portfolio expanded global presence increased manufacturing capabilities additionally company expects realize substantial cost savings synergies including opportunities consolidation sales marketing research development calculation consideration transferred 1 upon completion merger period 15 days thereafter holders 6 preferred stock entitled convert share 6 preferred stock number units merger consideration equal “makewhole” conversion rate 82021 determined accordance terms preferred stock amount represents units merger consideration relating 6 preferred stock converted holders 15day period following merger 2 represents present value remaining future dividend payments conversion date mandatory conversion date august 13 2010 paid holders 6 preferred stock elected convert connection merger using discount rate stipulated terms preferred stock 3 represents cash consideration paid holders scheringplough deferred stock units issued 2007 prior converted right receive cash specified merger agreement attributable precombination services 4 represents fair value scheringplough stock option performance share unit deferred stock unit replacement awards attributable precombination service issued holders awards merger fair value outstanding scheringplough stock options performance share units 2007 awards prior immediately vested effective time merger attributed precombination service included consideration transferred stock option performance share unit deferred stock unit awards 2008 2009 immediately vest upon completion merger awards fair value awards attributed precombination services included part consideration transferred fair value attributed postcombination service recognized compensation cost requisite service period postcombination financial statements new merck preliminary allocation consideration transferred net assets acquired following amounts represent preliminary determination fair value identifiable assets acquired liabilities assumed merger final determination fair value certain assets liabilities completed 2010 may result adjustments preliminary values presented 1 connection merger company obtained controlling interest merckscheringplough partnership table reflects scheringplough’s share fair value merckscheringplough partnership’s net assets including intangibles inventories reflected table merck’s share fair value merckscheringplough partnership’s net assets recorded connection fair value adjustment merck’s previously held equity interest partnership see “merckscheringplough partnership” 2 iprd represents fair value assigned incomplete research projects time merger reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life asset begin amortization see “inprocess research development” 3 goodwill recognized largely attributable anticipated synergies expected arise merger approximately 87 billion goodwill allocated pharmaceutical segment remainder goodwill allocated nonreportable segments goodwill deductible tax purposes order allocate merger consideration company estimated fair value assets liabilities scheringplough contingent assets liabilities recognized fair value merger date fair value contingencies could determined contingent liabilities recorded extent amounts probable reasonably estimable see note 12 accounting financial reporting purposes fair value defined price would received upon sale asset amount paid transfer liability orderly transaction market participants measurement date market participants assumed buyers sellers principal advantageous market asset liability additionally fair value measurements asset assume highest best use asset market participants use different estimates judgments could yield different results fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate inprocess research development connection merger company recorded fair value human animal health research projects approximately 50 billion consideration transferred merger allocated human health iprd projects 13 billion allocated animal health iprd projects amounts capitalized accounted similar indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life asset begin amortization fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probability adjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using discount rates range 12 15 actual cash flows likely different assumed iprd projects subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates significant projects include bridion vorapaxar boceprevir phase iii clinical development well ezetimibeatorvastatin combination product bridion sugammadex medication designed rapidly reverse effects certain muscle relaxants used part general anesthesia bridion received regulatory approval european union “eu” several countries around world date regulatory review markets including united states vorapaxar studied prevention treatment atherothrombosis boceprevir hepatitis c protease inhibitor currently development ezetimibe combined atorvastatin investigational medication treatment dyslipidemia merckscheringplough partnership upon consummation merger company obtained controlling interest merckscheringplough partnership “msp partnership” owned 100 company previously company noncontrolling interest result obtaining controlling interest company required remeasure merck’s previously held equity interest msp partnership mergerdate fair value recognized resulting gain 75 billion earnings income expense net conjunction remeasurement company recorded intangible assets approximately 73 billion included iprd approximately 03 billion stepup inventories mergerrelated costs mergerrelated costs expensed incurred year ended december 31 2009 merck incurred 1362 million transaction costs directly related merger including advisory legal fees 2338 million integration costs 15 billion restructuring costs including exit costs connection merger see note 4 costs recognized within marketing administrative expenses restructuring costs additionally 1735 million interest costs recognized connection debt issued partially fund merger see note 11 supplemental pro forma data scheringplough’s results operations included new merck’s financial statements periods subsequent completion merger scheringplough contributed revenues 34 billion estimated losses 22 billion new merck period consummation merger december 31 2009 following unaudited supplemental pro forma data presents consolidated information merger completed january 1 2008 unaudited supplemental pro forma data reflect application following adjustments • consolidation msp partnership owned 100 company corresponding gain resulting company’s remeasurement previously held equity interest msp partnership • additional depreciation amortization expense would recognized assuming fair value adjustments inventory property plant equipment intangible assets • additional interest expense financing costs would incurred borrowing arrangements loss interest income cash shortterm investments used fund merger • transaction costs associated merger • conversion portion outstanding 6 preferred stock unaudited supplemental pro forma financial information reflect potential realization cost savings relating integration two companies pro forma data considered indicative results would occurred merger related borrowings consummated january 1 2008 indicative future results 4 restructuring merger restructuring program february 2010 company announced first phase new global restructuring program “merger restructuring program” conjunction integration legacy merck legacy scheringplough businesses merger restructuring program intended optimize cost structure combined company part first phase merger restructuring program end 2012 company expects reduce total workforce approximately 15 across areas company worldwide company also plans eliminate 2500 vacant positions part first phase program workforce reductions primarily come elimination duplicative positions sales administrative headquarters organizations well consolidation certain manufacturing facilities research development operations company continue hire new employees strategic growth areas business period certain actions ongoing reevaluation manufacturing research development facilities worldwide yet completed included later 2010 phases merger restructuring program connection merger restructuring program separation costs company’s existing severance programs worldwide recorded fourth quarter 2009 extent costs probable reasonably estimable company recorded pretax restructuring costs 15 billion primarily employee separation costs related merger restructuring program fourth quarter 2009 first phase merger restructuring program expected completed end 2012 total pretax costs estimated 26 billion 33 billion costs voluntary programs enhancement programs recorded 2010 relevant criteria met company estimates approximately 85 cumulative pretax costs relate cash outlays primarily related employee separation expense approximately 15 cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested global restructuring program october 2008 old merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness part 2008 restructuring program company expects eliminate approximately 7200 positions 6800 active employees 400 vacancies across areas company worldwide end 2011 40 total reductions occur united states part 2008 restructuring program company streamlining management layers reducing total number senior midlevel executives globally december 31 2009 approximately 4910 positions eliminated connection 2008 restructuring program comprised employee separations elimination contractors vacant positions merck rolling new customercentric selling model designed provide merck meaningful competitive advantage help physicians patients payers improve patient outcomes company operating new commercial selling models united states markets around world company also making greater use outside technology resources centralizing common sales marketing activities consolidating streamlining operations merck’s manufacturing division focus capabilities core products outsource noncore manufacturing 2009 merck continued implementing new model basic research global operating strategy legacy merck research laboratories sites new model align franchise function well align resources disease area priorities balance capacity across discovery phases allow company act upon programs highest probability success additionally across disease area priorities company’s strategy designed expand access worldwide external science incorporate external research key component company’s early discovery pipeline order translate basic research productivity latestage clinical success 2009 basic research facilities pomezia italy tsukuba japan sold operations conducted basic research facility seattle closed merck also sold closed certain facilities sold related assets connection 2008 restructuring program connection 2008 restructuring program separation costs existing severance programs worldwide recorded third quarter 2008 extent costs probable estimable old merck commenced accruing costs related onetime termination benefits offered employees 2008 restructuring program fourth quarter 2008 necessary criteria met pretax restructuring costs 4747 million 9213 million respectively recorded related 2008 restructuring program 2009 2008 since inception 2008 restructuring program december 31 2009 merck recorded total pretax accumulated costs 14 billion 2008 restructuring program expected completed end 2011 total pretax costs estimated 16 billion 20 billion company estimates twothirds cumulative pretax costs relate cash outlays primarily employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested global restructuring program november 2005 old merck announced global restructuring program “2005 restructuring program” designed reduce cost structure increase efficiency enhance competitiveness substantially complete end 2008 segment reporting restructuring charges unallocated expenses following table summarizes charges related merger restructuring program 2008 2005 restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated approximately 3300 positions eliminated 2009 approximately 3160 related 2008 restructuring program approximately 140 related merger restructuring program 2009 certain employees anticipated separated part planned restructuring actions 2008 restructuring program instead transferred buyer conjunction sale facility accordingly accrual separation costs associated employees reversed resulting reduction expenses approximately 5800 positions eliminated 2008 approximately 1750 related 2008 restructuring program 4050 related 2005 restructuring program approximately 2400 positions eliminated 2007 connection 2005 restructuring program position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research facilities sold closed part programs sites continue operate respective closure dates since future cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather write immediately site assets include manufacturing research facilities equipment activity 2009 2008 2007 includes 149 million 294 million 394 million respectively asset abandonment shutdown related costs additionally activity includes 823 million 684 million 189 million 2009 2008 2007 respectively related curtailment settlement termination charges pension postretirement benefit plans see note 15 activity also reflects pretax losses resulting sales facilities related assets 2009 579 million pretax gains sales 2008 615 million adjustments recorded amounts material period following table summarizes charges spending relating merger restructuring program 2008 2005 restructuring program activities 1 cash outlays associated first phase merger restructuring program expected substantially completed end 2012 cash outlays associated remaining restructuring reserve 2008 restructuring program expected completed end 2011 cash outlays associated remaining restructuring reserve 2005 restructuring program expected completed end 2010 2 includes proceeds sales facilities connection restructuring actions legacy scheringplough program prior merger scheringplough commenced productivity transformation program designed reduce avoid costs increase productivity postmerger period december 31 2009 company recorded 464 million costs related program including 387 million employee separation costs included restructuring costs 77 million accelerated depreciation costs included materials production costs remaining reserve associated program 797 million december 31 2009 approximately 225 positions eliminated connection program postmerger period december 31 2009 5 acquisitions research collaborations license agreements december 2009 merck avecia investments limited announced definitive agreement merck would acquire biologics business avecia group total purchase price 180 million avecia biologics contract manufacturing organization specific expertise microbialderived biologics terms agreement merck would acquire avecia biologics limited “avecia” assets including avecia’s process development scaleup manufacturing quality business support operations located billingham united kingdom transaction closed february 1 2010 accordingly results operations acquired business included merck’s results operations acquisition date september 2009 old merck announced entered exclusive agreement csl biotherapies “csl” subsidiary csl limited market distribute afluria csl’s seasonal influenza flu vaccine united states 2010201120152016 flu seasons terms agreement merck assume responsibility aspects commercialization afluria united states csl supply afluria merck retain responsibility marketing vaccine outside united states afluria indicated active immunization persons ages 6 months older influenza disease caused influenza virus subtypes type b present vaccine july 2009 old merck portola pharmaceuticals inc “portola” signed exclusive global collaboration license agreement development commercialization betrixaban mk4448 investigational oral factor xa inhibitor anticoagulant currently phase ii clinical development prevention stroke patients atrial fibrillation return exclusive worldwide license betrixaban old merck paid portola initial fee 50 million closing recorded research development expense portola eligible receive additional cash payments totaling 420 million upon achievement certain development regulatory commercialization milestones well doubledigit royalties worldwide sales betrixaban approved merck assume development commercialization costs including costs phase iii clinical trials portola retained option cofund phase iii clinical trials return additional royalties b copromote betrixaban merck united states term agreement commenced august 2009 unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country agreement may terminated either party event material uncured breach bankruptcy party agreement may terminated merck event parties merck decide cease development betrixaban safety efficacy addition merck may terminate agreement time upon 180 days prior written notice portola may terminate agreement event merck challenges portola patent covering betrixaban upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization betrixaban case termination cause merck certain royalty obligations april 2009 old merck medarex inc “medarex” massachusetts biologic laboratories “mbl” university massachusetts medical school announced exclusive worldwide license agreement cda1 cdb1 mk3415a also known mdx066mdx1388 mblcda1mblcdb1 investigational fully human monoclonal antibody combination developed target neutralize clostridium difficile toxins b treatment c difficile infection cda1 cdb1 codeveloped medarex mbl terms agreement merck gained worldwide rights develop commercialize cda1 cdb1 medarex mbl received aggregate upfront payment 60 million upon closing recorded research development expense potentially eligible receive additional cash payments 165 million aggregate upon achievement certain milestones associated development approval drug candidate covered agreement upon commercialization medarex mbl also eligible receive doubledigit royalties product sales milestones certain sales targets met term agreement commenced closing date unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country either party may terminate agreement uncured material breach party bankruptcy insolvency party merck may terminate agreement time upon providing 180 days prior written notice medarex mbl also april 2009 old merck santen pharmaceutical co ltd “santen” announced worldwide licensing agreement tafluprost mk2452 prostaglandin analogue investigation united states tafluprost preserved preservativefree formulations received marketing approval reduction elevated intraocular pressure openangle glaucoma ocular hypertension several european nordic countries well japan filed approval additional european asia pacific markets terms agreement merck paid fee capitalized amortized materials production costs life underlying patent pay milestones royalty payments based future sales tafluprost preserved preservativefree formulations exchange exclusive commercial rights tafluprost western europe excluding germany north america south america africa santen retain commercial rights tafluprost countries eastern europe northern europe asia pacific including japan merck provide promotion support santen germany poland tafluprost approved united states santen option copromote agreement merck santen expires countrybycountry basis last occur expiry last expire valid patent claim b expiration last expire royalty merck may terminate agreement time upon 90 days prior written notice also time upon 60 days prior written notice merck determines product presents issues safety tolerability addition merck may terminate agreement event enumerated agreements santen coownerlicensor certain intellectual property terminate expire materially adversely affects merck either merck santen materially breaches agreement fails cure receiving notice nonbreaching party may terminate agreement provides termination noninsolvent party due bankruptcy party finally agreement terminate term merck develops commercializes competitive product term defined agreement addition april 2009 old merck cardiome pharma corp “cardiome” announced collaboration license agreement development commercialization vernakalant mk6621 investigational candidate treatment atrial fibrillation agreement provides merck exclusive global rights oral formulation vernakalant “vernakalant oral” maintenance normal heart rhythm patients atrial fibrillation provides merck affiliate merck sharp dohme switzerland gmbh exclusive rights outside united states canada mexico intravenous “iv” formulation vernakalant “vernakalant iv” rapid conversion acute atrial fibrillation normal heart rhythm terms agreement old merck paid cardiome initial fee 60 million upon closing recorded research development expense addition cardiome eligible receive 200 million payments based achievement certain milestones associated development approval vernakalant products including 15 million submission regulatory approval europe vernakalant iv old merck paid 2009 result submission 20 million initiation planned phase iii program vernakalant oral 100 million milestones associated approvals subsequent indications intravenous oral formulations also cardiome receive tiered royalty payments sales approved products potential receive 340 million milestone payments based achievement significant sales thresholds cardiome retained option copromote vernakalant oral merck hospitalbased sales force united states merck responsible future costs associated development manufacturing commercialization candidates merck granted cardiome secured interestbearing credit facility 100 million cardiome may access tranches several years commencing 2010 cardiome’s codevelopment partner north america astellas pharma us inc submitted nda fda kynapid vernakalant hydrochloride injection december 2006 included results two pivotal phase iii clinical trials december 2007 cardiovascular renal drugs advisory committee recommended fda approve vernakalant iv rapid conversion atrial fibrillation august 2008 fda issued approvable action letter requesting additional information phase iib doubleblind placebocontrolled randomized doseranging clinical trial patients risk recurrent atrial fibrillation showed 500 mg dose vernakalant oral significantly reduced rate atrial fibrillation relapse compared placebo agreement continues effect expiration cardiome’s copromotion rights royalty milestone payment obligations agreement may terminated event insolvency material uncured breach either party additionally collaboration may terminated merck event merck determines good faith advisable continue development commercialization vernakalant product result serious safety issue addition merck may terminate agreement time upon 12 months prior written notice cardiome may terminate agreement event merck challenges cardiome patent covering vernakalant upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vernakalant cases continuing royalty obligations march 2009 old merck acquired insmed inc’s “insmed” portfolio followon biologic therapeutic candidates commercial manufacturing facilities located boulder colorado terms agreement old merck paid insmed aggregate 130 million cash acquire rights boulder facilities insmed’s pipeline followon biologic candidates insmed’s followon biologics portfolio includes two clinical candidates mk4214 investigational recombinant granulocytecolony stimulating factor “gcsf” evaluated ability prevent infections patients cancer receiving chemotherapy mk6302 pegylated recombinant gcsf designed allow less frequent dosing transaction accounted business combination accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated insmed’s followon biologics portfolio mk4214 mk6302 indefinitelived intangible asset recorded fair value determined based upon present value expected future cash flows new product candidates resulting insmed’s followon biologics portfolio adjusted probability estimated technical marketing success utilizing income approach reflecting appropriate riskadjusted discount rates ongoing activity related mk4214 mk6302 expected material company’s research development expense remaining net assets acquired material milestone royalty obligations associated acquisition transaction closed march 31 2009 accordingly results operations acquired business included merck’s results operations beginning april 1 2009 september 2008 old merck japan tobacco inc “jt” signed worldwide licensing agreement develop commercialize jtt305 mk5442 investigational oral osteoanabolic bone growth stimulating agent treatment osteoporosis disease reduces bone density strength results increased risk bone fractures jtt305 investigational oral calcium sensing receptor antagonist currently evaluated jt phase ii clinical trials japan effect increasing bone density phase clinical trials outside japan terms agreement merck gained worldwide rights except japan develop commercialize jtt305 certain related compounds jt received upfront payment 85 million recorded research development expense eligible receive additional cash payments upon achievement certain milestones associated development approval drug candidate covered agreement jt also eligible receive royalties sales drug candidates receive marketing approval license agreement merck jt remain effect expiration royalty milestone obligations may terminated event uncured material breach party agreement may also terminated merck without cause initial commercial sale jtt305 giving six months prior notice jt thereafter giving one year prior notice thereof jt license agreement may also terminated immediately merck determines due safety andor efficacy concerns based available scientific evidence cease development jtt305 andor withdraw jtt305 market permanent basis september 2007 old merck completed acquisition novacardia inc “novacardia” privately held clinicalstage pharmaceutical company focused cardiovascular disease old merck acquired outstanding equity novacardia total purchase price 3664 million including 164 million cash investments hand closing paid issuance 73 million shares old merck common stock former novacardia shareholders based old merck’s average closing stock price five days prior closing acquisition connection acquisition old merck recorded charge 3251 million inprocess research development associated rolofylline mk7418 novacardia’s investigational phase iii compound acute heart failure acquisition date technological feasibility established alternative future use existed charge deductible tax purposes recorded research development expense determined based upon present value expected future cash flows resulting technology adjusted estimated probability technical marketing success time utilizing income approach reflecting appropriate riskadjusted discount rate 220 remaining purchase price allocated cash investments 164 million deferred tax asset relating net operating loss carryforward 239 million net assets 10 million novacardia development stage company commenced planned principal operations transaction accounted acquisition assets rather business combination therefore goodwill recorded novacardia’s results operations included merck’s consolidated financial results since acquisition date june 2009 old merck announced preliminary results pivotal phase iii study rolofylline showed rolofylline meet primary secondary efficacy endpoints old merck terminated clinical development program rolofylline also 2007 old merck gtx inc “gtx” entered agreement providing research development global strategic collaboration selective androgen receptor modulators “sarms” new class drugs potential treat agerelated muscle loss sarcopenia well musculoskeletal conditions merck discontinued internal development mk2866 sarm agreement currently discussing next steps gtx also 2007 old merck ariad pharmaceuticals inc “ariad” entered global collaboration jointly develop commercialize ridaforolimus mk8669 ariad’s novel mtor inhibitor use cancer collaborations generally continue effect expiration royalty milestone payment obligations collaborations may generally terminated event insolvency material uncured breach either party additionally collaboration agreement merck gtx may terminated merck upon 90 days notice gtx time december 18 2009 collaboration agreement merck ariad may terminated merck upon failure mk8669 meet certain developmental safety requirements event merck concludes advisable continue development mk8669 use cancer indication addition merck may terminate ariad collaboration agreement third anniversary effective date providing least 12 months prior written notice upon termination ariad collaboration agreement depending upon circumstances parties varying rights obligations respect continued development commercialization mk8669 continuing royalty obligations 6 collaborative arrangements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations licensing preclinical clinical compounds technology platforms drive near longterm growth company supplements internal research aggressive licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies across broad range therapeutic areas arrangements often include upfront payments royalty profit share payments contingent upon occurrence certain future events linked success asset development well expense reimbursements payments third party discussed note 2 january 1 2009 new guidance issued fasb adopted defines collaborative arrangements establishes reporting requirements transactions participants collaborative arrangement participants arrangement third parties company reviewed third party arrangements determine arrangement within scope new guidance arrangement unique nature company’s significant arrangements discussed cozaarhyzaar 1989 old merck ei dupont de nemours company “dupont” agreed form longterm research marketing collaboration develop class therapeutic agents high blood pressure heart disease discovered dupont called angiotensin ii receptor antagonists include cozaar hyzaar return old merck provided dupont marketing rights united states canada prescription medicines sinemet cr pursuant 1994 agreement dupont company exclusive licensing agreement market cozaar hyzaar registered trademarks dupont return royalties profit share payments dupont patents provide us marketing exclusivity cozaar hyzaar expire april 2010 addition patent cozaar expire number major european markets march 2010 hyzaar lost patent protection number major european markets february 2010 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor inc “centocor” johnson company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi golimumab fully human monoclonal antibody company exclusive marketing rights products outside united states japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi eu following receipt pricing reimbursement approval within eu operating expenses subject certain adjustments company entitled receive approximate 60 share profits company’s distribution company’s marketing territory beginning 2010 share profits change time 50 share profits 2014 products share profits remain fixed thereafter remainder term company may independently develop market simponi crohn’s disease indication territories option centocor participate see note 12 discussion arbitration involving remicadesimponi product rights 7 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management significant portion company’s revenues denominated foreign currencies merck relies sustained cash flows generated foreign sources support longterm commitment us dollarbased research development extent dollar value cash flows diminished result strengthening dollar company’s ability fund research dollarbased strategic initiatives consistent level may impaired company established revenue hedging balance sheet risk management programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates us functional currency entities objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company partially hedge forecasted foreign currency denominated third party intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion third party intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales probable hedged transaction occur portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase value anticipated foreign currency cash flows company also utilizes forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows derivative instruments designated cash flow hedges fair value contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet accordingly effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis cash flows contracts reported operating activities consolidated statement cash flows us dollar functional currency company’s foreign subsidiaries primary objective balance sheet risk management program protect us dollar value foreign currency denominated net monetary assets effects volatility foreign exchange might occur prior conversion us dollars instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange amount us dollar cash flows derived net assets us dollar functional currency company’s foreign subsidiaries merck executes spot trades convert foreign currencies us dollars based shortterm forecast needs us dollar proceeds invested required company’s foreign subsidiaries merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level foreign currency denominated monetary assets liabilities remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year applicable company uses forward contracts hedge changes fair value certain foreign currency denominated availableforsale securities attributable fluctuations foreign currency exchange rates derivative contracts designated qualify fair value hedges accordingly changes fair value hedged securities due fluctuations spot rates recorded income expense net offset fair value changes forward contracts attributable spot rate fluctuations changes contracts’ fair value due spotforward differences excluded designated hedge relationship recognized income expense net amounts well hedge ineffectiveness significant years ended december 31 2009 2008 2007 cash flows contracts reported operating activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes eurodenominated term loan designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within comprehensive income interest rate risk management december 31 2009 company party seven payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes two swaps maturing 2011 notional amounts 125 million effectively convert company’s 250 million 5125 fixedrate notes due 2011 floating rate instruments five swaps maturing 2015 notional amounts 150 million effectively convert 750 million company’s 10 billion 40 fixedrate notes due 2015 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes benchmark interest rate recorded interest expense offset fair value changes swap contracts 2008 old merck terminated four interest rate swap contracts notional amounts 250 million terminated one interest rate swap contract notional amount 500 million swaps effectively converted 10 billion 475 fixedrate notes due 2015 500 million 4375 fixedrate notes due 2013 variable rate debt result swap terminations old merck received 1283 million cash excluding accrued interest material corresponding gains related basis adjustment debt associated terminated swap contracts deferred amortized reduction interest expense remaining term notes cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives segregated derivatives designated hedging instruments designated hedging instruments december 31 2009 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated cash flow hedging relationship iii designated hedging relationship year ended december 31 2009 1 recognized income expense net 2 recognized sales 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2009 company estimates 656 million pretax net unrealized loss derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities company’s level 1 assets include equity securities traded active exchange market level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities company’s level 2 assets liabilities primarily include debt securities quoted prices traded less frequently exchangetraded instruments corporate notes bonds us foreign government agency securities certain mortgagebacked assetbacked securities municipal securities commercial paper derivative contracts whose values determined using pricing models inputs observable market derived principally corroborated observable market data level 3 unobservable inputs supported little market activity financial instruments whose values determined using pricing models discounted cash flow methodologies similar techniques well instruments determination fair value requires significant judgment estimation company’s level 3 assets mainly include certain mortgagebacked asset backed securities well certain corporate notes bonds limited market activity december 31 2009 715 million approximately 73 company’s investment securities categorized level 3 assets pledged certain collateral arrangements see note 17 assets classified level 3 december 31 2009 acquired old merck elected redeemedinkind shortterm fixed income fund restricted cash redemptions described inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis summarized 1 substantially assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 assets represent portion pledged collateral discussed note 17 december 31 2009 level 2 assets comprised 395 million assetbacked securities 116 million mortgage backed securities 40 million corporate notes bonds december 31 2008 level 2 assets comprised 9874 million corporate notes bonds 7925 million municipal securities 3573 million commercial paper 2760 million mortgagebacked securities 2401 million us government agency securities 2246 million assetbacked securities 3 fair value determination derivatives includes assessment credit risk counterparties derivatives company’s credit risk effects significant december 31 2009 company approximately 85 billion cash equivalents level 3 valuation techniques financial assets considered level 3 fair values determined using pricing models discounted cash flow methodologies similar techniques least one significant model assumption input unobservable level 3 financial assets also include certain investment securities limited market activity determination fair value requires significant judgment estimation company’s level 3 investment securities december 31 2009 primarily include certain mortgagebacked assetbacked securities well certain corporate notes bonds decrease observability market pricing investments securities valued primarily using pricing models management understands methodologies models incorporate transaction details contractual terms maturity timing amount future cash inflows well assumptions liquidity credit valuation adjustments marketplace participants december 31 2009 table provides summary changes fair value including net transfers andor financial assets measured fair value recurring basis using significant unobservable inputs level 3 1 transfers level 3 deemed occur beginning quarter transaction takes place 2 amounts recorded income expense net january 1 2008 old merck 12731 million invested shortterm fixed income fund “fund” due market liquidity conditions cash redemptions fund restricted result restriction cash redemptions old merck consider fund traded active market observable pricing january 1 2008 amounts categorized level 3 january 7 2008 old merck elected redeemedinkind fund received share underlying securities fund result majority underlying securities transferred level 3 determined securities observable markets december 31 2009 715 million investment securities associated redemptioninkind classified level 3 securities contained least one significant input unobservable securities account entire balance company’s level 3 assets december 31 2009 level 3 investments aggregate amount 267 million longer pledged collateral reclassified assets availableforsale investments financial instruments measured fair value company’s financial instruments measured fair value recurring basis recorded amounts approximate fair value due liquid shortterm nature cash equivalents receivables payables estimated fair value loans payable longterm debt including current portion december 31 2009 177 billion compared carrying value 175 billion december 31 2008 63 billion compared carrying value 62 billion fair value estimated using quoted dealer prices summary december 31 gross unrealized gains losses availableforsale investments including pledged collateral recorded aoci follows 1 december 31 2009 gross unrealized gains gross unrealized losses related amounts pledged collateral see note 17 256 million 03 million respectively december 31 2008 gross unrealized gains gross unrealized losses related amounts pledged collateral 361 million 303 million respectively availableforsale debt securities included shortterm investments totaled 2931 million december 31 2009 remaining debt securities 1419 million mature within five years debt securities pledged collateral included current assets december 31 2009 debt securities pledged collateral maturing within five years totaled 371 million letter credit august 2008 old merck executed 41 billion letter credit agreement financial institution satisfied certain conditions set forth us vioxx settlement agreement see note 12 old merck pledged collateral financial institution approximately 51 billion pursuant terms letter credit agreement although amount assets pledged collateral set letter credit agreement assets held custody third party assets managed old merck old merck considered assets pledged letter credit agreement restricted letter credit amount required collateral balances declined payments first 750 million settlement agreement made december 31 2008 38 billion recorded within deferred income taxes current assets 13 billion classified assets 2009 old merck made remaining payments vioxx settlement funds pursuant us vioxx settlement agreement accordingly letter credit agreement terminated collateral released concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2009 cash equivalents includes cash collateral 692 million received various counterparties corresponding offset included accrued current liabilities company advanced cash collateral counterparties december 31 2009 company’s four largest us customers mckesson corporation cardinal health inc amerisourcebergen corporation medco health solutions inc represented aggregate approximately onefifth accounts receivable december 31 2009 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales 8 inventories december 31 consisted increase inventories 2009 primarily due merger including 23 billion december 31 2009 remaining purchase accounting adjustments inventories adjustments recognized component materials production costs related inventories sold inventories valued lifo method comprised approximately 21 56 inventories december 31 2009 2008 respectively amounts recognized assets comprised almost entirely raw materials work process inventories 9 goodwill intangibles result merger see note 3 company recorded 105 billion goodwill 409 billion acquired identifiable intangible assets including acquired iprd company recorded additional 73 billion intangible assets conjunction remeasurement merck’s previously held equity interest msp partnership following table summarizes goodwill activity segment intangibles december 31 consisted 1 amounts capitalized inprocess research development accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization aggregate amortization expense 9218 million 2009 1861 million 2008 2358 million 2007 estimated aggregate amortization expense next five years follows 2010 48 billion 2011 48 billion 2012 47 billion 2013 47 billion 2014 44 billion 10 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 primarily reflects results merial limited disposition september 17 2009 sanofi pasteur msd johnson°merck consumer pharmaceuticals company merckscheringplough partnership 2000 old merck scheringplough collectively “partners” entered agreement create equallyowned partnership develop market united states new prescription medicines cholesterol management agreement generally provided equal sharing development costs copromotion approved products company 2001 cholesterolmanagement partnership expanded include countries world excluding japan 2002 ezetimibe first new class cholesterollowering agents launched united states zetia marketed ezetrol outside united states 2004 combination product containing active ingredients zetia zocor approved united states vytorin marketed inegy outside united states cholesterol agreements provided sharing operating income generated msp partnership based upon percentages varied product sales level country us market partners shared profits zetia vytorin sales equally exception first 300 million annual zetia sales scheringplough received greater share profits operating income included expenses partners contractually agreed share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services ongoing clinical research market support market research market expansion well specialty sales force physician education programs expenses incurred support msp partnership shared partners marketing administrative expenses including certain sales force costs well certain manufacturing costs included equity income affiliates however costs reflected overall results company certain research development expenses generally shared equally partners adjusting earned milestones result merger see note 3 msp partnership owned 100 company results msp partnership date merger reflected equity income affiliates activity resulting sale msp partnership products merger consolidated merck’s results see note 12 information respect litigation involving msp partnership partners related sale promotion zetia vytorin summarized financial information msp partnership follows 1 old merck’s share msp partnership’s income taxes differs equity income recognized msp partnership primarily due timing recognition certain transactions old merck msp partnership periods presented including milestone payments 2 amounts comprised almost entirely current balances astrazeneca lp 1982 old merck entered agreement astra ab “astra” develop market astra’s products royaltybearing license 1993 old merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” old merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 old merck astra completed restructuring ownership operations joint venture whereby old merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc “astrazeneca merger” became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales current future kbi products revenue 14 billion 16 billion 17 billion 2009 2008 2007 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates reflected table returns include priority return provided partnership agreement variable returns based part upon sales certain former astra usa inc products preferential return representing merck’s share undistributed azlp gaap earnings astrazeneca merger triggered partial redemption march 2008 old merck’s interest certain azlp product rights upon redemption old merck received 43 billion azlp amount based primarily multiple old merck’s average annual variable returns derived sales former astra usa inc products three years prior redemption “limited partner share agreed value” old merck recorded 15 billion pretax gain partial redemption 2008 partial redemption old merck’s interest product rights result change old merck’s 1 limited partnership interest conjunction 1998 restructuring astra purchased option “asset option” payment 4430 million recorded deferred income buy old merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” astrazeneca exercise asset option first half 2010 exercise price 647 million represents net present value march 31 2008 projected future pretax revenue received old merck nonppi products “appraised value” february 26 2010 astrazeneca notified company exercising asset option old merck also right require astra purchase interest 2008 appraised value february 2008 old merck advised astrazeneca would exercise asset option thus 4430 million remains deferred recognized asset option consummated addition 1998 old merck granted astra option “shares option” buy old merck’s common stock interest kbi therefore old merck’s interest nexium prilosec exercisable two years astra’s exercise asset option astra also exercise shares option 2017 combined annual sales two products fall minimum amount provided case long astrazeneca’s asset option exercised 2010 exercise price shares option based net present value estimated future net sales nexium prilosec determined time exercise subject certain trueup mechanisms astrazeneca merger constituted trigger event kbi restructuring agreements result merger exchange old merck’s relinquishment rights future astra products existing pending us patents time merger astra paid 9674 million “advance payment” advance payment deferred remained subject trueup calculation “trueup amount” directly dependent fair market value march 2008 astra product rights retained old merck calculated trueup amount 2437 million returned azlp march 2008 old merck recognized pretax gain 7237 million related residual advance payment balance provisions kbi restructuring agreements trigger event occurred sum limited partner share agreed value appraised value trueup amount guaranteed minimum 47 billion distribution limited partner share agreed value less payment trueup amount resulted cash receipts old merck 40 billion aggregate pretax gain 22 billion included income expense net 2008 astrazeneca’s purchase old merck’s interest nonppi products contingent upon exercise asset option astrazeneca 2010 therefore payment appraised value may occur also march 2008 138 billion outstanding loan astra plus interest redemption date settled result transactions old merck received net proceeds azlp 26 billion summarized financial information azlp follows merial limited 1997 old merck rhônepoulenc sa sanofiaventis combined animal health businesses form merial limited “merial” fully integrated animal health company standalone joint venture 50 owned party merial provides comprehensive range pharmaceuticals vaccines enhance health wellbeing performance wide range animal species september 17 2009 old merck sold 50 interest merial sanofiaventis 4 billion cash sale resulted recognition 32 billion gain 2009 reflected income expense net also connection sale merial old merck sanofiaventis scheringplough signed call option agreement terms call option agreement following closing merger sanofiaventis option require company combine intervetscheringplough animal health business merial form animal health joint venture would owned equally company sanofiaventis part call option agreement value merial fixed 8 billion minimum total value received company contributing intervetscheringplough combined entity would 925 billion subject customary transaction adjustments consisting floor valuation intervetscheringplough fixed minimum 85 billion subject potential upward revision based valuation exercise two parties additional payment sanofiaventis 750 million based valuation exercise intervetscheringplough customary transaction adjustments merial intervetscheringplough combined payment may required paid either party make joint venture equally owned company sanofiaventis payment would trueup value contributions equal formation new animal health joint venture sanofiaventis subject customary closing conditions including antitrust review united states europe prior closing merger agreements provided old merck certain rights terminate call option fee 400 million recognition termination fee deferred fourth quarter 2009 conditions could triggered payment lapsed amount reflected income expense net merial sales 18 billion period january 1 2009 september 17 2009 divestiture date 26 billion 2008 24 billion 2007 sanofi pasteur msd 1994 old merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 16 billion 2009 19 billion 2008 14 billion 2007 johnson°merck consumer pharmaceuticals company 1989 old merck formed joint venture johnson develop market broad range nonprescription medicines us consumers 50 owned venture subsequently expanded canada significant joint venture products pepcid ac overthecounter form company’s ulcer medication pepcid well pepcid complete overthecounter product combines company’s ulcer medication antacids sales products marketed joint venture 2032 million 2009 2121 million 2008 2197 million 2007 investments affiliates accounted using equity method including joint ventures totaled 09 billion december 31 2009 14 billion december 31 2008 amounts reported assets amounts due joint ventures included deferred income taxes current assets 3388 million december 31 2009 6234 million december 31 2008 summarized information affiliates excluding msp partnership azlp disclosed separately follows 1 includes information merial divestiture september 17 2009 11 loans payable longterm debt commitments loans payable december 31 2009 included 7391 million eurodenominated notes due 2010 shortterm foreign borrowing 2359 million also included loans payable december 31 2009 1060 million longdated notes subject repayment option holders beginning 2010 reclassified longterm debt 2009 additionally loans payable december 31 2009 included 2982 million longdated notes subject repayment option holders annual basis loans payable december 31 2008 included 19 billion commercial paper borrowings 3222 million longdated notes subject repayment option holders annual basis 68 million shortterm foreign borrowing longterm debt december 31 consisted company party interest rate swap contracts effectively convert 5125 fixedrate notes 750 million 400 fixedrate notes floatingrate instruments see note 7 presented table december 31 2009 2008 consisted primarily 1867 million 2927 million borrowings variable rates averaging 00 11 respectively borrowings 1587 million subject repayment option holders beginning 2011 years also included foreign borrowings varying rates 117 june 25 2009 old merck closed underwritten public offering 425 billion senior unsecured notes consisting 125 billion aggregate principal amount 1875 notes due 2011 10 billion aggregate principal amount 400 notes due 2015 125 billion aggregate principal amount 500 notes due 2019 750 million aggregate principal amount 585 notes due 2039 interest notes payable semiannually notes series redeemable whole part time company’s option redemption prices specified notes associated prospectus proceeds notes used fund portion cash consideration merger connection merger company recorded longterm debt fair value 80 billion december 31 2009 included 7458 million representing remaining excess fair value recorded value debt amortized interest expense remaining lives underlying debt obligations 500 eurodenominated notes due 2010 5375 eurodenominated notes due 2014 530 notes due 2013 650 notes due 2033 600 notes due 2017 655 notes due 2037 redeemable whole part merck’s option time redemption prices specified notes associated prospectus respect eurodenominated notes 600 notes 655 notes change control triggering event defined therein occurs certain circumstances defined notes associated prospectus holders notes right require merck repurchase part notes cash payment equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest date purchase 530 notes due 2013 650 notes due 2033 subject interest rate adjustment provisions event rating assigned particular series notes either moody’s investors service inc standard poor’s rating services dropped predetermined level prior merger interest rate adjustment triggered consequently time merger 530 notes due 2013 paying interest rate 555 650 notes due 2033 paying interest rate 675 following closing merger ratings series notes upgraded pursuant terms indenture interest rates payable notes reverted back stated amounts effective december 1 2009 interest rate adjustment provisions notes longer apply also connection merger effective november 3 2009 new merck executed full unconditional guarantee existing debt old merck old merck executed full unconditional guarantee existing debt new merck excluding commercial paper including payments principal interest aggregate maturities longterm debt next five years follows 2010 7486 million 2011 16 billion 2012 6742 million 2013 19 billion 2014 24 billion also connection merger march 8 2009 old merck entered financing commitment letter jpmorgan chase bank na jp morgan securities inc collectively “jpmorgan” jpmorgan committed provide 7 billion financing may 6 2009 old merck entered 3 billion 364day senior unsecured interim term loan facility “bridge loan facility” 3 billion 364day asset sale revolving credit facility “asset sale facility” 1 billion 364day corporate revolving credit facility “incremental facility” connection 425 billion offering bridge loan facility terminated commitment lenders 364day asset sale facility reduced upon completion sale merial sanofiaventis see note 10 asset sale facility terminated incremental facility available backstop commercial paper general corporate purposes facility drawn expire november 2010 merck incurred commitment fees approximately 150 million associated facilities amortized commitment period april 2009 old merck amended 15 billion 5year revolving credit facility maturing april 2013 allow facility remain place merger company’s existing 20 billion credit facility maturing august 2012 remains outstanding facilities provide backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding either facility rental expense operating leases net sublease income 2366 million 2009 2224 million 2008 1975 million 2007 minimum aggregate rental commitments noncancellable leases follows 2010 2816 million 2011 2310 million 2012 1624 million 2013 1143 million thereafter 1554 million company significant capital leases 12 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made result number factors product liability insurance become less available cost increased significantly company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 including liability legacy merck products first sold date company continue evaluate insurance needs costs availability benefits product liability insurance future vioxx litigation product liability lawsuits previously disclosed individual putative class actions filed old merck state federal courts alleging personal injury andor economic loss respect purchase use vioxx actions filed federal court coordinated multidistrict litigation us district court eastern district louisiana “mdl” district judge eldon e fallon number actions filed state court coordinated separate coordinated proceedings state courts new jersey california texas counties philadelphia pennsylvania washoe clark counties nevada december 31 2009 company served aware named defendant approximately 9100 pending lawsuits include approximately 19400 plaintiff groups alleging personal injuries resulting use vioxx approximately 44 putative class actions alleging personal injuries andor economic loss actions discussed paragraph “other lawsuits” collectively referred “vioxx product liability lawsuits” lawsuits approximately 7350 lawsuits representing approximately 15525 plaintiff groups slated federal mdl approximately 10 lawsuits representing approximately 10 plaintiff groups included coordinated proceeding new jersey superior court judge carol e higbee plaintiff groups described currently vioxx settlement program described december 31 2009 80 plaintiff groups otherwise eligible settlement program participated claims remain pending old merck addition claims approximately 275 plaintiff groups eligible settlement program remain pending old merck number 275 plaintiff groups subject various motions dismiss failure comply courtordered deadlines since december 31 2009 certain plaintiff groups since dismissed addition claims 35600 plaintiffs dismissed december 31 2009 vast majority dismissed result settlement process discussed november 9 2007 old merck announced entered agreement “settlement agreement” law firms comprise executive committee plaintiffs’ steering committee “psc” federal vioxx mdl well representatives plaintiffs’ counsel texas new jersey california state coordinated proceedings resolve state federal myocardial infarction “mi” ischemic stroke “is” claims filed date united states settlement agreement applies us legal residents allege mi occurred united states settlement agreement provided old merck pay fixed aggregate amount 485 billion two funds 40 billion mi claims 850 million claims interim final payments made certain qualifying claimants expected remainder full 485 billion distributed first half 2010 company completed making payments settlement funds two us vioxx product liability lawsuits currently scheduled trial 2010 old merck previously disclosed outcomes several vioxx product liability lawsuits tried prior 2010 cases went trial mcdarby matter resolved fourth quarter 2009 leaving two unresolved posttrial appeals ernst v merck garza v merck previously reported september 2006 old merck filed notice appeal august 2005 jury verdict favor plaintiff texas state court case ernst v merck may 29 2008 texas court appeals reversed trial court’s judgment issued judgment favor old merck court appeals found evidence legally insufficient issue causation plaintiff filed motion rehearing en banc court appeals june 4 2009 response plaintiff’s motion rehearing court appeals issued new opinion reversing jury’s verdict rendered judgment old merck september 8 2009 plaintiff filed second motion rehearing en banc court appeals denied november 19 2009 december 7 2009 plaintiff filed another motion rehearing court appeals denied plaintiff filed petition review supreme court texas february 3 2010 previously reported april 2006 garza v merck jury state court rio grande city texas returned verdict favor family decedent leonel garza jury awarded total 7 million compensatory damages mr garza’s widow three sons jury also purported award 25 million punitive damages even though texas law case potential punitive damages capped 750000 may 2008 san antonio court appeals reversed judgment rendered judgment favor old merck december 2008 court appeals rehearing vacated prior ruling issued replacement new ruling court ordered takenothing judgment old merck design defect claim reversed remanded new trial strict liability claim juror misconduct january 2009 old merck filed petition review texas supreme court texas supreme court granted old merck’s petition review oral argument held january 20 2010 lawsuits approximately 190 claims individual private thirdparty payors filed new jersey court federal court mdl september 15 2009 old merck announced finalized settlement agreement previously disclosed resolve pending lawsuits usbased private thirdparty payors “tpps” sought reimbursement covering vioxx purchased plan members certain claimants participated resolution well agreement provided old merck admit wrongdoing fault settlement agreement old merck paid fixed total 80 million amount includes settlement fund divided among tpps insurers employee benefit plans union welfare funds participating resolution accordance formula based product volume provision potential payment attorneys’ fees return settling tpps dismiss lawsuits release claims old merck stipulated dismissals settled ttp actions filed new jersey mdl december 2009 old merck recorded charge 80 million second quarter 2009 related settlement paid 80 million fourth quarter 2009 since settlement one additional tpp case filed pending mdl proceeding separately also still pending various us courts putative class actions purportedly brought behalf individual purchasers users vioxx seeking reimbursement alleged economic loss mdl proceeding 33 class actions remain 2005 old merck moved dismiss master complaint includes cases mdl court yet ruled motion march 17 2009 new jersey superior court denied plaintiffs’ motion class certification martinkleinman v merck putative consumer class action plaintiffs moved leave appeal decision new jersey supreme court november 6 2009 january 12 2010 new jersey supreme court denied plaintiff’s request appellate review denial class certification june 12 2008 missouri state court certified class missouri plaintiffs seeking reimbursement outofpocket costs relating vioxx plaintiffs allege personal injuries taking vioxx missouri court appeals affirmed trial court’s certification class may 12 2009 missouri supreme court denied old merck’s application review decision september 1 2009 trial set april 11 2011 addition indiana plaintiffs filed motion certify class indiana vioxx purchasers case pending circuit court marion county indiana discovery case ongoing briefing complete plaintiffs’ motion certify class kentucky vioxx purchasers circuit court pike county kentucky hearing matter held february 26 2010 judge cook county illinois consolidated three putative class actions brought vioxx purchasers plaintiffs actions recently voluntarily dismissed lawsuits plaintiffs also filed class action california state court seeking certification class california thirdparty payors endusers trial court denied motion class certification april 30 2009 court appeal affirmed ruling december 15 2009 january 25 2010 plaintiffs filed petition review california supreme court old merck also named defendant twentyone separate lawsuits brought government entities including attorneys general thirteen states five counties city new york private citizens brought qui tam taxpayer derivative suits actions allege old merck misrepresented safety vioxx seek recovery cost vioxx purchased reimbursed government entity agencies ii reimbursement sums paid government entity agencies medical services treatment persons injured vioxx iii damages various common law theories andor iv remedies various state statutory theories including state consumer fraud andor fair business practices medicaid fraud statutes including civil penalties nine thirteen cases pending mdl proceeding two subject conditional orders transferring mdl proceeding two remanded state court one lawsuits brought counties class action filed santa clara county california behalf similarly situated california counties old merck’s motion summary judgment granted november 2009 case brought attorney general texas scheduled go trial early 2010 texas attorney general appeal michigan attorney general case old merck currently seeking appellate review trial court’s order denying old merck’s motion dismiss trial court entered stay proceedings including discovery pending result appeal finally attorney general actions mdl described previous paragraph discovery phase louisiana attorney general case currently scheduled trial mdl court april 12 2010 shareholder lawsuits previously disclosed addition vioxx product liability lawsuits old merck various current former officers directors defendants various putative class actions individual lawsuits federal securities laws state securities laws “vioxx securities lawsuits” vioxx securities lawsuits pending federal court transferred judicial panel multidistrict litigation “jpml” us district court district new jersey district judge stanley r chesler inclusion nationwide mdl “shareholder mdl” judge chesler consolidated vioxx securities lawsuits purposes putative class action requested damages behalf purchasers old merck stock may 21 1999 october 29 2004 alleged defendants made false misleading statements regarding vioxx violation sections 10b 20a securities exchange act 1934 sought unspecified compensatory damages costs suit including attorneys’ fees complaint also asserted claims section 20a securities exchange act certain defendants relating sales old merck stock sections 11 12 15 securities act 1933 certain defendants based statements registration statement certain prospectuses filed connection old merck stock investment plan dividend reinvestment plan april 12 2007 judge chesler granted defendants’ motion dismiss complaint prejudice plaintiffs appealed judge chesler’s decision us court appeals third circuit september 9 2008 third circuit issued opinion reversing judge chesler’s order remanding case district court old merck filed petition writ certiorari united states supreme court january 15 2009 supreme court granted may 26 2009 oral argument held november 30 2009 decision expected first half 2010 petition certiorari pending plaintiffs filed consolidated fifth amended class action complaint district court old merck filed motion dismiss complaint may 1 2009 following district court proceedings stayed pending outcome supreme court appeal motion dismiss district court withdrawn without prejudice old merck’s right refile motion pending outcome supreme court appeal october 2005 dutch pension fund filed complaint district new jersey alleging violations federal securities laws well violations state law old merck certain officers pursuant case management order governing shareholder mdl case based allegations vioxx securities lawsuits consolidated vioxx securities lawsuits defendants’ motion dismiss pension fund’s complaint filed august 3 2007 september 2007 dutch pension fund filed amended complaint rather responding defendants’ motion dismiss addition 2007 six new complaints filed district new jersey behalf various foreign institutional investors also alleging violations federal securities laws well violations state law old merck certain officers stipulation defendants required respond complaints resolution motion dismiss consolidated securities action addition previously disclosed various putative class actions filed federal court employee retirement income security act “erisa” old merck certain current former officers directors “vioxx erisa lawsuits” together vioxx securities lawsuits vioxx derivative lawsuits described “vioxx shareholder lawsuits” transferred shareholder mdl consolidated purposes consolidated complaint asserts claims breach fiduciary duty behalf certain old merck’s current former employees participants certain old merck’s retirement plans complaint makes similar allegations respect vioxx allegations contained vioxx securities lawsuits july 11 2006 judge chesler granted part denied part defendants’ motion dismiss erisa complaint october 19 2007 plaintiffs moved certification class individuals participants beneficiaries old merck’s retirement savings plans time october 1 1998 september 30 2004 whose plan accounts included investments old merck common stock fund andor old merck common stock february 9 2009 court denied motion certification class one count granted motion remaining counts court also excluded class definition individuals injured connection investments old merck stock ii executed postseparation settlement agreements released claims erisa march 23 2009 judge chesler denied defendants’ motion judgment pleadings may 11 2009 judge chesler entered order denying plaintiffs’ motion partial summary judgment certain individual defendants filed december 24 2008 previously disclosed october 29 2004 two individual shareholders made demand old merck’s board take legal action mr raymond gilmartin former chairman president chief executive officer individuals allegedly causing damage old merck respect allegedly improper marketing vioxx december 2004 special committee board directors retained honorable john martin jr debevoise plimpton llp conduct independent investigation among things allegations set forth demand judge martin’s report made public september 2006 based special committee’s recommendation made careful consideration martin report impact derivative litigation would old merck board rejected demand october 11 2007 two shareholders filed shareholder derivative lawsuit purportedly old merck’s behalf state court atlantic county new jersey current former officers directors old merck plaintiffs alleged board’s rejection demand unreasonable improper defendants breached various duties old merck allowing vioxx marketed parties reached proposed settlement february 8 2010 court issued order preliminarily approving settlement requiring notice proposed settlement made merck’s shareholders setting hearing consider final approval settlement march 22 2010 february 9 2010 merck notified shareholders proposed settlement terms proposed settlement merck agreed make certain corporate governance changes supplement policies procedures previously established company agreed pay award fees expenses plaintiffs’ attorneys amount determined court exceed 1215 million addition merck plaintiffs individual defendants exchange full mutual releases claims could asserted derivative actions proposed settlement constitute admission liability wrongful conduct merck defendants named actions approved court proposed settlement also resolve federal consolidated shareholder derivative action described previously disclosed various shareholder derivative actions filed federal court transferred shareholder mdl consolidated purposes judge chesler “vioxx derivative lawsuits” may 5 2006 judge chesler granted defendants’ motion dismiss grounds plaintiffs failed demonstrate demand excused denied plaintiffs’ request leave amend complaint plaintiffs appealed arguing judge chesler erred denying plaintiffs’ leave amend complaint documents acquired stipulation parties july 18 2007 united states court appeals third circuit reversed district court’s decision grounds judge chesler allowed plaintiffs seek leave amend complaint using documents acquired stipulation remanded case district court’s consideration whether even additional materials plaintiffs’ proposed amendment would futile plaintiffs filed brief support request leave amend complaint along proposed amended complaint november 9 2007 court denied motion june 17 2008 dismissed case one plaintiffs appealed judge chesler’s decision united states court appeals third circuit oral argument appeal held july 15 2009 november 10 2009 decision issued appeal stayed pending approval settlement reached derivative action pending new jersey superior court would resolve state federal shareholder derivative claims relating vioxx international lawsuits previously disclosed addition lawsuits discussed old merck named defendant litigation relating vioxx various countries collectively “vioxx foreign lawsuits” europe well canada brazil argentina australia turkey israel philippines singapore november 2006 superior court quebec authorized institution class action behalf individuals quebec consumed vioxx suffered damages arising ingestion may 7 2009 plaintiffs served introductory motion class action based upon authorization case remains preliminary stages litigation may 30 2008 provincial court queen’s bench saskatchewan canada entered order certifying class vioxx users canada except quebec old merck appealed certification order march 30 2009 court appeal granted old merck’s appeal quashed certification order october 22 2009 supreme court canada dismissed plaintiffs’ appeal application decided review judgment saskatchewan court appeal july 28 2008 superior court ontario denied old merck’s motion stay class proceedings ontario decided certify overlapping class vioxx users canada except quebec saskatchewan allege negligence entitlement elect waive tort february 13 2009 ontario divisional court dismissed appeal order denying stay may 15 2009 ontario court appeal denied leave appeal october 22 2009 supreme court canada dismissed old merck’s application decided review judgment ontario court appeal court appeal saskatchewan quashed multijurisdictional certification order entered province old merck applied ontario court appeal leave appeal ontario certification order leave appeal granted appeal filed may 20 2009 accordance court’s decision old merck sought leave appeal divisional court denied december 7 2009 procedural decisions canadian litigation address merits plaintiffs’ claims litigation canada remains early stage trial representative action australia commenced march 30 2009 federal court australia named plaintiff alleges suffered mi seeks represent others australia ingested vioxx suffered mi thrombotic stroke unstable angina transient ischemic attack peripheral vascular disease march 30 2009 trial judge entered order directing advance issues proceeding issues determined trial issues fact law named plaintiff’s individual case issues fact law trial judge finds hearing evidence common claims group members named plaintiff alleged represents trial representative action concluded june 25 2009 trial judge reserved decision insurance previously disclosed company directors officers insurance coverage applicable vioxx securities lawsuits vioxx derivative lawsuits stated upper limits approximately 190 million company fiduciary insurance vioxx erisa lawsuits stated upper limits approximately 275 million result previously disclosed arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits investigations previously disclosed old merck received subpoenas us department justice “doj” requesting information related old merck’s research marketing selling activities respect vioxx federal health care investigation criminal statutes investigation includes subpoenas witnesses appear grand jury previously disclosed march 2009 old merck received letter us attorney’s office district massachusetts identifying target grand jury investigation regarding vioxx previously disclosed investigations conducted local authorities certain cities europe order determine whether criminal charges brought concerning vioxx company cooperating governmental entities respective investigations “vioxx investigations” company cannot predict outcome inquiries however could result potential civil andor criminal remedies addition old merck received subpoena september 2006 state california attorney general seeking documents information related placement vioxx california’s medical formulary company cooperating attorney general responding subpoena reserves discussed november 9 2007 old merck entered settlement agreement law firms comprise executive committee psc federal vioxx mdl well representatives plaintiffs’ counsel texas new jersey california state coordinated proceedings resolve state federal mi claims filed date united states 2007 result entering settlement agreement old merck recorded pretax charge 485 billion represents fixed aggregate amount paid plaintiffs qualifying payment settlement program two us vioxx product liability lawsuit trials scheduled trial 2010 company cannot predict timing trials related vioxx litigation company believes meritorious defenses vioxx product liability lawsuits vioxx shareholder lawsuits vioxx foreign lawsuits collectively “vioxx lawsuits” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect vioxx lawsuits included settlement program company established reserves potential liability relating vioxx lawsuits included settlement program reserve established connection resolution shareholder derivative lawsuits discussed vioxx investigations unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable december 31 2008 old merck aggregate reserve approximately 4379 billion “vioxx reserve” settlement program future legal defense costs related vioxx litigation 2009 merck spent approximately 244 million aggregate legal defense costs worldwide including approximately 54 million fourth quarter 2009 related vioxx product liability lawsuits ii vioxx shareholder lawsuits iii vioxx foreign lawsuits iv vioxx investigations collectively “vioxx litigation” addition 2009 old merck paid additional 41 billion settlement funds connection settlement program also 2009 merck recorded 75 million charges including 35 million fourth quarter solely future legal defense costs vioxx litigation consequently december 31 2009 aggregate amount vioxx reserve approximately 110 million solely future legal defense costs vioxx litigation significant factors considered review vioxx reserve follows actual costs incurred company development company’s legal defense strategy structure light scope vioxx litigation including settlement agreement expectation certain lawsuits continue pending number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials vioxx litigation amount vioxx reserve december 31 2009 represents company’s best estimate minimum amount defense costs incurred connection remaining aspects vioxx litigation however events additional trials vioxx litigation events could arise course vioxx litigation could affect ultimate amount defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase vioxx reserve time future based upon factors set forth believes would appropriate product liability litigation fosamax previously disclosed old merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2009 approximately 978 cases include approximately 1356 plaintiff groups filed pending old merck either federal state court including one case seeks class action certification well damages andor medical monitoring actions plaintiffs allege among things suffered osteonecrosis jaw generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately five percent actions allege sustained stress andor low energy femoral fractures association use fosamax august 16 2006 jpml ordered fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax mdl” coordinated pretrial proceedings fosamax mdl transferred judge john keenan us district court southern district new york result jpml order approximately 771 cases judge keenan judge keenan issued case management order various amendments thereto setting forth schedule governing proceedings focused primarily upon resolving class action certification motions 2007 completing fact discovery initial group 25 cases october 1 2008 briefing argument plaintiffs’ motions certification medical monitoring classes completed 2007 judge keenan issued order denying motions january 3 2008 january 28 2008 judge keenan issued order dismissing prejudice class claims asserted first four class action lawsuits filed old merck sought personal injury damages andor medical monitoring relief class wide basis daubert motions filed may 2009 judge keenan conducted daubert hearing july 2009 july 27 2009 judge keenan issued ruling parties’ respective daubert motions ruling denied plaintiff steering committee’s motion granted part denied part old merck’s motion first mdl trial boles v merck began august 11 2009 ended september 2 2009 september 11 2009 mdl court declared mistrial boles eight person jury could reach unanimous verdict consequently boles case set retried june 2 2010 second mdl case set trial flemings v merck scheduled start january 12 2010 judge keenan granted old merck’s motion summary judgment dismissed case november 23 2009 next mdl case set trial maley v merck currently scheduled start april 19 2010 old merck filed motion summary judgment maley mdl court granted part denied part january 27 2010 result company expects trial commence currently scheduled april 19 february 1 2010 judge keenan selected new bellwether case judith graves v merck replace flemings bellwether case mdl court dismissed granted summary judgment favor old merck mdl court set graves trial begin september 13 2010 trial alabama currently scheduled begin may 3 2010 trial florida currently scheduled begin june 21 2010 addition july 2008 application made atlantic county superior court new jersey requesting fosamax cases pending new jersey considered mass tort designation centralized management one judge new jersey october 6 2008 new jersey supreme court ordered pending future actions filed new jersey arising use fosamax seeking damages existing dental jawrelated injuries including osteonecrosis jaw solely seeking medical monitoring designated mass tort centralized management purposes judge higbee atlantic county superior court december 31 2009 approximately 189 cases pending old merck new jersey coordinated proceeding july 20 2009 judge higbee entered case management order various amendments thereto setting forth schedule contemplates completing fact discovery initial group 10 cases february 28 2010 followed expert discovery five cases projected trial date july 12 2010 first case tried new jersey coordinated proceeding discovery ongoing fosamax mdl litigation new jersey coordinated proceeding remaining jurisdictions fosamax cases pending company intends defend lawsuits december 31 2008 company remaining reserve approximately 33 million solely future legal defense costs fosamax litigation 2009 company spent approximately 35 million added 40 million reserve consequently december 31 2009 company reserve approximately 38 million solely future legal defense costs fosamax litigation significant factors considered establishment reserve fosamax litigation legal defense costs follows actual defense costs incurred thus far development company’s legal defense strategy structure light creation fosamax mdl number cases brought company anticipated timing progression related costs pretrial activities fosamax litigation company continue monitor legal defense costs review adequacy associated reserves due uncertain nature litigation company unable reasonably estimate costs beyond third quarter 2010 company established reserves potential liability relating fosamax litigation unfavorable outcomes fosamax litigation could material adverse effect company’s financial position liquidity results operations nuvaring beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” scheringplough arising organon’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation venued missouri new jersey state court cases pending states vetsulin december 28 2009 scheringplough animal health named defendant putative class action lawsuit filed us district court northern district ohio lawsuit entitled friedman v scheringplough animal health individual plaintiff seeks represent class people purchased vetsulin household pets suit alleges vetsulin contaminated improperly manufactured vetsulin insulin product administered diabetic dogs cats plaintiff seeks compensatory punitive damages based theories negligence violation consumer sales practices acts breach warranty product liability due allegedly defective manufacturing merck intends defend lawsuit vigorously commercial litigation awp litigation investigations previously disclosed old merck joined ongoing litigation alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used calculations determine public private sector reimbursement levels complaints allege violations federal state law including fraud medicaid fraud consumer protection violations among claims outcome litigations investigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies 2002 jpml ordered transfer consolidation pending federal awp cases federal court boston massachusetts plaintiffs filed one consolidated class action complaint aggregated claims previously filed various federal district court actions also expanded number manufacturers include like old merck defendants prior pending case may 2003 court granted old merck’s motion dismiss consolidated class action dismissed old merck class action case old merck many pharmaceutical manufacturers defendants similar complaints pending federal state court including cases brought individually number counties state new york fifty county cases consolidated new york state court old merck dismissed suffolk county case first new york county cases filed addition new york county cases december 31 2008 old merck defendant state cases brought attorneys general eleven states defended february 2009 kansas attorney general filed suit old merck several manufacturers awp claims brought attorney general arizona old merck dropped 2009 court awp cases pending hawaii listed old merck others set trial mid2010 2009 scheringplough reached settlements claims relating awp august 2009 scheringplough five pharmaceutical companies settled claims brought behalf alabama medicaid program combined total 89 million addition july 2009 scheringplough reached settlement relator acting behalf united states nonintervened awp qui tam action pending us federal district court massachusetts states california florida combined total 69 million settlement resolved claims brought behalf medicaid programs states california florida approved us district court district massachusetts held preclusive claims federal share alleged medicaid overpayment remaining states consistent applicable precedent january 2010 us district court district massachusetts held unit scheringplough eight drug makers overcharged new york city 42 new york counties certain generic drugs court reserved issue damages penalties future proceedings company continues respond litigation brought certain states private payors investigations initiated department health human services department justice several states regarding awp company cooperating investigations centocor distribution agreement may 27 2009 centocor wholly owned subsidiary johnson delivered scheringplough notice initiating arbitration proceeding resolve whether result merger centocor permitted terminate company’s rights distribute commercialize remicade simponi sales remicade simponi included company’s results postmerger period 4307 million 39 million respectively sales remicade recognized scheringplough 2009 prior merger 19 billion arbitration process involves number steps including selection independent arbitrators information exchanges hearings final decision reached hearing arbitration scheduled commence late september 2010 unfavorable outcome arbitration would material adverse effect company’s financial position liquidity results operations governmental proceedings previously disclosed february 2008 old merck entered corporate integrity agreement “cia” us department health human services office inspector general “hhsoig” fiveyear term cia requires among things old merck maintain ethics training program policies procedures governing promotional practices medicaid price reporting required cia old merck retained independent review organization “iro” conduct systems review promotional policies procedures conduct sample basis transactional reviews old merck’s promotional programs certain medicaid pricing calculations old merck also required provide regular reports certifications hhsoig regarding compliance cia similarly previously disclosed scheringplough 2004 scheringplough entered cia hhsoig fiveyear term august 2006 entered addendum cia also effective five years requirements old merck scheringplough cias similar although identical failure comply cias’ requirements result financial penalties exclusion participation federal health care programs company believes promotional practices medicaid price reports meet requirements cias vytorinzetia litigation previously disclosed legacy companies received several letters house committee energy commerce subcommittee oversight investigations “oi” ranking minority member senate finance committee collectively seeking combination witness interviews documents information variety issues related enhance clinical trial sale promotion vytorin well sales stock corporate officers addition previously disclosed since august 2008 old merck scheringplough received three additional letters oi including identical letters dated february 19 2009 seeking certain information documents related seas clinical trial previously disclosed legacy companies received subpoenas new york state attorney general’s office letter connecticut attorney general seeking similar information documents july 15 2009 legacy companies announced reached civil settlement attorneys general representing 35 states district columbia resolve previously disclosed investigation group whether legacy companies violated state consumer protection laws marketing vytorin zetia part settlement legacy companies agreed reimburse investigative costs 35 states district columbia totaled 54 million make voluntary assurances compliance related promotion vytorin zetia including agreeing continue comply food drug cosmetic act us food drug administration amendments act laws requiring truthful nonmisleading marketing pharmaceutical products settlement include admission misconduct liability legacy companies furthermore previously disclosed september 2008 legacy companies received letters civil division doj informing doj investigating whether conduct relating promotion vytorin caused false claims submitted federal health care programs company cooperating investigations responding inquiries previously disclosed legacy companies become aware served approximately 145 civil class action lawsuits alleging common law state consumer fraud claims connection msp partnership’s sale promotion vytorin zetia certain lawsuits alleged personal injuries andor sought medical monitoring lawsuits old merck scheringplough consolidated single multidistrict litigation docket judge cavanaugh district new jersey vytorinzetia marketing sales practices products liability litigation august 5 2009 old merck scheringplough jointly announced cholesterol joint venture entered agreements resolve total fixed amount 415 million civil class action lawsuits msp partnership recorded charges second quarter 2009 february 9 2010 judge cavanaugh granted final approval settlements also previously disclosed april 3 2008 old merck shareholder filed putative class action lawsuit federal court eastern district pennsylvania alleging old merck chairman president chief executive officer richard clark violated federal securities laws suit since withdrawn refiled district new jersey consolidated another federal securities lawsuit caption merck co inc vytorin securities litigation amended consolidated complaint filed october 6 2008 names defendants old merck merckscheringplough pharmaceuticals llc certain company’s current former officers directors specifically complaint alleges old merck delayed releasing unfavorable results enhance clinical trial regarding efficacy vytorin old merck made false misleading statements expected earnings knowing results vytorin study released sales vytorin would decline old merck’s earnings would suffer december 12 2008 old merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2 2009 court issued opinion order denying defendants’ motion dismiss lawsuit october 19 2009 old merck defendants filed answer amended consolidated complaint similar consolidated putative class action securities lawsuit pending district new jersey filed scheringplough shareholder scheringplough former chairman president chief executive officer fred hassan caption scheringplough corporationenhance securities litigation amended consolidated complaint filed september 15 2008 names defendants scheringplough merckscheringplough pharmaceuticals llc certain company’s current former officers directors underwriters participated august 2007 public offering scheringplough’s common preferred stock december 10 2008 scheringplough defendants filed motions dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2 2009 court issued opinion order denying defendants’ motion dismiss lawsuit september 17 2009 defendants filed motion reconsideration court’s september 2 2009 opinion order denying motion dismiss motion reconsideration fully briefed october 13 2009 decision remains pending defendants filed answer consolidated amended complaint november 18 2009 previously disclosed april 22 2008 member old merck erisa plan filed putative class action lawsuit old merck certain company’s current former officers directors alleging breached fiduciary duties erisa since time similar erisa lawsuits filed old merck district new jersey lawsuits consolidated caption merck co inc vytorin erisa litigation consolidated amended complaint filed february 5 2009 names defendants old merck various current former members company’s board directors plaintiffs allege erisa plans’ investment old merck stock imprudent old merck’s earnings dependent commercial success cholesterol drug vytorin defendants knew known results scientific study would cause medical community turn less expensive drugs cholesterol management april 23 2009 old merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 1 2009 court issued opinion order denying defendants’ motion dismiss lawsuit november 9 plaintiffs moved strike certain defendants’ affirmative defenses motion fully briefed december 4 2009 pending court similar consolidated putative class action erisa lawsuit currently pending district new jersey filed member scheringplough erisa plan scheringplough certain current former officers directors alleging breached fiduciary duties erisa caption scheringplough corp enhance erisa litigation consolidated amended complaint filed october 1 2009 names defendants scheringplough various current former members scheringplough’s board directors current former members committees scheringplough’s board directors november 6 2009 company defendants filed motion dismiss lawsuit grounds plaintiffs failed state claim relief granted plaintiffs’ opposition motion dismiss filed december 16 2009 motion fully briefed january 15 2010 decision remains pending november 5 2009 stockholder company filed shareholder derivative lawsuit local 38 international brotherhood electrical workers pension fund v clark “local 38” district new jersey behalf nominal defendant company shareholders company certain company’s officers directors alleged insiders certain predecessor companies’ former officers directors alleged insiders alleged breaches fiduciary duties waste unjust enrichment gross mismanagement similar shareholder derivative lawsuit cain v hassan filed scheringplough stockholder currently pending district new jersey amended complaint filed may 13 2008 scheringplough stockholder behalf nominal defendant scheringplough shareholders lawsuit scheringplough’s thencurrent board directors certain scheringplough’s current former officer directors alleged insiders plaintiffs local 38 cain v hassan allege defendants withheld enhance study results made false misleading statements thereby deceiving causing harm company scheringplough respectively investing public unjustly enriching insiders wasting corporate assets defendants local 38 intend move dismiss plaintiff’s complaint defendants cain v hassan moved dismiss amended complaint july 14 2008 motion fully briefed october 15 2008 decision remains pending company intends defend lawsuits referred section unfavorable outcomes resulting government investigations civil litigations could material adverse effect company’s financial position liquidity results operations november 2008 individual shareholder previously delivered letter old merck’s board directors demanding board take legal action responsible individuals recover amounts paid old merck 2007 resolve certain governmental investigations delivered another letter board demanding board subcommittee thereof commence investigation matters raised various civil suits governmental investigations relating vytorin securities class action litigation federal securities litigation following scheringplough’s announcement february 15 2001 fda conducting inspections manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices delayed approval clarinex several lawsuits filed scheringplough certain named officers lawsuits allege defendants violated federal securities law allegedly failing disclose material information making material misstatements specifically allege scheringplough failed disclose alleged serious risk new drug application clarinex would delayed result manufacturing issues allege company failed disclose alleged depth severity manufacturing issues complaints consolidated one action us district court district new jersey consolidated amended complaint filed october 11 2001 purporting represent class shareholders purchased shares scheringplough stock may 9 2000 february 15 2001 complaint sought compensatory damages behalf class february 18 2009 court signed order preliminarily approving settlement agreement scheringplough would provide settlement fund amount 165 million resolve claims class funds placed escrow time vast majority settlement covered insurance december 31 2009 district court granted final approval settlement due consummated expiration appeal period final approval decision erisa litigation march 31 2003 scheringplough served putative class action complaint filed us district court new jersey alleging scheringplough employee savings plan “plan” administrator several current former directors certain former corporate officers breached fiduciary obligations certain participants plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs appealed august 19 2005 us court appeals third circuit reversed dismissal district court matter remanded back district court proceedings september 30 2008 district court entered order granting part denying part named putative class representative’s motion class certification scheringplough thereafter petitioned us district court appeals third circuit leave appeal class certification decision scheringplough’s petition granted december 10 2008 december 21 2009 third circuit vacated district court’s order remanded case proceedings consistent court’s ruling kdur antitrust litigation june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications following commencement administrative proceeding united states federal trade commission “ftc” alleging anticompetitive effects settlements resolved scheringplough’s favor alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages february 2009 special master recommended us district court district new jersey dismiss class action lawsuits summary judgment us district court judge yet ruled recommendation thirdparty payor actions discussed july 2004 connection settlement investigation doj us attorney’s office eastern district pennsylvania scheringplough entered fiveyear cia amended august 2006 connection 435 million settlement investigation state massachusetts involving certain scheringplough’s sales marketing clinical trial practices programs “massachusetts investigation” several purported class action litigations filed following announcement settlement massachusetts investigation plaintiffs actions seek damages behalf thirdparty payors resulting allegations offlabel promotion improper payments physicians issue massachusetts investigation actions consolidated multidistrict litigation federal district court district new jersey july 2009 district court dismissed consolidated class action complaint granted plaintiffs leave refile september 2009 plaintiffs filed amended complaints company’s motion dismiss complaints pending vaccine litigation previously disclosed old merck party individual class action product liability lawsuits claims united states involving pediatric vaccines eg hepatitis b vaccine contained thimerosal preservative used vaccines december 31 2009 approximately 200 thimerosal related lawsuits pending old merck defendant although vast majority lawsuits currently active defendants include vaccine manufacturers produced pediatric vaccines containing thimerosal well manufacturers thimerosal actions plaintiffs allege among things suffered neurological injuries result exposure thimerosal pediatric vaccines cases currently scheduled trial company defend lawsuits however possible unfavorable outcomes could material adverse effect company’s financial position liquidity results operations old merck successful cases type either dismissed stayed ground action prohibited national childhood vaccine injury act “vaccine act” vaccine act prohibits person filing maintaining civil action state federal court seeking damages vaccine manufacturer vaccinerelated injuries unless petition first filed united states court federal claims hereinafter “vaccine court” vaccine act filing civil action vaccine manufacturer petitioner must either pursue petition conclusion vaccine court timely file election proceed civil action lieu accepting vaccine court’s adjudication petition b timely exercise right withdraw petition prior vaccine court adjudication accordance certain statutorily prescribed time periods old merck party vaccine court proceedings petitions brought united states department health human services company aware approximately 5000 cases pending vaccine court involving allegations thimerosalcontaining vaccines andor mmr ii vaccine cause autism spectrum disorders thimerosalcontaining vaccines involved vaccine court proceeding company vaccines company sole source mmr ii vaccine domestically special masters presiding vaccine court proceedings held hearings three test cases involving theory combination mmr ii vaccine thimerosal vaccines causes autism spectrum disorders february 12 2009 special masters issued decisions cases finding theory unsupported valid scientific evidence petitioners three cases therefore entitled compensation two three cases currently appeal special masters held similar hearings three different test cases involving theory thimerosal vaccines alone causes autism spectrum disorders decisions issued second set test cases special masters previously indicated would hold similar hearings involving theory mmr ii alone causes autism spectrum disorders stated longer intend vaccine court indicated intends use evidence presented test case hearings guide adjudication remaining autism spectrum disorder cases patent litigation time generic manufacturers pharmaceutical products file anda’s fda seeking market generic forms company’s products prior expiration relevant patents owned company generic pharmaceutical manufacturers submitted anda’s fda seeking market united states generic forms fosamax nexium singulair emend cancidas respectively prior expiration old merck’s astrazeneca’s case nexium patents concerning products addition anda submitted fda seeking market united states generic form zetia anda submitted fda seeking market united states generic form vytorin prior expiration scheringplough’s patent concerning product generic companies’ anda’s generally include allegations noninfringement invalidity unenforceability patents company filed patent infringement suits federal court companies filing anda’s generic alendronate fosamax montelukast singulair astrazeneca company filed patent infringement suits federal court companies filing anda’s generic esomeprazole nexium also company scheringplough filed patent infringement suits federal court companies filing anda’s generic versions ezetimibe zetia ezetimibesimvastatin vytorin also schering corp “schering” subsidiary company filed patent infringement suits federal court generic companies filing anda’s generic versions temodar integrilin levitra nasonex similar patent challenges exist certain foreign jurisdictions company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration dates patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products february 2007 scheringplough received notice generic company indicating filed anda zetia challenging us patents listed zetia prior merger company marketed zetia joint venture msp singapore company llc march 22 2007 scheringplough msp singapore company llc filed patent infringement suit glenmark pharmaceuticals inc usa parent corporation “glenmark” lawsuit automatically stays fda approval glenmark’s anda october 2010 adverse court decision whichever may occur earlier trial matter scheduled commence may 3 2010 previously disclosed february 2007 old merck received notice teva pharmaceuticals inc “teva” generic company indicating filed anda montelukast challenging us patent listed singulair april 2 2007 old merck filed patent infringement action teva trial matter held february 2009 august 19 2009 court issued decision upholding validity old merck’s singulair patent ordered teva’s anda could approved prior expiry old merck’s exclusivity rights august 2012 teva appealed decision however january 2010 teva withdrew appeal trial court’s decision upholding validity old merck’s singulair patent addition may 2009 united states patent trademark office granted petition article one partners llc reexamine old merck’s singulair patent december 15 2009 united states patent trademark office issued notice indicating allow claims company’s singulair patent product exclusivity accordingly expected maintained august 2012 may 2005 federal court canada trial division issued decision refusing bar approval generic alendronate grounds old merck’s patent weekly alendronate likely invalid decision cannot appealed generic alendronate launched canada june 2005 july 2005 old merck sued federal court canada apotex corp “apotex” seeking damages lost sales generic weekly alendronate due patent proceeding october 2008 federal court canada issued decision awarding apotex lost profits generic alendronate product period time held market due old merck’s lawsuit june 2009 trial court decision upheld part companies sought leave appeal supreme court canada january 2010 supreme court canada declined hear appeal leaving intact decision apotex entitled damages discrete period time market entry postponed due litigation launched old merck previously disclosed september 2004 old merck appealed decision opposition division european patent office “epo” revoked company’s patent europe covers onceweekly administration alendronate march 14 2006 board appeal epo upheld decision opposition division revoking patent march 28 2007 epo issued another patent europe old merck covers onceweekly administration alendronate terms new patent effective july 2018 old merck sued multiple parties european countries asserting european patent covering onceweekly dosing fosamax decisions rendered netherlands belgium invalidating patent countries old merck appealed decisions oppositions filed epo patent hearing held march 1719 2009 opposition division epo issued appealable decision revoking patent old merck appealed decision addition previously disclosed japan proceeding filed challenging validity old merck’s japanese patent onceweekly administration alendronate patent office invalidated patent decision appeal october 2008 us patent dorzolamide covering trusopt cosopt expired old merck experienced significant decline us sales products company involved litigation proceedings corresponding patents canada great britain germany november 2009 trial court great britain issued decision finding old merck’s cosopt patent invalid canada trial held december 2009 regarding company’s canadian trusopt cosopt patents company awaiting decision old merck astrazeneca received notice october 2005 ranbaxy filed anda esomeprazole magnesium anda contains paragraph iv challenges patents nexium november 2005 old merck astrazeneca sued ranbaxy us district court new jersey previously disclosed astrazeneca old merck ranbaxy entered settlement agreement provides ranbaxy bring generic esomeprazole product market united states may 27 2014 company astrazeneca received cid ftc july 2008 regarding settlement agreement ranbaxy company cooperating ftc responding cid old merck astrazeneca received notice january 2006 ivax pharmaceuticals inc “ivax” subsequently acquired teva filed anda esomeprazole magnesium anda contains paragraph iv challenges patents nexium march 2006 old merck astrazeneca sued teva us district court new jersey january 7 2010 astrazeneca old merck tevaivax entered settlement agreement provides tevaivax bring generic esomeprazole product market united states may 27 2014 addition january 2008 old merck astrazeneca sued dr reddy’s laboratories “dr reddy’s” district court new jersey based dr reddy’s filing anda esomeprazole magnesium trial scheduled january 2010 respect ivax’s dr reddy’s andas postponed new trial date set also old merck astrazeneca received notice december 2008 sandoz inc “sandoz” filed anda esomeprazole magnesium anda contains paragraph iv challenges patents nexium january 2009 old merck astrazeneca sued sandoz district court new jersey based sandoz’s filing anda esomeprazole magnesium addition old merck astrazeneca received notice september 2009 lupin ltd “lupin” filed anda esomeprazole magnesium anda contains paragraph iv challenges patents nexium october 2009 old merck astrazeneca sued lupin district court new jersey based lupin’s filing anda esomeprazole magnesium january 2009 old merck received notice sandoz filed anda challenging five old merck patents listed fda orange book emend february 2009 old merck filed patent infringement suit sandoz lawsuit automatically stays fda approval sandoz’s anda july 2011 adverse court decision whichever may occur earlier case scheduled go trial december 2010 europe old merck aware various companies seeking registration generic losartan active ingredient cozaar hyzaar old merck patent rights losartan via license ei du pont de nemours company “du pont” old merck du pont filed patent infringement proceedings various companies portugal spain norway finland belgium netherlands austria october 2009 old merck received notice teva parenteral medicines “tpm” filed anda caspofungin acetate challenging five patents listed fda orange book cancidas november 25 2009 company filed patent infringement suit tpm lawsuit automatically stays fda approval tpm’s anda april 2012 adverse court decision whichever may occur earlier november 2009 schering received notice apotex filed anda mometasone furoate nasal spray challenging two patents listed fda orange book nasonex december 18 2009 schering filed patent infringement suit apotex lawsuit automatically stays fda approval apotex’s anda may 2012 adverse court decision whichever may occur earlier november 2009 scheringplough received notice mylan filed anda ezetimibesimvastatin challenging two patents listed fda orange book vytorin december 16 2009 scheringplough filed patent infringement suit mylan lawsuit automatically stays fda approval mylan’s anda may 2012 adverse court decision whichever may occur earlier july 2007 schering licensor cancer research technologies limited “crt” received notice barr laboratories “barr” subsidiary teva barr filed anda temodar challenging crt’s patent temozolomide july 2007 schering crt filed patent infringement action barr january 2010 court issued decision finding crt patent unenforceable grounds prosecution laches inequitable conduct schering crt process appealing decision january 2009 schering licensor millennium received notice teva filed anda eptifibatide challenging three millennium patents listed fda orange book integrilin february 18 2009 schering millennium filed patent infringement actions teva lawsuit automatically stays fda approval teva’s anda august 2011 adverse court decision whichever may occur earlier may 2009 schering bayer schering pharma ag bayer healthcare pharmaceuticals received notice teva filed anda vardenofil challenging bayer’s patent listed fda orange book levitra june 30 2009 schering bayer filed patent infringement action teva lawsuit automatically stays fda approval teva’s anda november 2011 adverse court decision whichever may occur earlier legal proceedings related merger connection merger separate class action lawsuits brought old merck scheringplough challenging merger seeking forms relief previously disclosed lawsuits settled pending court approval settlements approved court resolve release claims could brought shareholder old merck scheringplough challenging aspect proposed merger including merger disclosure claims litigation french matter based complaint french competition authority competitor france pursuant court order french competition authority obtained documents french subsidiary company relating subutex one products subsidiary markets sells resolution matter adverse french subsidiary could result imposition civil fines injunctive administrative remedies july 17 2007 juge des libertés et de la détention ordered annulment search seizure procedural grounds july 19 2007 french authority appealed order french supreme court may 20 2009 french supreme court overturned annulment remanded case paris court appeal basis juge des libertés et de la détention examined document assess whether seized whether lawfully seized case pending paris court appeal april 2007 competitor also requested interim relief portion granted french competition authority december 2007 interim relief required company’s french subsidiary publish two specialized newspapers information including generic quantitative qualitative composition pharmaceutical form substitutable subutex february 2008 paris court appeal confirmed decision french competition authority january 2009 french supreme court confirmed decision french competition authority various legal proceedings principally product liability intellectual property suits involving company pending feasible predict outcome proceedings discussed note opinion company proceedings either adequately covered insurance covered ultimately result liability would material adverse effect financial position liquidity results operations company proceedings separate assessment provided note environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties previously disclosed approximately 2200 plaintiffs filed amended complaint old merck 12 defendants us district court eastern district california asserting claims clean water act resource conservation recovery act well negligence nuisance suit seeks damages personal injury diminution property value medical monitoring alleged real personal property damage associated groundwater soil contamination found site former old merck subsidiary merced california old merck intends defend claims management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 1618 million 895 million december 31 2009 2008 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 1700 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 13 equity accordance new merck certificate incorporation 6500000000 shares common stock 20000000 shares preferred stock authorized shares preferred stock series 11500000 shares designated 6 mandatory convertible preferred stock 6 mandatory convertible preferred stock prior merger august 15 2007 scheringplough issued 10000000 shares scheringplough 6 preferred stock connection merger holders scheringplough 6 preferred stock received 6 preferred stock rights substantially similar rights scheringplough 6 preferred stock accordance new merck restated certificate incorporation result merger 6 preferred stock became subject “makewhole” acquisition provisions preferred stock effective november 3 2009 makewhole acquisition conversion period ended november 19 2009 6 preferred stock convertible makewhole conversion rate 82021 share preferred stock converted period holder received 8612 cash 47302 new merck common shares holders also received dividend makewhole payment 1079 1082 depending date conversion total 9110423 shares 6 preferred stock converted 43093881 shares new merck common stock cash payments approximately 785 million made holders converted addition makewhole dividend payments 985 million made holders converted representing present value remaining future dividend payments conversion date mandatory conversion date august 13 2010 using discount rate stipulated preferred stock designations december 31 2009 855422 shares 6 preferred stock remained issued outstanding shares automatically convert common shares company cash august 13 2010 pursuant provisions new merck restated certificate incorporation holders may also elect convert time prior august 13 2010 6 preferred stock 2066 million december 31 2009 classified current liability conversions settled combination cash common stock additionally certain conditions company may elect cause conversion less merck 6 preferred stock outstanding 6 preferred stock accrues dividends annual rate 6 shares outstanding dividends cumulative date issuance extent company legally permitted pay dividends board directors declares dividend payable company pay dividends dividend payment date remaining dividend payment dates february 15 may 15 august 13 2010 capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 2 pursuant merger agreement certain old merck’s treasury shares cancelled noncontrolling interests connection 1998 restructuring ami old merck assumed 24 billion par value preferred stock obligation dividend rate 5 per annum carried kbi included noncontrolling interests small portion preferred stock carried kbi convertible kbi common shares none preferred securities convertible company’s common shares therefore included common shares issuable purposes computing earnings per common share assuming dilution available common shareholders see note 18 14 sharebased compensation plans company sharebased compensation plans employees nonemployee directors employees certain company’s equity method investees may granted options purchase shares company common stock fair market value time grant addition stock options company grants performance share units “psus” restricted stock units “rsus” certain management level employees plans approved company’s shareholders result merger scheringplough 2006 stock incentive plan “scheringplough 2006 sip” amended restated sharebased compensation instruments remain available future grant scheringplough 2006 sip new merck employees scheringplough prior merger outstanding sharebased compensation instruments well sharebased compensation instruments available future grant old merck new merck incentive plans also result merger certain sharebased compensation instruments previously granted scheringplough 2006 sip legacy scheringplough incentive plans exchanged new merck replacement awards related precombination services became payable cash addition certain stock options scheringplough legacy incentive plans contain “lockin” feature whereby award holder elect receive cash payment stock options fixed amount based price scheringplough’s common stock 60 days prior merger liability associated provision 2464 million december 31 2009 upon expiration exercise period associated “lockin” feature amount reclassified liabilities equity fair value replacement awards attributable precombination service 5252 million included calculation consideration transferred see note 3 significant portion legacy scheringplough awards vested opening balance sheet time merger scheringplough sharebased compensation instruments immediately vest upon completion merger exchanged new merck replacement awards generally vest basis original grants made scheringplough legacy incentive plans immediately vest employee terminated company within two years merger certain circumstances fair value new merck replacement awards attributed postcombination services recognized compensation cost subsequent merger requisite service period awards december 31 2009 1340 million shares collectively authorized future grants company’s sharebased compensation plans prior merger employee sharebased compensation awards settled primarily treasury shares subsequent merger awards settled newly issued shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest well nonforfeitable dividend equivalents fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price fair value stock option rsu psu replacement awards determined fixed time merger psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2009 2008 2007 4155 million 3480 million 3302 million respectively related income tax benefits 1324 million 1075 million 1041 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents expected amount time options granted expected outstanding based historical forecasted exercise behavior weighted average fair value options granted 2009 2008 2007 402 980 951 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table 1 fair value stock options vested excludes fair value options vested result merger attributable precombination service summary nonvested rsu psu activity shares thousands follows december 31 2009 5218 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 15 years segment reporting sharebased compensation costs unallocated expenses 15 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries pension benefits united states based formula considers final average pay years credited service addition company provides medical dental life insurance benefits principally eligible us retirees similar benefits dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net cost pension postretirement benefit plans consisted following components net pension postretirement benefit cost totaled 5111 million 2009 3766 million 2008 4893 million 2007 increase 2009 compared 2008 primarily due 1182 million costs associated scheringplough benefit plans date merger december 31 2009 net pension cost attributable us plans included table 2887 million 2009 2264 million 2008 3022 million 2007 connection restructuring actions see note 4 termination charges recorded 2009 2008 2007 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities net curtailment gains recorded 2009 curtailment losses recorded 2008 2007 pension plans net curtailment gains recorded 2009 2008 2007 postretirement benefit plans addition settlement losses recorded 2009 2008 2007 certain domestic international pension plans employee benefit plans exception recognition fair value measurement principles business combinations employee benefit plan obligations recognized measured accordance existing authoritative literature accounting benefit plans rather fair value accordingly company remeasured benefit plans sponsored scheringplough recognized asset liability funded status plans merger date summarized information changes plan assets benefit obligation funded status amounts recorded december 31 2009 2008 follows fair value us pension plan assets included preceding table 61 billion 2009 35 billion 2008 pension projected benefit obligation us plans included table 76 billion 2009 46 billion 2008 increase fair value pension projected benefit obligation us plans primarily related merger approximately 42 company’s pension projected benefit obligation relates international defined benefit plans individual plan significant relative total benefit obligation december 31 2009 2008 accumulated benefit obligation 107 billion 57 billion respectively pension plans december 31 2009 2008 accumulated benefit obligation us pension plans 60 billion 34 billion respectively pension plans benefit obligations excess plan assets december 31 2009 2008 fair value plan assets 49 billion 48 billion respectively benefit obligation 77 billion 62 billion respectively plans accumulated benefit obligations excess plan assets december 31 2009 2008 fair value plan assets 35 billion 4145 million respectively accumulated benefit obligation 51 billion 8800 million respectively discussed note 2 december 31 2009 company adopted new authoritative guidance issued fasb revised disclosure requirements plan assets defined pension postretirement plans amended guidance requires disclosure investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fair value measurements using significant unobservable inputs level 3 changes plan assets period significant concentrations risk within plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities plans’ level 1 assets primarily include registered investment companies mutual funds equity securities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities plans’ level 2 assets primarily include investments commoncollective trusts certain fixed income investments government agency securities corporate obligations level 3 unobservable inputs supported little market activity financial instruments whose values determined using pricing models discounted cash flow methodologies similar techniques well instruments determination fair value requires significant judgment estimation plans’ level 3 assets primarily include investments insurance contracts real estate funds valued using methodologies management understands plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques plans’ level 3 investments real estate generally valued market appraisals may infrequent nature december 31 2009 5682 million approximately 51 company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 2009 asset category follows table provides summary changes fair value including net transfers andor financial assets measured fair value using significant unobservable inputs level 3 2009 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 2009 asset category follows total pension postretirement benefit plan assets excluded fair value hierarchy include shortterm payables receivables related purchase sale investments respectively company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines contributions pension plans postretirement benefit plans 2010 expected approximately 950 million 50 million respectively expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components comprehensive income estimated net loss prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2010 1696 million 87 million respectively pension plans 569 million 472 million respectively postretirement benefit plans company reassesses benefit plan assumptions regular basis weighted average assumptions used determining pension plan us pension postretirement benefit plan information follows 2009 net cost rates preceding table include costs associated scheringplough benefit plans date merger december 31 2009 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined country basis developing expected rate return within country longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return country’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2010 company’s expected rate return range 80 875 compared range 750 875 2009 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects company also maintains defined contribution savings plans united states including plans assumed connection merger company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2009 2008 2007 1115 million 1040 million 1100 million respectively 16 income expense net decline interest income 2009 compared 2008 primarily result lower interest rates change investment portfolio mix toward cash shorterdated securities anticipation merger increase interest expense 2009 largely due 174 million commitment fees incremental interest expense related financing merger included net 2009 75 billion gain resulting recognizing merck’s previously held equity interest msp partnership fair value result obtaining control msp partnership merger see note 3 also included net 2009 32 billion gain sale old merck’s interest merial see note 10 231 million investment portfolio recognized net gains 80 million charge related settlement vioxx thirdparty payor litigation united states included net 2008 aggregate gain distribution azlp 22 billion see note 10 gain 249 million related sale remaining worldwide rights aggrastat 300 million expense contribution merck company foundation 117 million investment portfolio recognized net losses 58 million charge related resolution investigation whether old merck violated state consumer protection laws respect sales marketing vioxx fluctuation exchange losses gains 2008 2007 primarily due higher cost foreign currency contracts due lower us interest rates unfavorable impacts periodtoperiod changes foreign currency exchange rates net long net short foreign currency positions considering net monetary assets related foreign currency contracts change net 2008 primarily reflects aggregate gain 2008 azlp 22 billion impact 671 million charge 2007 related resolution certain civil governmental investigations 2008 gain 249 million related sale remaining worldwide rights aggrastat partially offset 300 million expense contribution merck company foundation higher investment portfolio recognized net losses 153 million 58 million charge related resolution investigation whether old merck violated consumer protection laws respect sales marketing vioxx interest paid 3514 million 2009 2470 million 2008 4064 million 2007 respectively excludes commitment fees 17 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits export incentives miscellaneous items 2007 tax rate reconciliation percentage 343 foreign earnings reflects change mix foreign domestic earnings primarily resulting 485 billion us vioxx settlement agreement charge income loss taxes consisted taxes income consisted deferred income taxes december 31 consisted increases deferred tax assets relating pensions postretirement benefits compensation related net operating losses tax credit carryforwards well increases deferred tax liabilities relating intangibles unremitted foreign earnings primarily reflect impact deferred taxes recorded conjunction merger company net operating loss “nol” carryforwards several jurisdictions december 31 2009 significant nol carryforwards approximately 668 million united states begin expire 2024 360 million netherlands expire 2017 unused company also tax credit carryforwards us research development tax credits us foreign tax credits federal alternative minimum tax “amt” credit carryforwards december 31 2009 company 250 million research development credit carryforwards begin expire 2022 705 million foreign tax credit carryforwards begin expire 2011 43 million amt credit carryforwards indefinite life valuation allowance 2009 primarily relates various foreign entity nol carryforwards resulting primarily losses generated restructuring actions income taxes paid 2009 2008 2007 9575 million 18 billion 35 billion respectively stock option exercises reduced income taxes paid 1384 million 2007 stock option exercises significant impact taxes paid 2009 2008 january 1 2007 new authoritative guidance issued fasb accounting reporting uncertain tax positions adopted reconciliation beginning ending amount unrecognized tax benefits follows 1 reflects settlement internal revenue service 2007 discussed company recognize unrecognized tax benefits 43 billion december 31 2009 income tax provision would reflect favorable net impact 37 billion amount unrecognized tax benefits change next 12 months due primarily anticipated closure various tax examinations company estimates change could result reduction unrecognized tax benefits approximately 760 million interest penalties associated uncertain tax positions amounted benefit expense 163 million 2009 101 million 2008 270 million 2007 liabilities accrued interest penalties 14 billion 17 billion december 31 2009 2008 respectively previously disclosed internal revenue service “irs” completed examination old merck’s tax returns years 1993 2001 result examination old merck made aggregate payment 279 billion february 2007 payment offset tax refund 165 million received 2007 amounts previously paid matters ii federal tax benefit approximately 360 million related interest included payment resulting net cash cost old merck approximately 23 billion 2007 impact years subsequent 2001 items reviewed part examination included payment although years remain open respects closing irs examination material impact old merck’s results operations 2007 amounts previously accrued old merck reported results irs adjustments years 1993 2001 various state tax authorities resulted additional tax well interest penalty payments 20 million 9 million respectively 2008 57 million 67 million respectively 2007 equivalent reduction balances unrecognized tax benefits accrued interest penalties october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income taxes 279 million interest scheringplough filed refund claims taxes interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount taxes interest scheringplough’s tax reserves adequate cover mentioned payments decision favor government announced august 2009 scheringplough filed motion retrial motion granted scheringplough intends file appeal 3rd circuit previously disclosed october 2006 canada revenue agency “cra” issued old merck notice reassessment containing adjustments related certain intercompany pricing matters february 2009 old merck cra negotiated settlement agreement regard matters accordance settlement old merck paid additional tax approximately 300 million us dollars interest approximately 360 million us dollars additional amounts penalties due assessment settlement accounted first quarter 2009 old merck previously established reserves matters significant portion taxes paid expected creditable us tax purposes resolution matters material effect old merck’s financial position liquidity respect associated collateral discussed addition july 2007 november 2008 cra proposed additional adjustments 1999 2000 respectively relating intercompany pricing matters adjustments would increase canadian tax due approximately 312 million us dollars plus 314 million us dollars interest december 31 2009 possible cra propose similar adjustments later years company disagrees positions taken cra believes without merit company intends contest assessments cra appeals process courts necessary management believes resolution matters material effect company’s financial position liquidity connection appeals process matters discussed 2007 old merck pledged collateral two financial institutions one provided guarantee cra quebec ministry revenue representing portion tax interest assessed result settlement noted guarantees required appeal disputes reduced eliminated approximately 960 million associated collateral released certain cash investments continue collateralized guarantees required appeal canadian tax disputes collateral included deferred income taxes current assets consolidated balance sheet totaled approximately 290 million 12 billion december 31 2009 2008 respectively irs examining old merck’s 2002 2005 federal income tax returns addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 1999 2009 second quarter 2007 irs completed examination scheringplough’s 19972002 federal income tax returns company seeking resolution issue raised examination irs administrative appeals process july 2007 scheringplough made payment 98 million irs pertaining 19972002 examination company’s income tax returns remain open irs 19972009 tax years 2008 irs commenced examination 20032006 federal income tax returns examination expected completed 2010 significant tax jurisdictions us state foreign company’s income tax returns open examination period 2002 2009 december 31 2009 foreign earnings 312 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2013 18 earnings per share discussed note 2 effective january 1 2009 new guidance issued fasb adopted clarifies unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid considered participating securities shall included computation earnings per share pursuant twoclass method provisions new guidance retrospective therefore prior periods restated twoclass method earnings allocation formula determines earnings per share common stock participating securities according dividends declared participation rights undistributed earnings method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted certain management level employees see note 14 participate dividends basis common shares nonforfeitable holder result rsus psus meet definition participating security calculations earnings per share twoclass method follows 1 issuable primarily sharebased compensation plans 2009 2008 2007 2280 million 2012 million 1237 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 19 comprehensive income components comprehensive income loss follows 1 increase cumulative translation adjustment 2009 due merger amounts 2008 2007 represent cumulative translation adjustments related equity investees components accumulated comprehensive loss follows included cumulative translation adjustment gains 782 million postmerger period eurodenominated debt designated effective economic hedges net investment foreign operation 20 segment reporting company’s operations principally managed products basis comprised one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government company also animal health operations discover develop manufacture market animal health products including vaccines additionally company consumer health care operations develop manufacture market otc foot care sun care products united states canada segment composition reflects certain managerial changes implemented segment disclosures prior periods recast comparable basis 2009 includes nonreportable segments including animal health consumer health care well revenue company’s relationship azlp accounting policies segments described note 2 revenues profits segments follows segment profits comprised segment revenues less certain elements materials production costs operating expenses including components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate production costs standard costs research development expenses general administrative expenses well cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits sales1 company’s products follows 1 sales legacy scheringplough products reflect results postmerger period december 31 2009 sales msp partnership products zetia vytorin represent sales postmerger period december 31 2009 prior merger sales zetia vytorin primarily recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates sales zetia vytorin 2008 2007 reflect old merck’s sales products latin america part msp partnership 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily includes sales human pharmaceutical products including products within franchises listed separately 4 reflects nonreportable segments including animal health consumer health care revenue company’s relationship azlp primarily relating sales nexium well prilosec revenue azlp 14 billion 16 billion 17 billion 2009 2008 2007 respectively 5 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows profits primarily comprised miscellaneous corporate profits well operating profits related divested products businesses supply sales adjustments represent elimination effect double counting certain items income expense equity income affiliates includes taxes paid joint venture level portion equity income reported segment profits expenses net include expenses corporate manufacturing cost centers miscellaneous income expense net property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2009 december 31 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also opinion merck maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso merck’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report item 9a responsibility express opinions financial statements merck’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 17 consolidated financial statements merck changed manner accounts unrecognized tax benefits 2007 discussed note 3 note 5 consolidated financial statements merck changed manner accounts business combinations 2009 discussed note 13 consolidated financial statements merck changed manner accounts noncontrolling interests 2009 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 26 2010 b supplementary data selected quarterly financial data 2009 2008 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2009 include gain fair value adjustment merck’s previously held interest msp partnership see note 3 2 fourth quarter 2008 tax provision reflects favorable impact foreign exchange rate changes benefit relating us research development tax credit 3 amounts third fourth quarter 2009 fourth quarter 2008 include impact additional vioxx legal defense reserves see note 12 amounts third quarter second quarter 2009 first quarter 2008 include impact additional fosamax legal defense reserves see note 12 4 amounts 2009 include gain sale old merck’s interest merial limited see note 10 5 amounts 2008 reflect favorable impact tax settlements 6 amounts 2008 include gain distribution astrazeneca lp see note 10 gain related sale remaining worldwide rights aggrastat realization foreign tax credits expense contribution merck company foundation 7 amounts 2009 include impacts merger including amortization intangible assets mergerrelated costs see note 3 amounts 2009 2008 include impact restructuring actions see note 4 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2010 2009 related consolidated statements income equity cash flows three years period ended december 31 2010 notes consolidated financial statements report dated february 25 2011 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets united states canada november 3 2009 merck co inc “old merck” scheringplough corporation “scheringplough” merged “merger” merger scheringplough acquired shares old merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp scheringplough continued surviving public company renamed merck co inc “new merck” “company” however accounting purposes merger treated acquisition old merck considered accounting acquirer accordingly accompanying financial statements reflect old merck’s standalone operations existed prior completion merger results scheringplough’s business included new merck’s financial statements periods subsequent completion merger therefore new merck’s financial results 2009 reflect full year legacy scheringplough operations references financial statements “merck” periods prior merger refer old merck periods completion merger new merck 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net result merger functional currency operations company’s international subsidiaries reevaluated resulted may result change functional currency cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products certain products awaiting regulatory approval evaluating recoverability inventories produced preparation product launches company considers probability revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair value company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax aoci declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investment debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized aoci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions included accounts receivable accrued current liabilities 117 million 12 billion respectively december 31 2010 115 million 13 billion respectively december 31 2009 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated company’s multiyear implementation enterprisewide resource planning system amortized 6 10 years december 31 2010 2009 approximately 457 million 428 million respectively remaining unamortized capitalized software costs associated initiative capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators present using fair value based test based upon company’s recent annual impairment test completed october 1 2010 fair value reporting unit excess carrying value acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 40 years see note 9 events circumstances warrant review company assess recoverability future operations acquired intangibles using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows inprocess research development inprocess research development “iprd” represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility transactions closed prior 2009 fair value projects expensed upon acquisition transactions closed 2009 thereafter fair value research projects recorded intangible assets consolidated balance sheet rather expensed amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantially cash flows expected generated begin amortization company tests indefinitelived intangibles including iprd impairment least annually frequently impairment indicators exist onestep test compares fair value indefinitelived intangible asset’s carrying value research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include 24 billion iprd impairment charges 2010 restructuring costs periods sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including fair value determinations assets liabilities primarily iprd intangible assets additionally estimates used determining items current fair values goodwill iprd intangibles well provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards 2010 several new accounting standards issued fasb adopted january 1 2010 company adopted new guidance accounting disclosure requirements transfers financial assets eliminated concept qualifying specialpurpose entity changed requirements derecognizing financial assets required enhanced disclosures provide financial statement users greater transparency transfers financial assets including securitization transactions entity’s continuing involvement exposure risks related transferred financial assets effect adoption company’s financial position results operations material january 1 2010 company adopted new accounting disclosure guidance consolidation variable interest entities required enhanced disclosures intended provide users financial statements transparent information enterprise’s involvement variable interest entity effect adoption company’s financial position results operations material recently issued accounting standards fasb issued several new accounting pronouncements yet effective company october 2009 fasb issued new guidance revenue recognition multiple deliverables effective revenue arrangements entered materially modified fiscal years beginning june 15 2010 although early adoption permitted guidance eliminates residual method current guidance replaces “relative selling price” method allocating revenue multiple deliverable arrangement selling price deliverable shall determined using vendor specific objective evidence selling price exists otherwise thirdparty evidence selling price shall used neither exists deliverable vendor shall use best estimate selling price deliverable adoption guidance also require expanded qualitative quantitative disclosures company currently assessing impact adoption financial position results operations january 2010 fasb amended existing disclosure guidance fair value measurements effective january 1 2010 except disclosures purchases sales issuances settlements roll forward activity level 3 fair value measurements effective january 1 2011 among things updated guidance requires additional disclosure amounts significant transfers level 1 level 2 measurements requires certain level 3 disclosures gross basis additionally updates amend existing guidance require greater level disaggregated information robust disclosures valuation techniques inputs fair value measurements since amended guidance requires additional disclosures adoption provisions effective january 1 2010 provisions effective 2011 impact company’s financial position results operations 3 merger november 3 2009 old merck scheringplough completed merger scheringplough acquired shares old merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp scheringplough continued surviving public company renamed merck co inc however accounting purposes merger treated acquisition old merck considered accounting acquirer terms merger agreement issued outstanding share scheringplough common stock converted right receive combination 1050 cash 05767 share common stock new merck issued outstanding share old merck common stock automatically converted share common stock new merck based closing price old merck stock november 3 2009 consideration received scheringplough shareholders valued 2819 per share 496 billion aggregate cash portion consideration funded combination existing cash including sale old merck’s interest merial limited sale redemption investments issuance debt upon completion merger issued outstanding share scheringplough 6 mandatory convertible preferred stock “scheringplough 6 preferred stock” converted accordance terms preferred stock remained outstanding one share merck 6 mandatory convertible preferred stock “6 preferred stock” rights set forth new merck certificate incorporation rights substantially similar rights scheringplough 6 preferred stock august 2010 outstanding 6 preferred stock automatically converted terms right receive cash shares merck common stock see note 13 merger expanded company’s pipeline product candidates broadened company’s commercial portfolio expanded global presence increased manufacturing capabilities additionally company expects realize substantial cost savings synergies including opportunities consolidation sales marketing research development calculation consideration transferred millions except per shareunit amounts 1 upon completion merger period 15 days thereafter holders 6 preferred stock entitled convert share 6 preferred stock number units merger consideration equal “makewhole” conversion rate 82021 determined accordance terms preferred stock amount represents units merger consideration relating 6 preferred stock converted holders 15day period following merger 2 represents present value remaining dividend payments conversion date mandatory conversion date august 13 2010 paid holders 6 preferred stock elected convert connection merger using discount rate stipulated terms preferred stock 3 represents cash consideration paid holders scheringplough deferred stock units issued 2007 prior converted right receive cash specified merger agreement attributable precombination service 4 represents fair value scheringplough stock option performance share unit deferred stock unit replacement awards attributable precombination service issued holders awards merger fair value outstanding scheringplough stock option performance share unit awards issued 2007 prior immediately vested effective time merger attributed precombination service included consideration transferred stock option performance share unit deferred stock unit awards 2008 2009 immediately vest upon completion merger awards fair value awards attributed precombination service included part consideration transferred fair value attributed postcombination service recognized compensation cost requisite service period postcombination financial statements new merck allocation consideration transferred net assets acquired preliminary allocation consideration transferred net assets scheringplough made date merger “merger date” 2010 company adjusted preliminary values assigned certain assets liabilities order reflect additional information obtained since preliminary allocation made pertained facts circumstances existed merger date measurement period adjustments reflected opening balance sheet however since adjustments significant impact consolidated statements income cash flows period statements retrospectively adjusted following table summarizes determination fair value identifiable assets acquired liabilities assumed merger 1 connection merger company obtained controlling interest merckscheringplough partnership table reflects scheringplough’s share fair value merckscheringplough partnership’s net assets including intangibles inventories reflected table merck’s share fair value merckscheringplough partnership’s net assets recorded connection fair value adjustment merck’s previously held equity interest partnership see “merckscheringplough partnership” 2 iprd represents fair value assigned incomplete research projects time merger reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life asset begin amortization see “inprocess research development” 3 goodwill recognized largely attributable anticipated synergies expected arise merger approximately 89 billion goodwill allocated pharmaceutical segment remainder goodwill allocated nonreportable segments goodwill deductible tax purposes 4 measurement period adjustments primarily reflect adjustments income tax liabilities changes estimated fair value certain intangible assets corresponding impacts goodwill order allocate merger consideration company estimated fair value assets liabilities scheringplough contingent assets liabilities recognized fair value merger date fair value contingencies could determined contingent liabilities recorded extent amounts probable reasonably estimable see note 12 accounting financial reporting purposes fair value defined price would received upon sale asset amount paid transfer liability orderly transaction market participants measurement date market participants assumed buyers sellers principal advantageous market asset liability additionally fair value measurements asset assume highest best use asset market participants use different estimates judgments could yield different results fair values identifiable intangible assets related currently marketed products product rights primarily determined using “income approach” fair value estimated based asset’s discounted projected net cash flows company’s estimates market participant net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles time investment required develop products technologies ability obtain marketing regulatory approvals ability manufacture commercialize products extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing appropriate discount rate inprocess research development connection merger company recorded fair value human animal health research projects underway scheringplough msp partnership fair value projects allocated pharmaceutical animal health operating segments 53 billion 13 billion respectively amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life asset begin amortization fair values identifiable intangible assets related iprd determined using income approach fair value estimated based asset’s probability adjusted future net cash flows reflect different stages development product associated probability successful completion net cash flows discounted present value using discount rates ranged 12 15 actual cash flows likely different assumed significant projects include boceprevir bridion vorapaxar well ezetimibeatorvastatin combination product boceprevir investigational hepatitis c protease inhibitor accepted expedited review united states european union “eu” bridion sugammadex medication designed rapidly reverse effects certain muscle relaxants used part general anesthesia bridion received regulatory approval eu several countries around world regulatory review markets ezetimibe combined atorvastatin investigational medication treatment dyslipidemia 2010 company recorded 24 billion iprd impairment charges recorded research development expense amount 17 billion related writedown vorapaxar intangible asset company determined developments clinical research program vorapaxar including termination clinical trial constituted triggering event required company evaluate vorapaxar intangible asset impairment although great deal information related developments remains unknown company utilizing market participant assumptions considering several different scenarios company concluded best estimate current fair value intangible asset related vorapaxar 350 million resulted recognition impairment charge 17 billion 2010 company continue monitor remaining asset value impairment company anticipates results tracer clinical trial available later 2011 also 2010 company recorded additional 763 million iprd impairment charges attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates merckscheringplough partnership upon consummation merger company obtained controlling interest merckscheringplough partnership “msp partnership” whollyowned company previously company noncontrolling interest result obtaining controlling interest company required remeasure merck’s previously held equity interest msp partnership merger date fair value recognize resulting gain 75 billion earnings income expense net 2009 conjunction remeasurement company recorded intangible assets approximately 73 billion included iprd approximately 03 billion stepup inventories mergerrelated costs mergerrelated costs expensed incurred year ended december 31 2010 company incurred 396 million integration costs 18 billion restructuring costs including exit costs connection merger see note 4 year ended december 31 2009 merck incurred 136 million transaction costs directly related merger including advisory legal fees 235 million integration costs 15 billion restructuring costs recognized within marketing administrative expenses restructuring costs additionally 2009 173 million interest costs recognized connection debt issued partially fund merger supplemental pro forma data scheringplough’s results operations included new merck’s financial statements periods subsequent completion merger scheringplough contributed revenues 34 billion estimated losses 22 billion new merck period consummation merger december 31 2009 following unaudited supplemental pro forma data presents consolidated information merger completed january 1 2008 unaudited supplemental pro forma data reflect application following adjustments • consolidation msp partnership whollyowned company corresponding gain resulting company’s remeasurement previously held equity interest msp partnership • additional depreciation amortization expense would recognized assuming fair value adjustments inventory property plant equipment intangible assets • additional interest expense financing costs would incurred borrowing arrangements loss interest income cash shortterm investments used fund merger • transaction costs associated merger • conversion portion outstanding 6 preferred stock unaudited supplemental pro forma financial information reflect potential realization cost savings relating integration two companies pro forma data considered indicative results would occurred merger related borrowings consummated january 1 2008 indicative future results 4 restructuring merger restructuring program february 2010 company commenced actions global restructuring program “merger restructuring program” conjunction integration legacy merck legacy scheringplough businesses merger restructuring program intended optimize cost structure combined company additional actions program continued 2010 part restructuring actions taken thus far merger restructuring program company expects reduce total workforce measured time merger approximately 17 across company worldwide addition company eliminated 2500 positions vacant time merger workforce reductions primarily come elimination duplicative positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities period company continue hire new employees strategic growth areas business necessary merck plans phase operations certain research manufacturing sites well continue consolidate office facilities worldwide eight research sites impacted include montreal canada boxmeer nobilon facility oss schaijk netherlands odense denmark waltrop germany newhouse scotland cambridge kendall square massachusetts second half 2010 company began phasing operations eight manufacturing facilities sites exit global network activities transferred locations specifically company intends cease manufacturing activities facilities comazzo italy cacem portugal azcapotzalco mexico coyoacan mexico santo amaro brazil intends sell mirador argentina miami lakes florida facilities singapore chemical manufacturing phased legacy merck site continue legacy scheringplough site company’s extensive pharmaceutical manufacturing operations continue singapore facilities addition manufacturing operations kenilworth new jersey site discontinued activities consolidated existing operations merck facilities company continue pursue productivity efficiencies evaluate manufacturing supply chain capabilities ongoing basis may result future restructuring actions connection merger restructuring program separation costs company’s existing severance programs worldwide recorded fourth quarter 2009 extent costs probable reasonably estimable company commenced accruing costs related enhanced termination benefits offered employees merger restructuring program first quarter 2010 necessary criteria met company recorded total pretax restructuring costs 18 billion 2010 15 billion 2009 related program since inception merger restructuring program december 31 2010 merck recorded total pretax accumulated costs approximately 33 billion eliminated approximately 11550 positions comprised employee separations elimination contractors vacant positions restructuring actions taken thus far merger restructuring program expected substantially completed end 2012 exception certain manufacturing facilities actions total cumulative pretax costs estimated approximately 38 billion 46 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested global restructuring program october 2008 old merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness part 2008 restructuring program company expects eliminate approximately 7200 positions 6800 active employees 400 vacancies across company worldwide end 2011 40 reductions occur united states program includes roll new customercentric selling model company also making greater use outside technology resources centralizing common sales marketing activities consolidating streamlining operations merck’s manufacturing division focusing capabilities core products outsourcing noncore manufacturing program also included implementation new model basic research global operating strategy legacy merck research laboratories sites pretax restructuring costs 176 million 475 million 922 million recorded 2010 2009 2008 respectively related 2008 restructuring program since inception 2008 restructuring program december 31 2010 merck recorded total pretax accumulated costs 16 billion eliminated approximately 5800 positions comprised employee separations elimination contractors vacant positions 2008 restructuring program expected completed end 2011 total cumulative pretax costs estimated 16 billion 20 billion company estimates twothirds cumulative pretax costs relate cash outlays primarily employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested global restructuring program november 2005 old merck announced global restructuring program “2005 restructuring program” designed reduce cost structure increase efficiency enhance competitiveness substantially complete end 2008 segment reporting restructuring charges unallocated expenses following table summarizes charges related merger restructuring program 2008 2005 restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated 2010 approximately 11410 positions eliminated related merger restructuring program approximately 890 positions eliminated related 2008 restructuring program 2009 approximately 3160 positions eliminated related 2008 restructuring program approximately 140 positions eliminated related merger restructuring program 2009 certain employees anticipated separated part planned restructuring actions 2008 restructuring program instead transferred buyer conjunction sale facility accordingly accrual separation costs associated employees reversed resulting reduction expenses 2008 approximately 1750 positions eliminated related 2008 restructuring program approximately 4050 positions eliminated related 2005 restructuring program position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather write immediately site assets include manufacturing research administrative facilities equipment activity 2010 2009 2008 includes 152 million 15 million 29 million respectively asset abandonment shutdown related costs 2010 approximately 65 million contract termination costs additionally activity includes 88 million 109 million 88 million 2010 2009 2008 respectively employeerelated costs curtailment settlement termination charges pension postretirement benefit plans see note 15 sharebased compensation costs activity also reflects net pretax gains losses resulting sales facilities related assets 2010 2009 2008 49 million 52 million 52 million respectively adjustments recorded amounts material period following table summarizes charges spending relating merger restructuring program 2008 2005 restructuring program activities 1 cash outlays associated merger restructuring program expected substantially completed end 2012 cash outlays associated remaining restructuring reserve 2008 restructuring program expected completed end 2011 2 includes proceeds sales facilities connection restructuring actions legacy scheringplough program prior merger scheringplough commenced productivity transformation program designed reduce avoid costs increase productivity postmerger period december 31 2009 company recorded 46 million costs related program including 39 million employee separation costs included restructuring costs 7 million accelerated depreciation costs included materials production costs remaining reserve associated program 80 million december 31 2009 2010 company recorded 22 million accelerated depreciation costs included materials production costs 7 million net gain restructuring costs primarily related sale manufacturing facility made payments 33 million plan resulting remaining reserve 47 million december 31 2010 connection program approximately 165 positions eliminated 2010 225 positions eliminated postmerger period 2009 5 acquisitions research collaborations license agreements december 2010 company acquired outstanding stock smartcells private company developing glucose responsive insulin formulation treatment diabetes mellitus total purchase consideration company determined fair value acquisition date 138 million included upfront cash payment contingent consideration consisting future clinical development regulatory milestones well contingent consideration future sales products resulting acquisition transaction accounted acquisition method accounting accordingly assets liabilities recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially preliminary purchase price allocated iprd remaining net assets acquired significant fair value contingent consideration determined utilizing probability weighted estimated cash flow stream adjusted expected timing payment subsequent acquisition date quarterly basis contingent consideration liability remeasured current fair value changes recorded earnings results operations smartcells included company’s results operations date acquisition significant certain estimated values yet finalized may subject change company expects finalize amounts soon possible later one year acquisition date february 2010 company completed acquisition avecia biologics limited “avecia” total purchase price approximately 190 million avecia contract manufacturing organization specific expertise microbialderived biologics terms agreement company acquired avecia assets including avecia’s process development scaleup manufacturing quality business support operations located billingham united kingdom transaction accounted business combination accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated avecia’s property plant equipment goodwill remaining net assets acquired material transaction closed february 1 2010 accordingly results operations acquired business included company’s results operations beginning acquisition date pro forma financial information included avecia’s historical financial results significant compared company’s financial results may 2010 merck announced restructured codevelopment cocommercialization agreement ariad pharmaceuticals inc “ariad” ridaforolimus mk8669 investigational orally available mtor inhibitor currently evaluated treatment multiple cancer types exclusive license agreement restructured agreement merck acquired full control development worldwide commercialization ridaforolimus ariad received 50 million upfront fee company recorded research development expense 2010 eligible receive milestone payments associated regulatory filings approvals ridaforolimus multiple cancer indications achievement significant sales thresholds lieu profit split us sales provided previous agreement ariad receive royalties global net sales ridaforolimus sales recorded merck assumed responsibility activities acquired decision rights matters relating development manufacturing commercialization ridaforolimus investigational new drug application transferred merck file marketing application worldwide oncology indications lead interactions regulatory agencies agreement terminable merck upon nine months notice immediately upon good faith determination serious safety issue agreement terminable either party result insolvency party uncured material breach party ariad failure merck perform certain product development responsibilities july 2009 old merck portola pharmaceuticals inc “portola” signed exclusive global collaboration license agreement development commercialization betrixaban mk4448 investigational oral factor xa inhibitor anticoagulant currently clinical development prevention stroke patients atrial fibrillation return exclusive worldwide license betrixaban old merck paid portola initial fee 50 million closing recorded research development expense portola eligible receive additional cash payments totaling 420 million upon achievement certain development regulatory commercialization milestones well doubledigit royalties worldwide sales betrixaban approved merck assumed development commercialization costs including costs phase iii clinical trials portola retains option cofund phase iii clinical trials return additional royalties b copromote betrixaban merck united states term agreement commenced august 2009 unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country agreement may terminated either party event material uncured breach bankruptcy party agreement may terminated merck event parties merck decide cease development betrixaban safety efficacy addition merck may terminate agreement time upon 180 days prior written notice portola may terminate agreement event merck challenges portola patent covering betrixaban upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization betrixaban case termination cause merck certain royalty obligations april 2009 old merck medarex inc “medarex” whollyowned subsidiary bristolmyers squibb massachusetts biologic laboratories “mbl” university massachusetts medical school announced exclusive worldwide license agreement cda1 cdb1 mk3415a investigational fully human monoclonal antibody combination developed target neutralize clostridium difficile toxins b treatment c difficile infection cda1 cdb1 codeveloped medarex mbl terms agreement merck gained worldwide rights develop commercialize cda1 cdb1 medarex mbl received aggregate upfront payment 60 million upon closing recorded research development expense potentially eligible receive additional cash payments 165 million aggregate upon achievement certain milestones associated development approval drug candidate covered agreement upon commercialization medarex mbl also eligible receive doubledigit royalties product sales milestones certain sales targets met term agreement commenced closing date unless terminated earlier continue remaining royalty payment obligations country time agreement expire entirety country either party may terminate agreement uncured material breach party bankruptcy insolvency party merck may terminate agreement time upon providing 180 days prior written notice medarex mbl also april 2009 old merck santen pharmaceutical co ltd “santen” announced worldwide licensing agreement tafluprost mk2452 prostaglandin analogue investigation united states tafluprost preserved andor preservativefree formulations received marketing approval reduction elevated intraocular pressure openangle glaucoma ocular hypertension several european nordic countries well japan filed approval international markets terms agreement merck paid fee capitalized amortized materials production costs life underlying patent pay milestones royalty payments based future sales tafluprost preserved preservativefree formulations exchange exclusive commercial rights tafluprost western europe excluding germany north america south america africa middle east india australia santen retain commercial rights tafluprost countries eastern europe northern europe asia pacific including japan merck provide promotion support santen germany poland tafluprost approved united states santen option copromote agreement merck santen expires countrybycountry basis last occur expiry last expire valid patent claim b expiration last expire royalty merck may terminate agreement time upon 90 days prior written notice also time upon 60 days prior written notice merck determines product presents issues safety tolerability addition merck may terminate agreement event enumerated agreements santen coownerlicensor certain intellectual property terminate expire materially adversely affects merck either merck santen materially breaches agreement fails cure receiving notice nonbreaching party may terminate agreement provides termination noninsolvent party due bankruptcy party finally agreement terminate term merck develops commercializes competitive product term defined agreement addition april 2009 old merck cardiome pharma corp “cardiome” announced collaboration license agreement development commercialization vernakalant mk6621 investigational candidate treatment atrial fibrillation agreement provides merck exclusive global rights oral formulation vernakalant “vernakalant oral” maintenance normal heart rhythm patients atrial fibrillation provides merck affiliate merck sharp dohme switzerland gmbh exclusive rights outside united states canada mexico intravenous “iv” formulation vernakalant “vernakalant iv” rapid conversion acute atrial fibrillation normal heart rhythm terms agreement old merck paid cardiome initial fee 60 million upon closing recorded research development expense addition cardiome eligible receive 200 million payments based achievement certain milestones associated development approval vernakalant products including 15 million paid 2009 submission regulatory approval europe vernakalant iv 30 million paid 2010 upon receipt marketing approval vernakalant iv brinavess eu iceland norway potential future payments 20 million initiation planned phase iii program vernakalant oral 100 million milestones associated approvals subsequent indications intravenous oral formulations september 2010 merck announced vernakalant iv brinavess granted marketing approval eu iceland norway also cardiome receive tiered royalty payments sales approved products potential receive 340 million milestone payments based achievement significant sales thresholds cardiome retained option copromote vernakalant oral merck hospitalbased sales force united states merck responsible future costs associated development manufacturing commercialization candidates agreement continues effect expiration cardiome’s copromotion rights royalty milestone payment obligations agreement may terminated event insolvency material uncured breach either party additionally collaboration may terminated merck event merck determines good faith advisable continue development commercialization vernakalant product result serious safety issue addition merck may terminate agreement time upon 12 months prior written notice cardiome may terminate agreement event merck challenges cardiome patent covering vernakalant upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vernakalant cases continuing royalty obligations merck granted cardiome secured interestbearing credit facility 100 million cardiome may access tranches several years commencing 2010 march 2009 old merck acquired insmed inc’s “insmed” portfolio followon biologic therapeutic candidates commercial manufacturing facilities located boulder colorado terms agreement old merck paid insmed aggregate 130 million cash acquire rights boulder facilities insmed’s pipeline followon biologic candidates insmed’s followon biologics portfolio includes two clinical candidates mk4214 investigational recombinant granulocytecolony stimulating factor “gcsf” evaluated ability prevent infections patients cancer receiving chemotherapy mk6302 pegylated recombinant gcsf designed allow less frequent dosing transaction accounted business combination accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated insmed’s followon biologics portfolio mk4214 mk6302 indefinitelived intangible asset recorded fair value determined based upon present value expected future cash flows new product candidates resulting insmed’s followon biologics portfolio adjusted probability estimated technical marketing success utilizing income approach reflecting appropriate riskadjusted discount rates ongoing activity related mk4214 mk6302 expected material company’s research development expense remaining net assets acquired material milestone royalty obligations associated acquisition transaction closed march 31 2009 accordingly results operations acquired business included merck’s results operations beginning april 1 2009 6 collaborative arrangements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations licensing preclinical clinical compounds technology platforms drive near longterm growth company supplements internal research aggressive licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies across broad range therapeutic areas arrangements often include upfront payments royalty profit share payments contingent upon occurrence certain future events linked success asset development well expense reimbursements payments third party cozaarhyzaar 1989 old merck ei dupont de nemours company “dupont” agreed form longterm research marketing collaboration develop class therapeutic agents high blood pressure heart disease discovered dupont called angiotensin ii receptor antagonists include cozaar hyzaar return old merck provided dupont marketing rights united states canada prescription medicines sinemet cr company recently regained global marketing rights sinemet cr pursuant 1994 agreement dupont company exclusive licensing agreement market cozaar hyzaar registered trademarks dupont return royalties profit share payments dupont patents provided market exclusivity united states cozaar hyzaar expired april 2010 addition cozaar hyzaar lost patent protection number major european markets march 2010 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc “centocor” johnson company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi golimumab fully human monoclonal antibody company exclusive marketing rights products outside united states japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi eu following receipt pricing reimbursement approval within eu operating expenses subject certain adjustments company entitled receive approximate 60 share profits company’s distribution company’s marketing territory december 31 2009 beginning 2010 company’s share profits change time 50 share profits 2014 products share profits remain fixed thereafter remainder term company may independently develop market simponi crohn’s disease indication territories option centocor participate see note 12 discussion arbitration involving company’s rights market remicade simponi 7 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management significant portion company’s revenues denominated foreign currencies company established revenue hedging balance sheet risk management programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company partially hedge forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales probable hedged transaction occur portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase value anticipated foreign currency cash flows company also utilizes forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair value derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings comprehensive income “oci” depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges unrealized gains losses recorded sales period cash flows contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange might occur prior conversion us dollars instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level foreign currency denominated monetary assets liabilities foreign subsidiaries us dollar functional currency remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year applicable company uses forward contracts hedge changes fair value certain foreign currency denominated availableforsale securities attributable fluctuations foreign currency exchange rates derivative contracts designated fair value hedges accordingly changes fair value hedged securities due fluctuations spot rates recorded income expense net offset fair value changes forward contracts attributable spot rate fluctuations changes contracts’ fair value due spotforward differences excluded designated hedge relationship recognized income expense net amounts well hedge ineffectiveness significant years ended december 31 2010 2009 2008 cash flows contracts reported operating activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses eurodenominated debt instruments included foreign currency translation adjustment within oci 2010 company began using forward exchange contracts hedge net investment foreign operations adverse movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains oci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows interest rate risk management december 31 2010 company party 13 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes two swaps maturing 2011 notional amounts 125 million effectively convert company’s 250 million 5125 fixedrate notes due 2011 floating rate instruments five swaps maturing 2015 notional amounts 150 million effectively convert 750 million company’s 10 billion 40 fixedrate notes due 2015 floating rate instruments addition six swaps maturing 2016 two notional amounts 175 million four notional amounts 125 million effectively convert company’s 850 million 225 fixedrate notes due 2016 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes benchmark interest rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives segregated derivatives designated hedging instruments designated hedging instruments december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated cash flow hedging relationship iii designated foreign currency hedging relationship net investment hedge iv designated hedging relationship 1 ineffectiveness hedge represents amount excluded hedge effectiveness testing 2 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2010 company estimates 22 million pretax net unrealized gain derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities company’s level 1 assets include equity securities traded active exchange market level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities company’s level 2 assets liabilities primarily include debt securities quoted prices traded less frequently exchangetraded instruments corporate notes bonds us foreign government agency securities certain mortgagebacked assetbacked securities municipal securities commercial paper derivative contracts whose values determined using pricing models inputs observable market derived principally corroborated observable market data level 3 unobservable inputs supported little market activity financial instruments whose values determined using pricing models discounted cash flow methodologies similar techniques well instruments determination fair value requires significant judgment estimation company’s level 3 assets include certain mortgagebacked securities limited market activity december 31 2010 13 million approximately 04 company’s investment securities categorized level 3 assets inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 substantially assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes assessment credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2010 december 31 2010 cash equivalents 109 billion included 103 billion cash equivalents level 3 valuation techniques financial assets considered level 3 fair values determined using pricing models discounted cash flow methodologies similar techniques least one significant model assumption input unobservable level 3 financial assets also include certain investment securities limited market activity determination fair value requires significant judgment estimation company’s level 3 investment securities include certain mortgagebacked securities valued primarily using pricing models management understands methodologies models incorporate transaction details contractual terms maturity timing amount future cash inflows well assumptions liquidity credit valuation adjustments marketplace participants table provides summary changes fair value including net transfers andor financial assets measured fair value recurring basis using significant unobservable inputs level 3 1 transfers level 3 deemed occur beginning quarter transaction takes place 2 2010 2009 investments aggregate amount 13 million 27 million respectively longer pledged collateral reclassified assets availableforsale investments 3 amounts recorded income expense net financial instruments measured fair value company’s financial instruments measured fair value recurring basis recorded amounts approximate fair value due liquid shortterm nature cash equivalents receivables payables estimated fair value loans payable longterm debt including current portion december 31 2010 187 billion compared carrying value 179 billion december 31 2009 177 billion compared carrying value 175 billion fair value estimated using quoted dealer prices summary gross unrealized gains losses availableforsale investments recorded aoci december 31 follows 1 december 31 2010 amounts pledged collateral december 31 2009 gross unrealized gains losses related amounts pledged collateral see note 17 26 million 03 million december 31 2009 respectively availableforsale debt securities included shortterm investments totaled 13 billion december 31 2010 remaining debt securities 16 billion mature within five years december 31 2010 debt securities pledged collateral concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines approximately half company’s cash equivalents invested three highly rated money market funds majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic downturn sovereign debt issues certain european countries company believes credit economic conditions within greece spain italy portugal among members eu deteriorated 2010 conditions well inherent variability timing cash receipts resulted may continue result increase average length time takes collect accounts receivable outstanding december 31 2010 company’s accounts receivable greece italy spain portugal totaled approximately 14 billion hospital public sector receivables greece approximately 15 december 31 2010 company’s total accounts receivable outstanding one year approximately 390 million approximately 340 million related accounts receivable greece italy spain portugal 2010 greek government announced would exchange zero coupon bonds outstanding 20072009 accounts receivable related certain government sponsored institutions company received substantially bonds settlement 170 million 20072009 accounts receivable company’s five largest us customers cardinal health inc amerisourcebergen corporation mckesson corporation walmart stores inc medco health solutions inc represented aggregate approximately onefifth accounts receivable december 31 2010 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2010 2009 company received cash collateral 157 million 69 million respectively various counterparties recorded accrued current liabilities company advanced cash collateral counterparties december 31 2010 2009 8 inventories december 31 consisted december 31 2010 2009 225 million 23 billion respectively purchase accounting adjustments inventories remained recognized component materials production costs related inventories sold inventories valued lifo method comprised approximately 26 21 inventories december 31 2010 2009 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2010 amounts included approximately 10 billion inventories expected sold within one year 197 million inventories produced preparation product launches 9 goodwill intangibles result merger see note 3 company recorded 106 billion goodwill 410 billion acquired identifiable intangible assets including acquired iprd company recorded additional 73 billion intangible assets conjunction remeasurement merck’s previously held equity interest msp partnership following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances intangibles december 31 consisted 1 amounts capitalized inprocess research development accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization 2010 company recorded 24 billion inprocess research development “iprd” impairment charges see note 3 also 2010 approximately 378 million iprd reclassified products product rights upon receipt marketing approval major market aggregate amortization expense primarily recorded within materials production costs 47 billion 2010 922 million 2009 186 million 2008 estimated aggregate amortization expense next five years follows 2011 46 billion 2012 45 billion 2013 45 billion 2014 43 billion 2015 37 billion 10 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 upon completion merger 2009 msp partnership became whollyowned company see 2 primarily reflects results sanofi pasteur msd johnson°merck consumer pharmaceuticals company well merial limited disposed september 17 2009 astrazeneca lp 1982 old merck entered agreement astra ab “astra” develop market astra’s products royaltybearing license 1993 old merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” old merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 old merck astra completed restructuring ownership operations joint venture whereby old merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc “astrazeneca merger” became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 13 billion 14 billion 16 billion 2010 2009 2008 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates reflected table returns include priority return provided partnership agreement variable returns based part upon sales certain former astra usa inc products preferential return representing merck’s share undistributed azlp gaap earnings astrazeneca merger constituted trigger event kbi restructuring agreements resulted partial redemption 2008 old merck’s interest certain azlp product rights upon redemption old merck received 43 billion azlp amount based primarily multiple old merck’s average annual variable returns derived sales former astra usa inc products three years prior redemption “limited partner share agreed value” old merck recorded 15 billion pretax gain partial redemption 2008 partial redemption old merck’s interest product rights result change old merck’s 1 limited partnership interest result astrazeneca merger exchange old merck’s relinquishment rights future astra products existing pending us patents time merger astra paid 967 million “advance payment” advance payment deferred remained subject trueup calculation “trueup amount” directly dependent fair market value march 2008 astra product rights retained old merck calculated trueup amount 243 million returned azlp 2008 old merck recognized pretax gain 724 million related residual advance payment balance provisions kbi restructuring agreements trigger event occurred sum limited partner share agreed value appraised value discussed trueup amount guaranteed minimum 47 billion distribution limited partner share agreed value less payment trueup amount resulted cash receipts old merck 40 billion aggregate pretax gain 22 billion included income expense net 2008 also march 2008 138 billion outstanding loan astra plus interest redemption date settled result transactions old merck received net proceeds azlp 26 billion 2008 conjunction 1998 restructuring discussed astra purchased option “asset option” payment 443 million recorded deferred income buy old merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” april 2010 astrazeneca exercised asset option merck received 647 million astrazeneca representing net present value march 31 2008 projected future pretax revenue received old merck nonppi products “appraised value” recorded reduction company’s investment azlp company recognized 443 million deferred income 2010 component income expense net addition 1998 old merck granted astra option “shares option” buy old merck’s common stock interest kbi therefore old merck’s interest nexium prilosec exercisable 2012 exercise price shares option based net present value estimated future net sales nexium prilosec determined time exercise subject certain trueup mechanisms company believes likely astrazeneca exercise shares option summarized financial information azlp follows merckscheringplough partnership 2000 old merck scheringplough collectively “partners” entered agreement create equallyowned partnership develop market united states new prescription medicines cholesterol management 2002 ezetimibe first new class cholesterollowering agents launched united states zetia marketed ezetrol outside united states 2004 combination product containing active ingredients zetia zocor approved united states vytorin marketed inegy outside united states cholesterol agreements provided sharing operating income generated msp partnership based upon percentages varied product sales level country operating income included expenses partners contractually agreed share expenses incurred support msp partnership shared partners included equity income affiliates however costs reflected overall results partners result merger msp partnership whollyowned company merck’s share results msp partnership date merger reflected equity income affiliates activity resulting sale msp partnership products merger consolidated merck’s results see note 12 information respect litigation involving msp partnership partners related sale promotion zetia vytorin summarized financial information msp partnership follows 1 old merck’s share msp partnership’s income taxes differs equity income recognized msp partnership primarily due timing recognition certain transactions old merck msp partnership periods presented including milestone payments merial limited 1997 old merck rhônepoulenc sa sanofiaventis combined animal health businesses form merial limited “merial” fully integrated animal health company standalone joint venture 50 owned party merial provides comprehensive range pharmaceuticals vaccines enhance health wellbeing performance wide range animal species september 17 2009 old merck sold 50 interest merial sanofiaventis 40 billion cash sale resulted recognition 32 billion pretax gain 2009 reflected income expense net connection sale merial old merck sanofiaventis scheringplough signed call option agreement provided sanofiaventis option require company combine intervetscheringplough animal health business merial form animal health joint venture would owned equally company sanofiaventis march 2010 sanofiaventis exercised option part call option agreement value merial fixed 80 billion minimum total value received company contributing intervetscheringplough combined entity would 925 billion subject customary transaction adjustments consisting floor valuation intervetscheringplough fixed minimum 85 billion subject potential upward revision based valuation exercise two parties additional payment sanofiaventis 750 million upon completion valuation exercise parties agreed future payment 250 million would made sanofiaventis company addition 750 million payment referred payments including adjustments debt certain liabilities made upon closing transaction formation new animal health joint venture sanofiaventis subject execution final agreements regulatory review united states europe countries customary closing conditions march 30 2010 parties signed contribution agreement obligates subject regulatory approval form joint venture company expects transaction close third quarter 2011 company’s agreement sanofiaventis provides transaction consummated march 30 2011 either party may terminate proposed joint venture without paying breakup fee penalty merial sales 18 billion period january 1 2009 september 17 2009 divestiture date 26 billion 2008 sanofi pasteur msd 1994 old merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 12 billion 2010 16 billion 2009 19 billion 2008 johnson°merck consumer pharmaceuticals company 1989 old merck formed joint venture johnson develop market broad range nonprescription medicines us consumers 50 owned venture subsequently expanded canada significant joint venture products pepcid ac overthecounter form company’s ulcer medication pepcid well pepcid complete overthecounter product combines company’s ulcer medication antacids sales products marketed joint venture 129 million 2010 203 million 2009 212 million 2008 investments affiliates accounted using equity method including joint ventures totaled 494 million december 31 2010 881 million december 31 2009 amounts reported assets amounts due joint ventures included deferred income taxes current assets 348 million december 31 2010 339 million december 31 2009 summarized information affiliates excluding msp partnership azlp disclosed separately follows 1 includes information merial divestiture september 17 2009 11 loans payable longterm debt commitments loans payable december 31 2010 included 15 billion notes due 2011 250 million commercial paper 142 million shortterm foreign borrowings addition loans payable included 496 million longdated notes subjected repayment option holders 159 million subject repayment beginning 2011 reclassified longterm debt 2010 loans payable december 31 2009 included 739 million eurodenominated 500 notes due 2010 shortterm foreign borrowings 236 million also included loans payable december 31 2009 404 million longdated notes subject repayment option holders longterm debt december 31 consisted december 31 2010 company party interest rate swap contracts effectively convert 225 fixedrate notes 750 million 400 fixedrate notes floatingrate instruments addition company party interest rate swap contracts effectively convert 5125 fixedrate notes due 2011 included loans payable current portion longterm debt floatingrate instruments see note 7 presented table december 31 2010 2009 consisted 28 million 187 million borrowings variable rates averaging 04 00 respectively 2009 borrowings 159 million subject repayment option holders beginning 2011 reclassified longterm debt 2010 also included foreign borrowings 98 million 101 million december 31 2010 2009 respectively varying rates 85 2010 117 2009 2010 company repaid 610 million eurodenominated notes due mature 2012 funding repay notes provided issuance commercial paper december 2010 merck closed underwritten public offering 20 billion senior unsecured notes consisting 850 million aggregate principal amount 225 notes due 2016 115 billion aggregate principal amount 3875 notes due 2021 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices proceeds notes used general corporate purposes including reduction shortterm debt 5375 eurodenominated notes due 2014 530 notes due 2013 650 notes due 2033 600 notes due 2017 655 notes due 2037 redeemable whole part merck’s option time redemption prices specified notes associated prospectus respect eurodenominated notes 600 notes 655 notes change control triggering event defined therein occurs certain circumstances defined notes associated prospectus holders notes right require merck repurchase part notes cash payment equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest date purchase connection merger effective november 3 2009 new merck executed full unconditional guarantee existing debt old merck old merck executed full unconditional guarantee existing debt new merck excluding commercial paper including payments principal interest guarantees extend debt issued subsequent merger aggregate maturities longterm debt next five years follows 2011 15 billion 2012 20 million 2013 19 billion 2014 21 billion 2015 21 billion 2010 company executed new 20 billion 364day credit facility terminated old merck’s 10 billion incremental facility due expire november 2010 15 billion revolving credit facility scheduled mature april 2013 company’s 20 billion credit facility maturing august 2012 remains outstanding facilities provide backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding either facility rental expense operating leases net sublease income 431 million 2010 237 million 2009 222 million 2008 minimum aggregate rental commitments noncancellable leases follows 2011 247 million 2012 187 million 2013 142 million 2014 93 million 2015 85 million thereafter 125 million company significant capital leases 12 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made result number factors product liability insurance become less available cost increased significantly company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 including liability old merck products first sold date company continue evaluate insurance needs costs availability benefits product liability insurance future vioxx litigation product liability lawsuits previously disclosed individual putative class actions filed old merck state federal courts alleging personal injury andor economic loss respect purchase use vioxx actions filed federal court coordinated multidistrict litigation us district court eastern district louisiana “mdl” district judge eldon e fallon number actions filed state court coordinated separate coordinated proceedings state courts california texas counties philadelphia pennsylvania washoe clark counties nevada october 26 2010 new jersey supreme court dissolved new jersey coordinated vioxx proceeding actions discussed paragraph “other lawsuits” collectively referred “vioxx product liability lawsuits” plaintiff groups vioxx product liability lawsuits described vast majority enrolled vioxx settlement program described december 31 2010 approximately 35 plaintiff groups otherwise eligible settlement program participate claims remain pending old merck addition claims approximately 130 plaintiff groups eligible settlement program remain pending old merck number 130 plaintiff groups subject various motions dismiss failure comply courtordered deadlines claims 47775 plaintiffs dismissed december 31 2010 vast majority dismissed result settlement process discussed november 9 2007 old merck announced entered agreement “settlement agreement” law firms comprise executive committee plaintiffs’ steering committee “psc” federal vioxx mdl well representatives plaintiffs’ counsel texas new jersey california state coordinated proceedings resolve state federal myocardial infarction “mi” ischemic stroke “is” claims filed date united states settlement agreement applied us legal residents alleged mi occurred united states settlement agreement provided old merck pay fixed aggregate amount 485 billion two funds 40 billion mi claims 850 million claims “settlement program” december 31 2010 processing mi claims settlement program completed final payments made 99 claimants majority claimants yet paid finalizing documents one us vioxx product liability lawsuit trial held 2010 trial louisiana attorney general matter discussed three us vioxx product liability lawsuits currently scheduled trial 2011 old merck previously disclosed outcomes several vioxx product liability lawsuits tried prior 2010 cases went trial two unresolved posttrial appeals ernst v merck garza v merck previously disclosed details associated cases grounds merck’s appeals lawsuits still pending various us courts putative class actions purportedly brought behalf individual purchasers users vioxx seeking reimbursement alleged economic loss mdl proceeding approximately 30 class actions remain june 30 2010 old merck moved strike class claims judgment pleadings regarding master complaint includes abovereferenced cases briefing motion completed september 23 2010 mdl court heard oral argument old merck’s motion october 7 2010 took advisement june 12 2008 missouri state court certified class missouri plaintiffs seeking reimbursement outofpocket costs relating vioxx trial scheduled begin october 31 2011 addition indiana plaintiffs filed motion certify class indiana vioxx purchasers case pending circuit court marion county indiana april 1 2010 kentucky state court denied old merck’s motion summary judgment certified class kentucky plaintiffs seeking reimbursement outofpocket costs relating vioxx intermediate appellate court denied old merck’s petition writ mandamus old merck appealed decision kentucky supreme court old merck also named defendant several lawsuits brought behalf government entities twelve suits brought state attorneys general one behalf county one brought private citizen qui tam suit actions except suit brought attorney general michigan mdl proceeding michigan attorney general case remanded state court actions allege old merck misrepresented safety vioxx one suits seeks recovery expenditures vioxx governmentfunded health care programs medicaid along relief penalties attorneys’ fees action brought attorney general kentucky seeks penalties alleged consumer fraud violations lawsuit brought county class action filed santa clara county california behalf similarly situated california counties old merck moved dismiss false claims act claims brought qui tam plaintiff behalf district columbia november 2010 court heard oral argument motion december 21 2010 took advisement old merck also moved dismiss case brought attorney general oklahoma december 2010 march 31 2010 judge fallon partially granted partially denied old merck’s motion summary judgment louisiana attorney general case trial remaining claims judge fallon began april 12 2010 completed april 21 2010 judge fallon found favor old merck june 29 2010 dismissing attorney general’s remaining claims prejudice louisiana attorney general appealing ruling shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits federal state securities laws filed old merck various current former officers directors “vioxx securities lawsuits” previously disclosed vioxx securities lawsuits transferred judicial panel multidistrict litigation “jpml” us district court district new jersey district judge stanley r chesler inclusion nationwide mdl “shareholder mdl” consolidated purposes june 2010 old merck moved dismiss fifth amended class action complaint consolidated securities action plaintiffs filed opposition august 2010 old merck filed reply september 2010 motion currently pending district court previously disclosed several individual securities lawsuits filed foreign institutional investors also consolidated vioxx securities lawsuits stipulation defendants required respond complaints resolution motions dismiss consolidated securities class action addition previously disclosed various putative class actions filed federal court employee retirement income security act “erisa” old merck certain current former officers directors “vioxx erisa lawsuits” cases consolidated shareholder mdl judge chesler fact discovery vioxx erisa lawsuits closed september 30 2010 parties filed proposed schedule expert discovery dispositive motions trial international lawsuits previously disclosed addition lawsuits discussed old merck named defendant litigation relating vioxx australia brazil canada europe israel collectively “vioxx foreign lawsuits” following trial representative action 2009 federal court australia entered orders 2010 dismissed claims old merck regard old merck’s australian subsidiary merck sharp dohme australia pty ltd court dismissed certain claims awarded named plaintiff court found suffered mi ingesting vioxx approximately 33 months au 330465 based statutory claims vioxx fit purpose merchantable quality even though court rejected applicant’s claim old merck australian subsidiary knew ought known prior voluntary withdrawal vioxx september 2004 vioxx materially increased risk mi court also determined findings fact law common claims group members whose individual claims would proceed reference findings old merck’s subsidiary appealed adverse findings full federal court scheduled hear appeal crossappeal august 2011 canada 2006 superior court quebec authorized class action behalf vioxx users quebec alleged negligence 2008 superior court ontario certified class vioxx users canada except quebec saskatchewan alleged negligence entitlement elect waive tort procedural decisions canadian litigation address merits plaintiffs’ claims litigation canada remains early stage insurance previously disclosed company directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 175 million company fiduciary insurance vioxx erisa lawsuits stated upper limits approximately 275 million result previously disclosed arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits investigations previously disclosed old merck received subpoenas department justice “doj” requesting information related old merck’s research marketing selling activities respect vioxx federal health care investigation criminal statutes investigation included subpoenas witnesses appear grand jury previously disclosed march 2009 old merck received letter us attorney’s office district massachusetts identifying target grand jury investigation regarding vioxx october 29 2010 company announced established 950 million reserve “vioxx liability reserve” connection anticipated resolution doj’s investigation company’s discussions government ongoing concluded certainty definitive resolution previously disclosed investigations conducted local authorities certain cities europe order determine whether criminal charges brought concerning vioxx company cooperating governmental entities including doj respective investigations “vioxx investigations” company cannot predict outcome inquiries however could result potential civil andor criminal remedies reserves one us vioxx product liability lawsuit tried 2010 three us vioxx product liability lawsuits currently scheduled trial 2011 company cannot predict timing trials related vioxx litigation defined company believes meritorious defenses vioxx product liability lawsuits vioxx shareholder lawsuits vioxx foreign lawsuits collectively “vioxx lawsuits” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect vioxx lawsuits included settlement program vioxx liability reserve established respect doj investigation noted company established reserves potential liability relating vioxx lawsuits vioxx investigations unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable december 31 2009 company aggregate reserve approximately 110 million “vioxx legal defense costs reserve” solely future legal defense costs related vioxx litigation 2010 company spent approximately 140 million aggregate legal defense costs worldwide including approximately 31 million fourth quarter 2010 related vioxx product liability lawsuits ii vioxx shareholder lawsuits iii vioxx foreign lawsuits iv vioxx investigations collectively “vioxx litigation” also 2010 merck recorded 106 million charges including 46 million fourth quarter solely future legal defense costs vioxx litigation consequently december 31 2010 aggregate amount vioxx legal defense costs reserve approximately 76 million solely future legal defense costs vioxx litigation significant factors considered review vioxx legal defense costs reserve follows actual costs incurred company development company’s legal defense strategy structure light scope vioxx litigation including settlement agreement expectation certain lawsuits continue pending number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials vioxx litigation amount vioxx legal defense costs reserve december 31 2010 represents company’s best estimate minimum amount defense costs incurred connection remaining aspects vioxx litigation however events additional trials vioxx litigation events could arise course vioxx litigation could affect ultimate amount defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase vioxx legal defense costs reserve time future based upon factors set forth believes would appropriate product liability litigation fosamax previously disclosed old merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2010 approximately 1295 cases include approximately 1675 plaintiff groups filed pending old merck either federal state court including one case seeks class action certification well damages andor medical monitoring actions plaintiffs allege among things suffered osteonecrosis jaw generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 20 actions allege sustained stress andor low energy femoral fractures association use fosamax august 2006 jpml ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax mdl” coordinated pretrial proceedings fosamax mdl transferred judge john keenan us district court southern district new york result jpml order approximately 870 cases judge keenan judge keenan issued case management order various amendments thereto set forth schedule governing proceedings focused primarily upon resolving class action certification motions 2007 completing fact discovery initial group 25 cases october 1 2008 briefing argument plaintiffs’ motions certification medical monitoring classes completed 2007 judge keenan issued order denying motions january 3 2008 january 2008 judge keenan issued order dismissing prejudice class claims asserted first four class action lawsuits filed old merck sought personal injury damages andor medical monitoring relief class wide basis daubert motions filed may 2009 judge keenan conducted daubert hearing july 2009 july 2009 judge keenan issued ruling parties’ respective daubert motions ruling denied plaintiff steering committee’s motion granted part denied part old merck’s motion first fosamax mdl trial boles v merck fosamax mdl court declared mistrial eight person jury could reach unanimous verdict boles case retried june 2010 resulted verdict favor plaintiff amount 8 million merck filed posttrial motions seeking judgment matter law alternative new trial october 4 2010 court denied merck’s posttrial motions sua sponte ordered remittitur reducing verdict 15 million plaintiff rejected remittitur ordered court requested new trial damages company filed motion interlocutory appeal next fosamax mdl case set trial maley v merck jury may 2010 returned unanimous verdict merck’s favor february 1 2010 judge keenan selected new bellwether case judith graves v merck replace flemings bellwether case fosamax mdl court dismissed granted summary judgment favor old merck november 2010 second circuit affirmed court’s granting summary judgment favor old merck flemings case graves jury returned unanimous verdict favor old merck november 2010 next trials scheduled fosamax mdl secrest v merck scheduled begin march 14 2011 hester v merck scheduled begin may 9 2011 addition judge keenan ordered february 4 2011 two bellwether trials conducted fosamax mdl cases tried trial dates cases yet determined outside fosamax mdl trial florida scheduled begin june 21 2010 florida state court postponed trial date sometime january 1 2011 addition july 2008 application made atlantic county superior court new jersey requesting fosamax cases pending new jersey considered mass tort designation centralized management one judge new jersey october 2008 new jersey supreme court ordered pending future actions filed new jersey arising use fosamax seeking damages existing dental jawrelated injuries including osteonecrosis jaw solely seeking medical monitoring designated mass tort centralized management purposes judge higbee atlantic county superior court december 31 2010 approximately 385 cases pending old merck atlantic county new jersey july 20 2009 judge higbee entered case management order various amendments thereto setting forth schedule contemplates completing fact expert discovery initial group cases worked trial february 14 2011 jury rosenberg v merck first trial new jersey coordinated proceeding returned verdict merck’s favor discovery ongoing fosamax mdl litigation new jersey coordinated proceeding remaining jurisdictions fosamax cases pending company intends defend lawsuits nuvaring beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” scheringplough arising organon’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation “nuvaring mdl” venued missouri new jersey state court december 31 2010 approximately 730 nuvaring cases 610 pending nuvaring mdl us district court eastern district missouri judge rodney sippel approximately 110 pending consolidated discovery proceedings bergen county superior court new jersey judge brian r martinotti four additional cases pending various state courts pursuant january 13 2010 february 19 2010 orders judge sippel nuvaring mdl parties selected 26 trial pool cases subject fact discovery pursuant judge martinotti’s january 13 2010 case management order parties selected additional 10 trial pool cases subject fact discovery new jersey consolidated proceedings based revised scheduling order entered jurisdictions september 15 2010 fact discovery trial pool cases end june 2011 expert discovery end february 2012 first trials scheduled jurisdiction company intends defend lawsuits commercial litigation awp litigation investigations previously disclosed company andor certain subsidiaries remain defendants cases brought various states certain new york counties alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used public private payors calculating provider reimbursement levels outcome litigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies january 2010 us district court district massachusetts held unit company eight drug makers overcharged new york city 42 new york counties certain generic drugs court reserved issue damages penalties future proceedings period september 2010 january 2011 company settled awp cases brought states hawaii arizona kansas utah south carolina period company several manufacturers named defendants awp cases brought states oklahoma louisiana result company andor certain subsidiaries continue defendants twelve cases brought states new york counties jury us district court district massachusetts found company liable approximately 46 million compensatory damages september 2010 ground units scheringplough caused massachusetts overpay pharmacists prescriptions albuterol penalties case could substantial court deferred decision calculated massachusetts state law significant legal issues remain decided penalties could imposed amount company intends pursue reversal verdict trial court appeal necessary centocor distribution agreement may 27 2009 centocor wholly owned subsidiary johnson delivered scheringplough notice initiating arbitration proceeding resolve whether result merger centocor permitted terminate company’s rights distribute commercialize remicade simponi sales remicade simponi 28 billion aggregate 2010 arbitration hearing concluded company awaiting arbitration panel’s decision unfavorable outcome arbitration would material adverse effect company’s financial position liquidity results operations governmental proceedings effective august 2 2010 merck hhsoig executed unified corporate integrity agreement “unified cia” replaced individual cias signed old merck scheringplough prior merger unified cia incorporates certain requirements individual cias old merck scheringplough similar although identical legacy cias merck assumed compliance obligations unified cia february 5 2013 old merck cia company believes promotional practices medicaid price reports meet requirements unified cia previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperating agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries regard company received may continue receive additional requests information either doj sec vytorinzetia litigation previously disclosed april 2008 old merck shareholder filed putative class action lawsuit federal court eastern district pennsylvania alleging old merck violated federal securities laws suit since withdrawn refiled district new jersey consolidated another federal securities lawsuit caption merck co inc vytorin securities litigation amended consolidated complaint filed october 2008 names defendants old merck merckscheringplough pharmaceuticals llc certain company’s current former officers directors specifically complaint alleges old merck delayed releasing unfavorable results enhance clinical trial regarding efficacy vytorin old merck made false misleading statements expected earnings knowing results vytorin study released sales vytorin would decline old merck’s earnings would suffer december 2008 old merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court issued opinion order denying defendants’ motion dismiss lawsuit october 2009 old merck defendants filed answer amended consolidated complaint similar consolidated putative class action securities lawsuit pending district new jersey filed scheringplough shareholder scheringplough former chairman president chief executive officer fred hassan caption scheringplough corporationenhance securities litigation amended consolidated complaint filed september 2008 names defendants scheringplough merckscheringplough pharmaceuticals llc certain company’s current former officers directors underwriters participated august 2007 public offering scheringplough’s common preferred stock december 2008 scheringplough defendants filed motions dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court issued opinion order denying defendants’ motion dismiss lawsuit defendants filed answer consolidated amended complaint november 2009 previously disclosed april 2008 member old merck erisa plan filed putative class action lawsuit old merck certain company’s current former officers directors alleging breached fiduciary duties erisa since time similar erisa lawsuits filed old merck district new jersey lawsuits consolidated caption merck co inc vytorin erisa litigation consolidated amended complaint filed february 2009 names defendants old merck various current former members company’s board directors plaintiffs allege erisa plans’ investment old merck stock imprudent old merck’s earnings dependent commercial success cholesterol drug vytorin defendants knew known results scientific study would cause medical community turn less expensive drugs cholesterol management april 2009 old merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court issued opinion order denying defendants’ motion dismiss lawsuit november 2009 plaintiffs moved strike certain defendants’ affirmative defenses motion denied part granted part june 2010 amended answer filed july 2010 similar consolidated putative class action erisa lawsuit currently pending district new jersey filed member scheringplough erisa plan scheringplough certain current former officers directors alleging breached fiduciary duties erisa caption scheringplough corp enhance erisa litigation consolidated amended complaint filed october 2009 names defendants scheringplough various current former members scheringplough’s board directors current former members committees scheringplough’s board directors november 2009 company defendants filed motion dismiss lawsuit grounds plaintiffs failed state claim relief granted plaintiffs’ opposition motion dismiss filed december 2009 motion fully briefed january 2010 motion denied june 2010 september 2010 defendants filed answer amended complaint matter november 2009 stockholder company filed shareholder derivative lawsuit local 38 international brotherhood electrical workers pension fund v clark “local 38” district new jersey behalf nominal defendant company shareholders company certain company’s officers directors alleged insiders certain predecessor companies’ former officers directors alleged insiders alleged breaches fiduciary duties waste unjust enrichment gross mismanagement similar shareholder derivative lawsuit cain v hassan filed scheringplough stockholder currently pending district new jersey amended complaint filed may 2008 scheringplough stockholder behalf nominal defendant scheringplough shareholders lawsuit company scheringplough’s thencurrent board directors certain scheringplough’s current former officers directors alleged insiders plaintiffs local 38 cain v hassan allege defendants withheld enhance study results made false misleading statements thereby deceiving causing harm company scheringplough respectively investing public unjustly enriching insiders wasting corporate assets defendants local 38 intend move dismiss plaintiff’s complaint defendants cain v hassan moved dismiss amended complaint july 2008 motion fully briefed october 2008 decision remains pending november 2010 company shareholder filed derivative lawsuit state court new jersey case captioned rose v hassan asserts claims substantially identical claims alleged cain v hassan discovery cases referred section coordinated commenced company intends defend lawsuits referred section unfavorable outcomes resulting government investigations civil litigations could material adverse effect company’s financial position liquidity results operations insurance company directors officers insurance coverage applicable vytorin shareholder lawsuits stated upper limits approximately 250 million company fiduciary insurance vytorin erisa lawsuits approximately 265 million disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated limits securities class action litigation kdur antitrust litigation june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications “andas” following commencement administrative proceeding united states federal trade commission “ftc” 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claimed violations federal state antitrust laws well state statutory common law causes action suits sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case february 2009 special master recommended us district court district new jersey dismiss class action lawsuits summary judgment march 2010 district court adopted recommendation granted summary judgment defendants dismissed matter entirety plaintiffs appealed decision third circuit court appeals defendants simultaneously appealing december 2008 decision district court certify certain direct purchaser plaintiffs’ claims class action may 2010 superior court alameda county california also granted summary judgment defendants’ favor dismissing related california state law case making similar allegations regarding scheringplough’s settlements upshersmith lederle decision final vaccine litigation previously disclosed old merck party individual product liability lawsuits claims united states involving pediatric vaccines eg hepatitis b vaccine contained thimerosal preservative used vaccines december 31 2010 approximately 110 thimerosal related lawsuits pending old merck defendant although vast majority lawsuits currently active defendants include vaccine manufacturers produced pediatric vaccines containing thimerosal well manufacturers thimerosal actions plaintiffs allege among things suffered neurological injuries result exposure thimerosal pediatric vaccines cases currently scheduled trial company defend lawsuits however possible unfavorable outcomes could material adverse effect company’s financial position liquidity results operations old merck successful cases type either dismissed stayed ground action prohibited national childhood vaccine injury act “vaccine act” vaccine act prohibits person filing maintaining civil action state federal court seeking damages vaccine manufacturer vaccinerelated injuries unless petition first filed united states court federal claims hereinafter “vaccine court” vaccine act filing civil action vaccine manufacturer petitioner must either pursue petition conclusion vaccine court timely file election proceed civil action lieu accepting vaccine court’s adjudication petition b timely exercise right withdraw petition prior vaccine court adjudication accordance certain statutorily prescribed time periods old merck party vaccine court proceedings petitions brought united states department health human services company aware approximately 5000 cases pending vaccine court involving allegations thimerosalcontaining vaccines andor mmr ii vaccine cause autism spectrum disorders thimerosalcontaining vaccines involved vaccine court proceeding company vaccines company sole source mmr ii vaccine domestically special masters presiding vaccine court proceedings held hearings three test cases involving theory combination mmr ii vaccine thimerosal vaccines causes autism spectrum disorders february 2009 special masters issued decisions cases finding theory unsupported valid scientific evidence petitioners three cases therefore entitled compensation two three cases appealed may 2010 united states court appeals federal circuit issued opinion affirming one appealed cases august 2010 court issued opinion affirming second case special masters also held similar hearings three different test cases involving theory thimerosal vaccines alone causes autism spectrum disorders march 2010 special masters issued decisions second set test cases finding theory also unsupported valid scientific evidence petitioners cases also entitled compensation petitioners second set test cases exercise options seek review decisions accordingly april 2010 final judgments entered second set test cases special masters previously indicated would hold similar hearings involving theory mmr ii alone causes autism spectrum disorders stated longer intend vaccine court indicated intends use evidence presented test case hearings guide adjudication remaining autism spectrum disorder cases patent litigation time generic manufacturers pharmaceutical products file anda’s fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company marketed via agreements companies currently involved patent infringement litigation united states include cancidas integrilin nasonex nexium propecia temodar vytorin zetia similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products cancidas november 2009 patent infringement lawsuit filed united states teva parenteral medicines inc “tpm” respect tpm’s application fda seeking prepatent expiry approval sell generic version cancidas lawsuit automatically stays fda approval tpm’s application april 21 2012 adverse decision whichever may occur first also march 2010 patent infringement lawsuit filed united states sandoz inc “sandoz” respect sandoz’s application fda seeking prepatent expiry approval sell generic version cancidas lawsuit automatically stays fda approval sandoz’s application august 24 2012 adverse court decision whichever may occur earlier integrilin february 2009 patent infringement lawsuit filed jointly millennium pharmaceuticals inc “millennium” united states tpm respect tpm’s application fda seeking approval sell generic version integrilin prior expiry last expire listed patent tpm challenge certain patents expire november 2014 fda approval tpm application cannot occur earlier november 2014 however could later event favorable decision lawsuit company millennium nasonex december 2009 patent infringement suit filed united states apotex respect apotex’s application fda seeking prepatent expiry approval market generic version nasonex lawsuit automatically stays fda approval apotex’s anda may 2012 adverse court decision whichever may occur earlier nexium november 2005 patent infringement lawsuit filed jointly astrazeneca united states ranbaxy respect ranbaxy’s application fda seeking prepatent expiry approval sell generic version nexium previously disclosed astrazeneca merck ranbaxy entered settlement agreement provided ranbaxy would entitled bring generic esomeprazole product market united states may 27 2014 company astrazeneca received cid ftc july 2008 regarding settlement agreement ranbaxy company cooperating ftc responding cid march 2006 patent infringement lawsuit filed jointly astrazeneca ivax later acquired teva pharmaceuticals inc “teva” respect ivax’s application fda seeking prepatent expiry approval sell generic version nexium january 2010 astrazeneca merck tevaivax entered settlement agreement provides tevaivax would entitled bring generic esomeprazole product market united states may 27 2014 patent infringement lawsuits also filed united states dr reddy’s laboratories “dr reddy’s” sandoz lupin ltd “lupin” respect each’s respective application fda seeking prepatent expiry approval sell generic versions nexium lawsuits ongoing trial dates presently scheduled february 2011 patent infringement lawsuit filed jointly astrazeneca united states hamni usa inc “hamni” respect hanmi’s application fda seeking prepatent expiry approval sell generic version nexium january 2011 astrazeneca merck dr reddy’s entered settlement agreement provides dr reddy’s would entitled bring generic esomeprazole product market united states may 27 2014 lawsuits sandoz lupin ongoing trial dates presently scheduled patent infringement lawsuit also filed jointly astrazeneca 2010 united states sun pharma global fze respect application fda seeking prepatent expiry approval sell generic version nexium iv propecia december 2010 patent infringement lawsuit filed united states hetero drugs limited “hetero” respect hetero’s application fda seeking prepatent expiry approval sell generic version propecia lawsuit automatically stays fda approval hetero’s anda april 2013 adverse court decision whichever may occur earlier temodar july 2007 patent infringement action filed jointly cancer research technologies limited “crt” united states barr later acquired teva respect barr’s application fda seeking prepatent expiry approval sell generic version temodar january 2010 court issued decision finding crt patent unenforceable grounds prosecution laches inequitable conduct november 2010 appeals court issued decision reversing trial court’s finding december 2010 barr filed petition seeking rehearing en banc appeal virtue agreement barr launch product appeal process company agreed barr launch product august 2013 september 2010 patent infringement lawsuit filed jointly crt united states sun pharmaceutical industries inc “sun” respect sun’s application fda seeking prepatent expiry approval sell generic version temodar lawsuit automatically stays fda approval sun’s anda february 2013 adverse court decision whichever may occur earlier november 2010 patent infringement lawsuit filed jointly crt accord healthcare inc “accord” respect application fda seeking prepatent expiry approval sell generic version temodar company crt accord entered agreement stay lawsuit pending outcome appeal en banc process barr lawsuit vytorin december 2009 patent infringement lawsuit filed united states mylan respect mylan’s application fda seeking prepatent expiry approval sell generic version vytorin lawsuit automatically stays fda approval mylan’s application may 2012 adverse court decision whichever may occur earlier february 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version vytorin lawsuit automatically stays fda approval teva’s application august 2013 adverse court decision whichever may occur earlier august 2010 patent infringement lawsuit filed united states impax laboratories inc “impax” respect impax’s application fda seeking prepatent expiry approval sell generic version vytorin agreement reached impax stay lawsuit pending outcome lawsuit mylan zetia march 2007 patent infringement lawsuit filed united states glenmark pharmaceuticals inc usa parent corporation collectively “glenmark” respect glenmark’s application fda seeking prepatent expiry approval sell generic version zetia may 2010 glenmark agreed settlement virtue glenmark permitted launch generic product united states december 12 2016 subject receiving final fda approval june 2010 patent infringement lawsuit filed united states mylan respect mylan’s application fda seeking prepatent expiry approval sell generic version zetia lawsuit automatically stays fda approval mylan’s application december 2012 adverse court decision whichever may occur earlier september 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version zetia lawsuit automatically stays fda approval teva’s application january 2013 adverse court decision whichever may occur earlier september 2008 lawsuit filed federal court canada teva seeking order prohibition teva’s application seeking prepatent expiry approval sell generic version ezetimibe canada teva responded asserting patent invalid september 2010 federal court canada issued decision upholding validity company’s canadian ezetimibe patent decision appealed august 2010 lawsuit filed federal court canada mylan seeking order prohibition mylan’s application seeking prepatent expiry approval sell generic version ezetimibe canada december 2010 mylan withdrew application product approval prior patent expiration september 2014 subject lawsuit withdrawn litigation various legal proceedings principally product liability intellectual property suits involving company pending feasible predict outcome proceedings discussed note opinion company proceedings either adequately covered insurance covered ultimately result liability would material adverse effect financial position liquidity results operations company proceedings separate assessment provided note environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties previously disclosed approximately 2200 plaintiffs filed amended complaint old merck 12 defendants us district court eastern district california asserting claims clean water act resource conservation recovery act well negligence nuisance suit seeks damages personal injury diminution property value medical monitoring alleged real personal property damage associated groundwater soil contamination found site former old merck subsidiary merced california certain defendants suit settled plaintiffs regarding aspects plaintiffs’ claims lawsuit proceeding phased manner jury trial commenced february 2011 jury asked make certain factual findings regarding whether contamination moved offsite areas plaintiffs could exposed contamination amounts defendants “phase 1” trial include old merck three original 12 defendants depending results phase 1 trial later phases litigation may required address issues related causation damages related specific plaintiffs previously disclosed environmental protection agency “epa” merck tentatively agreed 260000 fine resolve alleged environmental violations merck’s las piedras puerto rico facility alleged violations arise epa air inspection conducted july 2008 primarily based site’s leak detection repair program management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 185 million 162 million december 31 2010 2009 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 150 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 13 equity accordance merck certificate incorporation 6500000000 shares common stock 20000000 shares preferred stock authorized shares preferred stock series 11500000 shares designated 6 mandatory convertible preferred stock 6 mandatory convertible preferred stock connection merger holders scheringplough 6 preferred stock received 6 preferred stock rights substantially similar rights scheringplough 6 preferred stock accordance new merck restated certificate incorporation result merger 6 preferred stock became subject “makewhole” acquisition provisions preferred stock effective november 3 2009 makewhole acquisition conversion period ended november 19 2009 6 preferred stock convertible makewhole conversion rate 82021 share preferred stock converted period holder received 8612 cash 47302 new merck common shares holders also received dividend makewhole payment 1079 1082 per share depending date conversion total 9110423 shares 6 preferred stock converted 43093881 shares new merck common stock cash payments approximately 785 million made holders converted addition makewhole dividend payments 98 million made holders converted representing present value remaining future dividend payments conversion date mandatory conversion date august 13 2010 using discount rate stipulated terms preferred stock august 13 2010 outstanding 6 mandatory convertible preferred stock automatically converted terms right receive cash shares merck common stock share 6 mandatory convertible preferred stock holders received 8506 cash 46719 shares merck common stock result conversion approximately 72 million paid holders approximately 4 million merck common shares issued capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 2 pursuant merger agreement certain old merck’s treasury shares cancelled noncontrolling interests connection 1998 restructuring ami old merck assumed 24 billion par value preferred stock obligation dividend rate 5 per annum carried kbi included noncontrolling interests astrazeneca exercises shares option see note 10 preferred stock obligation settled 14 sharebased compensation plans company sharebased compensation plans employees nonemployee directors employees certain company’s equity method investees may granted options purchase shares company common stock fair market value time grant addition stock options company grants performance share units “psus” restricted stock units “rsus” certain management level employees plans approved company’s shareholders result merger scheringplough 2006 stock incentive plan “scheringplough 2006 sip” amended restated sharebased compensation instruments remain available future grant scheringplough 2006 sip new merck employees scheringplough prior merger outstanding sharebased compensation instruments well sharebased compensation instruments available future grant old merck new merck incentive plans also result merger certain sharebased compensation instruments previously granted scheringplough 2006 sip legacy scheringplough incentive plans exchanged new merck replacement awards related precombination services became payable cash addition certain stock options scheringplough legacy incentive plans contained “lockin” feature whereby award holder could elected receive cash payment stock options fixed amount based price scheringplough’s common stock 60 days prior merger liability associated provision 246 million december 31 2009 upon expiration exercise period associated “lockin” feature amount reclassified liabilities equity fair value replacement awards attributable precombination service 525 million included calculation consideration transferred see note 3 significant portion legacy scheringplough awards vested opening balance sheet time merger scheringplough sharebased compensation instruments immediately vest upon completion merger exchanged new merck replacement awards generally vest basis original grants made scheringplough legacy incentive plans immediately vest employee terminated company within two years merger certain circumstances fair value new merck replacement awards attributed postcombination services recognized compensation cost subsequent merger requisite service period awards december 31 2010 175 million shares collectively authorized future grants company’s sharebased compensation plans prior merger employee sharebased compensation awards settled primarily treasury shares subsequent merger awards either settled newly issued shares treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting fair value stock option rsu psu replacement awards determined fixed time merger psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2010 2009 2008 509 million 415 million 348 million respectively related income tax benefits 173 million 132 million 108 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average grant price options granted 2010 2009 2008 3430 2431 4335 per option respectively weighted average fair value options granted 2010 2009 2008 799 402 980 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table 1 fair value stock options vested 2009 excludes fair value options vested result merger attributable precombination service summary nonvested rsu psu activity shares thousands follows december 31 2010 416 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 18 years segment reporting sharebased compensation costs unallocated expenses 15 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries pension benefits united states based formula considers final average pay years credited service addition company provides medical dental life insurance benefits principally eligible us retirees similar benefits dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components higher costs 2010 2009 compared 2008 primarily due incremental costs associated legacy scheringplough benefit plans recognized subsequent merger net periodic benefit cost attributable us pension plans included table 289 million 2010 289 million 2009 226 million 2008 connection restructuring actions see note 4 termination charges recorded 2010 2009 2008 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2010 2009 2008 pension postretirement benefit plans addition settlements recorded 2010 2009 2008 certain domestic international pension plans employee benefit plans exception recognition fair value measurement principles business combinations employee benefit plan obligations recognized measured accordance existing authoritative literature accounting benefit plans rather fair value accordingly company remeasured benefit plans sponsored scheringplough recognized asset liability funded status plans merger date obligations funded status summarized information changes plan assets benefit obligation funded status amounts recorded december 31 follows fair value us pension plan assets included preceding table 72 billion 61 billion december 31 2010 2009 respectively pension projected benefit obligation us plans 84 billion 76 billion respectively approximately 40 42 company’s pension projected benefit obligation december 31 2010 2009 respectively relates international defined benefit plans individual plan significant relative total benefit obligation december 31 2010 2009 accumulated benefit obligation 118 billion 107 billion respectively pension plans 69 billion 60 billion respectively related us pension plans pension plans benefit obligations excess plan assets december 31 2010 2009 fair value plan assets 43 billion 49 billion respectively benefit obligations 64 billion 77 billion respectively plans accumulated benefit obligations excess plan assets december 31 2010 2009 fair value plan assets 26 billion 35 billion respectively accumulated benefit obligations 38 billion 51 billion respectively plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities plans’ level 1 assets primarily include registered investment companies mutual funds equity securities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities plans’ level 2 assets primarily include investments commoncollective trusts certain fixed income investments government agency securities corporate obligations level 3 unobservable inputs supported little market activity financial instruments whose values determined using pricing models discounted cash flow methodologies similar techniques well instruments determination fair value requires significant judgment estimation plans’ level 3 assets primarily include investments insurance contracts real estate funds valued using methodologies management understands plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques plans’ level 3 investments real estate generally valued market appraisals may infrequent nature december 31 2010 2009 648 million 568 million respectively approximately 50 company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows table provides summary changes fair value including net transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows total pension postretirement benefit plan assets excluded fair value hierarchy include interest receivable well payables receivables related purchases sales investments respectively company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions pension plans postretirement benefit plans 2011 expected approximately 800 million 60 million respectively expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2011 174 million 5 million respectively pension plans 43 million 55 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining pension plan us pension postretirement benefit plan information follows 2009 net cost rates preceding table include costs associated scheringplough benefit plans date merger december 31 2009 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined country basis developing expected rate return within country longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return country’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2011 company’s expected rate return range 525 875 compared range 800 875 2010 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states including plans assumed connection merger company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2010 2009 2008 155 million 111 million 104 million respectively 16 income expense net decline interest income increase interest expense 2010 compared 2009 largely attributable merger increase exchange losses 2010 primarily due recognition 200 million exchange losses due two venezuelan currency devaluations discussed change net presented table 2010 compared 2009 primarily reflects 75 billion gain 2009 resulting recognizing merck’s previously held equity interest msp partnership fair value result obtaining control msp partnership merger see note 3 32 billion gain 2009 sale old merck’s interest merial see note 10 950 million charge vioxx liability reserve recorded 2010 see note 12 lower recognized net gains 2010 company’s investment portfolio charges recognized 2010 related settlement certain pending awp litigation see note 12 items partially offset 443 million income recognized upon astrazeneca’s asset option exercise see note 10 102 million income recognized settlement certain disputed royalties 2010 effective january 1 2010 company required remeasure local currency operations venezuela us dollars venezuelan economy determined hyperinflationary effective january 11 2010 venezuelan government devalued currency bsf 215 per us dollar twotiered official exchange rate 1 “the essentials rate” bsf 260 per us dollar 2 “the nonessentials rate” bsf 430 per us dollar throughout 2010 company settled transactions essentials rate therefore remeasured monetary assets liabilities utilizing essentials rate december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 transactions would settled official rate bsf 430 per us dollar result announcement company remeasured december 31 2010 monetary assets liabilities new official rate decline interest income 2009 compared 2008 primarily result lower interest rates change investment portfolio mix toward cash shorterdated securities anticipation merger increase interest expense 2009 largely due 173 million commitment fees incremental interest expense related financing merger included net 2009 75 billion gain result obtaining control msp partnership merger 32 billion gain sale old merck’s interest merial 231 million investment portfolio recognized net gains 80 million charge related settlement vioxx thirdparty payor litigation united states included net 2008 aggregate gain distribution azlp 22 billion see note 10 gain 249 million related sale remaining worldwide rights aggrastat 300 million expense contribution merck company foundation 117 million investment portfolio recognized net losses interest paid 763 million 2010 351 million 2009 247 million 2008 excludes commitment fees 17 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits export incentives miscellaneous items 2010 tax rate reconciliation percentages reflect impact significant decline company’s 2010 income taxes resulting primarily full year purchase accounting adjustments including iprd impairment charges restructuring charges vioxx liability reserve income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss “nol” carryforwards several jurisdictions december 31 2010 approximately 263 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant approximately 148 million valuation allowances established foreign nol carryforwards addition company approximately 257 million deferred tax assets relating various us tax credit carryforwards state tax nol carryforwards amounts 209 million expected fully utilized prior expiry income taxes paid 2010 2009 2008 16 billion 958 million 18 billion respectively stock option exercises significant impact taxes paid 2010 2009 2008 reconciliation beginning ending amount unrecognized tax benefits follows company recognize unrecognized tax benefits 49 billion december 31 2010 income tax provision would reflect favorable net impact 42 billion company old merck examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2010 could decrease 20 billion next 12 months company old merck result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover risks exposures interest penalties associated uncertain tax positions amounted expense benefit 144 million 2010 163 million 2009 101 million 2008 liabilities accrued interest penalties 16 billion 14 billion december 31 2010 2009 respectively previously disclosed october 2006 canada revenue agency “cra” issued old merck notice reassessment containing adjustments related certain intercompany pricing matters february 2009 old merck cra negotiated settlement agreement regard matters accordance settlement old merck paid additional tax approximately 300 million us dollars interest approximately 360 million us dollars additional amounts penalties due assessment settlement accounted first quarter 2009 old merck previously established reserves matters significant portion taxes paid expected creditable us tax purposes resolution matters material effect old merck’s financial position liquidity respect associated collateral discussed addition previously disclosed cra proposed additional adjustments 1999 2000 relating intercompany pricing matters adjustments would increase canadian tax due approximately 317 million us dollars plus approximately 340 million us dollars interest december 31 2010 company disagrees positions taken cra believes without merit company continues contest assessments cra appeals process cra expected prepare similar adjustments later years management believes resolution matters material effect company’s financial position liquidity connection appeals process discussed related 1999 2000 old merck pledged cash investments collateral two financial institutions one provided guarantee cra quebec ministry revenue representing portion tax interest assessed guarantee quebec ministry revenue expired first quarter 2009 collateral associated guarantee cra totaled approximately 290 million december 31 2009 included deferred income taxes current assets consolidated balance sheet 2010 guarantee replaced guarantee collateralized accordingly collateral associated original guarantee released reclassified cash investments october 2001 internal revenue service “irs” auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income taxes 279 million interest company’s tax reserves adequate cover payments scheringplough filed refund claims taxes interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount taxes interest decision favor government announced august 2009 company appealing decision district court us court appeals third circuit appeal scheduled heard march 2011 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards additionally company seeking resolution one issue raised examination irs administrative appeals process company’s reserves uncertain tax positions adequate cover adjustments related examination period irs began examination 20072009 tax years company 2010 irs’s examination old merck’s 20022005 federal income tax returns ongoing expected conclude within next 12 months addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2000 2010 december 31 2010 foreign earnings 404 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2013 18 earnings per share company calculates earnings per share pursuant twoclass method earnings allocation formula determines earnings per share common stock participating securities according dividends declared participation rights undistributed earnings method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted december 31 2009 certain management level employees see note 14 participate dividends basis common shares dividends nonforfeitable holder result rsus psus meet definition participating security rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting therefore rsus psus meet definition participating security calculations earnings per share twoclass method follows 1 issuable primarily sharebased compensation plans 2010 2009 2008 174 million 228 million 201 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 19 comprehensive income components comprehensive income loss follows components accumulated comprehensive loss follows included cumulative translation adjustment pretax gains 277 million 2010 78 million postmerger period 2009 eurodenominated notes designated effective economic hedges net investment foreign operation 20 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances includes revenue equity income company’s relationship azlp animal health consumer care alliances segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets united states canada accounting policies segments described note 2 revenues profits segments follows segment profits comprised segment revenues less certain elements materials production costs operating expenses including components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate production costs standard costs research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits sales1 company’s products follows 1 sales legacy scheringplough products reflect results 2010 postmerger period 2009 addition prior merger substantially sales zetia vytorin recognized msp partnership results old merck’s interest msp partnership recorded equity income affiliates result merger msp partnership whollyowned company accordingly sales msp partnership products merger reflected table sales zetia vytorin 2008 reflect old merck’s sales products latin america part msp partnership 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily reflects sales human pharmaceutical products including products within franchises listed separately 4 reflects nonreportable segments including animal health consumer care revenue company’s relationship azlp primarily relating sales nexium well prilosec revenue azlp 13 billion 14 billion 16 billion 2010 2009 2008 respectively 5 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows profits losses primarily comprised miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales adjustments represent elimination effect double counting certain items income expense equity income affiliates includes taxes paid joint venture level portion equity income reported segment profits expenses net include expenses corporate manufacturing cost centers miscellaneous income expense net property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2010 december 31 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also opinion merck maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso merck’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report item 9a responsibility express opinions financial statements merck’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 25 2011 b supplementary data selected quarterly financial data 2010 2009 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2010 include inprocess research development impairment charges amounts 2009 include gain fair value adjustment merck’s previously held interest msp partnership see note 3 2 amounts 2010 include impact vioxx liability reserve see note 12 3 amounts 2009 include gain sale old merck’s interest merial limited see note 10 4 amounts 2010 reflect impact gain astrazeneca’s exercise asset option see note 10 5 amounts 2010 2009 reflect impacts merger including amortization purchase accounting adjustments see note 3 amounts 2010 2009 also include impact restructuring actions see note 4 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2012 2011 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2012 notes consolidated financial statements report dated february 26 2013 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc “merck” “the company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products certain products awaiting regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income “oci” declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 120 million 18 billion respectively december 31 2012 87 million 17 billion respectively december 31 2011 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated company’s multiyear implementation enterprisewide resource planning system amortized 6 10 years december 31 2012 2011 approximately 385 million 390 million respectively remaining unamortized capitalized software costs associated initiative capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed based upon company’s recent annual impairment test completed october 1 2012 company concluded goodwill impaired acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 40 years see note 8 events circumstances warrant review company assess recoverability acquired intangibles future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows inprocess research development inprocess research development “iprd” represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantially cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist onestep test compares fair value iprd intangible asset carrying value fair value less carrying amount impairment loss recognized operating results research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs periods iprd impairment charges 200 million 587 million 24 billion 2012 2011 2010 respectively sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards 2012 company retrospectively adopted amended guidance financial accounting standards board “fasb” presentation comprehensive income financial statements result adopting guidance company presented separate statement comprehensive income adoption new guidance impact company’s financial position results operations cash flows recently issued accounting standards july 2012 fasb issued amended guidance simplifies entity tests indefinitelived intangibles impairment amended guidance allow companies first assess qualitative factors determine whether morelikelythannot indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test updated guidance effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted effect adoption company’s financial position results operations expected material 3 restructuring merger restructuring program 2010 subsequent merck scheringplough corporation “scheringplough” merger “merger” company commenced actions global restructuring program “merger restructuring program” conjunction integration legacy merck legacy scheringplough businesses designed optimize cost structure combined company initial actions expected result workforce reductions approximately 17 primarily reflect elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities july 2011 company initiated actions merger restructuring program company expects reduce workforce measured time merger additional 12 13 across company worldwide majority workforce reductions associated additional actions relate manufacturing including animal health administrative headquarters organizations company continue hire employees strategic growth areas business necessary company recorded total pretax restructuring costs 951 million 2012 18 billion 2011 18 billion 2010 related program since inception merger restructuring program december 31 2012 merck recorded total pretax accumulated costs approximately 61 billion eliminated approximately 22400 positions comprised employee separations well elimination contractors vacant positions restructuring actions merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated subsequent merger company rationalized number manufacturing sites worldwide remaining actions program result additional manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 72 billion 75 billion increase original estimates primarily reflects accelerated depreciation related additional facility closures identified company’s ongoing assessment worldwide capacity requirements manufacturing research administrative facilities subsequent merger including recently announced move company’s worldwide headquarters summit new jersey company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested 2008 global restructuring program october 2008 merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness part 2008 restructuring program company expects eliminate approximately 7200 positions 6800 active employees 400 vacancies across company worldwide pretax restructuring costs 48 million 45 million 176 million recorded 2012 2011 2010 respectively related 2008 restructuring program since inception 2008 restructuring program december 31 2012 merck recorded total pretax accumulated costs 17 billion eliminated approximately 6400 positions comprised employee separations elimination contractors vacant positions 2008 restructuring program substantially completed 2011 exception certain manufacturingrelated actions expected completed 2015 total cumulative pretax costs estimated 20 billion company estimates twothirds cumulative pretax costs relate cash outlays primarily employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested segment reporting restructuring charges unallocated expenses following table summarizes charges related merger restructuring program 2008 restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated 2012 2011 2010 approximately 3975 6880 11410 positions respectively eliminated merger restructuring program approximately 155 450 890 positions respectively eliminated 2008 restructuring program position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather write immediately anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2012 2011 2010 includes 155 million 72 million 152 million respectively asset abandonment shutdown related costs 2010 also includes approximately 65 million contract termination costs additionally activity includes 35 million 53 million 88 million 2012 2011 2010 respectively employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans see note 14 sharebased compensation costs activity also reflects net pretax gains resulting sales facilities related assets 2012 2011 2010 28 million 10 million 49 million respectively adjustments recorded amounts material period following table summarizes charges spending relating merger restructuring program 2008 restructuring program activities 1 cash outlays associated merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated expected substantially completed 2016 cash outlays associated remaining restructuring reserves 2008 restructuring program primarily manufacturingrelated expected completed end 2015 legacy scheringplough program prior merger scheringplough commenced productivity transformation program designed reduce avoid costs increase productivity 2011 2010 company recorded 20 million 22 million respectively accelerated depreciation costs included materials production costs addition restructuring costs reflect 7 million net gain 2010 primarily related sale manufacturing facility program substantially complete end 2011 4 acquisitions divestitures research collaborations license agreements october 2012 merck aicuris entered exclusive licensing agreement provides merck worldwide rights develop commercialize candidates aicuris’ novel portfolio investigational medicines targeting human cytomegalovirus “hcmv” including letermovir mk8228 oral latestage antiviral candidate investigated treatment prevention hcmv infection transplant recipients aicuris received upfront payment 110 million approximately 140 million company recorded research development expense eligible milestone payments 3325 million based successful achievement development regulatory commercialization goals hcmv candidates including letermovir additional backup candidate well phase candidates designed act via alternate mechanism addition aicuris entitled receive royalty payments reflecting advanced stage clinical program potential products result agreement merck responsible development activities costs agreement may terminated either party event material uncured breach insolvency agreement may terminated merck time event compounds licensed aicuris develop adverse safety profile material adverse issue arises related development efficacy dosing regimen compounds andor event certain patents invalid andor unenforceable certain jurisdictions merck may terminate agreement respect certain compounds successful completion first proof concept clinical trial ii must terminate agreement respect certain compounds merck fails minimally invest compounds addition merck may terminate agreement whole time upon six months prior written notice time completion first phase iii clinical trial compound aicuris may terminate agreement event merck challenges aicuris patent covering compounds licensed aicuris upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization compounds case termination cause merck certain royalty obligations april 2012 company entered agreement endocyte inc “endocyte” develop commercialize endocyte’s novel investigational therapeutic candidate vintafolide mk8109 vintafolide currently evaluated phase iii clinical trial folatereceptor positive platinumresistant ovarian cancer proceed phase ii trial nonsmall cell lung cancer agreement merck gained worldwide rights develop commercialize vintafolide endocyte received 120 million upfront payment company recorded research development expense eligible milestone payments 880 million based successful achievement development regulatory commercialization goals vintafolide total six cancer indications addition vintafolide receives regulatory approval merck endocyte share equally profits losses united states endocyte receive royalty sales product rest world endocyte retained right copromote vintafolide merck united states merck exclusive right promote vintafolide rest world endocyte responsible majority funding completion proceed trial merck responsible development activities development costs decision rights vintafolide merck right terminate agreement 90 days notice merck endocyte right terminate agreement due material breach insolvency party endocyte right terminate agreement event merck challenges endocyte patent right relating vintafolide upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vintafolide case termination cause merck certain royalty obligations us profit loss sharing may 2011 merck completed acquisition inspire pharmaceuticals inc “inspire” specialty pharmaceutical company focused developing commercializing ophthalmic products terms merger agreement merck acquired outstanding shares common stock inspire price 500 per share cash total approximately 420 million transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated inspire’s product right intangible assets related deferred tax liabilities deferred tax asset relating inspire’s net operating loss carryforwards goodwill transaction closed may 16 2011 accordingly results operations acquired business included company’s results operations since acquisition date pro forma financial information included inspire’s historical financial results significant compared company’s financial results march 2011 company sold merck biomanufacturing network provider contract manufacturing development services biopharmaceutical industry wholly owned merck fujifilm corporation “fujifilm” terms agreement fujifilm purchased equity interests two merck subsidiaries together owned assets merck biomanufacturing network comprising facilities located research triangle park north carolina billingham united kingdom part agreement fujifilm merck committed purchase certain development manufacturing services fair value fujifilm threeyear period following closing transaction resulted gain 127 million 2011 reflected income expense net 5 collaborative arrangements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations well licensing preclinical clinical compounds technology platforms drive near longterm growth company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies across broad range therapeutic areas arrangements often include upfront payments royalty profit share payments contingent upon occurrence certain future events linked success asset development well expense reimbursements payments third party cozaarhyzaar 1989 merck ei dupont de nemours company “dupont” agreed form longterm research marketing collaboration develop class therapeutic agents high blood pressure heart disease discovered dupont called angiotensin ii receptor antagonists include cozaar hyzaar return merck provided dupont marketing rights united states canada prescription medicines sinemet cr company since regained global marketing rights sinemet cr pursuant 1994 agreement dupont company exclusive licensing agreement market cozaar hyzaar return royalties profit share payments dupont agreement terminated december 31 2012 accordance terms result termination agreement merck longer shares profits marketing costs related sale cozaar hyzaar dupont however separate agreement trademarks cozaar hyzaar permanently transferred merck exchange merck paying trademark royalty dupont based sales cozaar hyzaar period 10 years remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc “centocor” johnson “jj” company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company exclusive marketing rights products outside united states japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi european union “eu” following receipt pricing reimbursement approval within eu april 2011 merck jj reached agreement amend agreement governing distribution rights remicade simponi terms amended distribution agreement merck relinquished marketing rights remicade simponi jj territories including canada central south america middle east africa asia pacific effective july 1 2011 merck retained exclusive marketing rights throughout europe russia turkey “retained territories” addition beginning july 1 2011 profits derived merck’s exclusive distribution two products retained territories equally divided merck jj also received onetime payment merck 500 million april 2011 company recorded charge income expense net 2011 6 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax losses 31 million 2012 pretax gains 6 million 2011 277 million 2010 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted certain fixedrate notes floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate result swap terminations company received 288 million cash included 43 million accrued interest corresponding 245 million basis adjustment debt associated terminated interest rate swap contracts deferred amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 ineffectiveness hedge represents amount excluded hedge effectiveness testing 2 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2012 company estimates 138 million pretax net unrealized losses derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information availableforsale investments december 31 follows availableforsale debt securities included shortterm investments totaled 27 billion december 31 2012 remaining debt securities 64 billion mature within five years december 31 2012 2011 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2012 december 31 2012 cash equivalents 135 billion included 125 billion cash equivalents would considered level 2 fair value hierarchy fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2012 228 billion compared carrying value 206 billion december 31 2011 195 billion compared carrying value 175 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines approximately 50 company’s cash equivalents invested five highly rated money market funds majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic downturn sovereign debt issues certain european countries company continues monitor credit economic conditions within greece italy spain portugal among members eu economic conditions well inherent variability timing cash receipts resulted may continue result increase average length time takes collect accounts receivable outstanding time value money discounts recorded customers collection accounts receivable expected excess one year december 31 2012 company classified approximately 475 million accounts receivable expected collected within one year assets company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations december 31 2012 company’s accounts receivable greece italy spain portugal totaled approximately 11 billion amount hospital public sector receivables approximately 800 million aggregate approximately 18 37 36 9 related greece italy spain portugal respectively december 31 2012 company’s total accounts receivable outstanding one year approximately 200 million approximately 70 related accounts receivable greece italy spain portugal mostly comprised hospital public sector receivables 2012 company collected approximately 60 million accounts receivable government portugal pertained accounts receivable outstanding 2011 prior also 2012 company collected approximately 500 million accounts receivable connection spanish government’s debt stabilizationstimulus plan addition company completed nonrecourse factorings approximately 230 million 2012 hospital public sector accounts receivable italy previously disclosed company received zero coupon bonds greek government settlement 20072009 receivables related certain government sponsored institutions company recorded impairment charges reduce bonds fair value 2011 company sold portion bonds remainder sold 2012 2011 2012 company continued receive payments 2011 2010 greek hospital public sector receivables additionally company continues expand emerging markets payment terms markets tend longer resulting increase accounts receivable balances certain markets company’s customers largest accounts receivable balances cardinal health inc mckesson corporation amerisourcebergen corporation alliance healthcare zuellig pharma ltd asia pacific grupo casa saba mexico represented aggregate approximately onefourth total accounts receivable december 31 2012 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2012 2011 company received cash collateral 305 million 327 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2012 2011 7 inventories december 31 consisted inventories valued lifo method comprised approximately 26 27 inventories december 31 2012 2011 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2012 2011 amounts included 14 billion 13 billion respectively inventories expected sold within one year addition amounts included 196 million 127 million december 31 2012 2011 respectively inventories produced preparation product launches 8 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments addition amounts 2011 reflect reclassification goodwill pharmaceutical segment consumer care segment result segment change intangibles december 31 consisted acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles related marketed products december 31 2012 include zetia 59 billion vytorin 32 billion nasonex 19 billion claritin 16 billion nuvaring 10 billion 2011 company recorded impairment charge 118 million related marketed product iprd represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization 2012 2011 78 million 666 million respectively iprd reclassified products product rights upon receipt marketing approval major market significant projects latestage development include sugammadex sodium injection ezetimibeatorvastatin combination product currently review fda vorapaxar remains phase iii clinical development 2012 company recorded 200 million iprd impairment charges within research development expenses primarily pipeline programs previously deprioritized subsequently deemed alternative use period 2011 company recorded 587 million iprd impairment charges primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges within research development expenses amount 17 billion related writedown vorapaxar intangible asset company determined developments clinical research program vorapaxar including termination clinical trial constituted triggering event required company evaluate vorapaxar intangible asset impairment company continues monitor remaining 350 million asset value vorapaxar impairment remaining 763 million iprd impairment charges recorded 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates aggregate amortization expense primarily recorded within materials production costs 50 billion 2012 51 billion 2011 47 billion 2010 estimated aggregate amortization expense next five years follows 2013 47 billion 2014 44 billion 2015 41 billion 2016 35 billion 2017 32 billion 9 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 primarily reflects results sanofi pasteur msd johnson°merck consumer pharmaceuticals company disposed september 29 2011 astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 915 million 12 billion 13 billion 2012 2011 2010 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates reflected table returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest conjunction 1998 restructuring discussed astra purchased option “asset option” payment 443 million recorded deferred income buy merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” april 2010 astrazeneca exercised asset option merck received 647 million astrazeneca representing net present value march 31 2008 projected future pretax revenue received merck nonppi products recorded reduction company’s investment azlp company recognized 443 million deferred income 2010 component income expense net addition 1998 merck granted astra option buy merck’s common stock interest kbi merck’s interest nexium prilosec well azlp exercisable 2012 june 2012 merck astrazeneca amended 1998 option agreement updated agreement eliminated astrazeneca’s option acquire merck’s interest kbi 2012 provides astrazeneca new option acquire merck’s interest kbi june 2014 result amended agreement merck continues record supply sales equity income partnership 2014 astrazeneca option purchase merck’s interest kbi based part value merck’s interest nexium prilosec astrazeneca’s option exercisable march 1 2014 april 30 2014 astrazeneca chooses exercise option closing date expected june 30 2014 amended agreement astrazeneca make payment merck upon closing 327 million reflecting estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 exercise price also include additional amount equal multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise company believes likely astrazeneca exercise option 2014 summarized financial information azlp follows 1 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 11 billion 2012 11 billion 2011 12 billion 2010 johnson°merck consumer pharmaceuticals company september 2011 merck sold 50 interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net partnership assets also included manufacturing facility sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date 129 million 2010 investments affiliates accounted using equity method including joint ventures totaled 13 billion december 31 2012 886 million december 31 2011 amounts reported assets amounts due joint ventures included deferred income taxes current assets 302 million december 31 2012 276 million december 31 2011 summarized information affiliates excluding azlp disclosed separately follows 1 includes information jjmcp joint venture divestiture september 29 2011 10 loans payable longterm debt commitments loans payable december 31 2012 included 18 billion notes due 2013 17 billion commercial paper 454 million shortterm foreign borrowings 328 million longdated notes subject repayment option holder loans payable december 31 2011 included 11 billion commercial paper 403 million shortterm foreign borrowings 469 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 015 011 december 31 2012 2011 respectively longterm debt december 31 consisted presented table included 165 million 28 million december 31 2012 2011 respectively borrowings variable rates averaging 01 2012 02 2011 also included foreign borrowings 70 million 62 million december 31 2012 2011 respectively varying rates 85 exception 63 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices september 2012 company closed underwritten public offering 25 billion senior unsecured notes consisting 10 billion aggregate principal amount 11 notes due 2018 10 billion aggregate principal amount 24 notes due 2022 500 million aggregate principal amount 36 notes due 2042 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices proceeds notes used general corporate purposes including contributions company’s pension plans repayment outstanding commercial paper certain debt maturities connection merger effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent merger certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2012 company compliance covenants aggregate maturities longterm debt next five years follows 2013 18 billion 2014 21 billion 2015 21 billion 2016 884 million 2017 11 billion may 2012 company terminated existing credit facilities entered new 40 billion fiveyear credit facility maturing may 2017 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 396 million 2012 411 million 2011 431 million 2010 minimum aggregate rental commitments noncancellable leases follows 2013 203 million 2014 172 million 2015 146 million 2016 97 million 2017 72 million thereafter 145 million company significant capital leases 11 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions environmental matters except vioxx litigation defined separate assessment provided note opinion company unlikely resolution matters material company’s financial position results operations cash flows given preliminary nature litigation discussed including vioxx litigation complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 vioxx litigation product liability lawsuits previously disclosed merck defendant approximately 90 federal state lawsuits “vioxx product liability lawsuits” alleging personal injury economic loss result purchase use vioxx remaining cases coordinated multidistrict litigation us district court eastern district louisiana “vioxx mdl” judge eldon e fallon pending various us courts putative class actions purportedly brought behalf individual purchasers users vioxx seeking reimbursement alleged economic loss vioxx mdl proceeding approximately 30 class actions remain june 2010 merck moved strike class claims judgment pleadings regarding master complaint includes abovereferenced cases briefing motion completed september 2010 vioxx mdl court heard oral argument merck’s motion october 2010 took advisement 2008 missouri state court certified class missouri plaintiffs seeking reimbursement outofpocket costs relating vioxx october 15 2012 parties executed settlement agreement resolve litigation company established reserve 39 million third quarter 2012 connection settlement agreement minimum amount company required pay agreement court preliminarily approved agreement class notice claims program underway indiana plaintiffs filed motion certify class indiana vioxx purchasers case pending circuit court marion county indiana case dormant several years april 2010 kentucky state court denied merck’s motion summary judgment certified class kentucky plaintiffs seeking reimbursement outofpocket costs relating vioxx trial court subsequently entered amended class certification order january 2011 merck appealed order kentucky court appeals february 10 2012 kentucky court appeals reversed trial court’s amended class certification order denied certification plaintiff petitioned kentucky supreme court review court appeals’ order november 16 2012 kentucky supreme court granted review briefing kentucky supreme court underway merck also named defendant lawsuits brought state attorneys general five states actions except kentucky action vioxx mdl proceeding actions allege merck misrepresented safety vioxx suits seek recovery expenditures vioxx governmentfunded health care programs medicaid andor penalties alleged consumer fraud act violations kentucky action currently scheduled proceed trial kentucky state court october 2013 january 10 2013 merck finalized settlement action filed pennsylvania attorney general merck agreed pay pennsylvania 825 million exchange dismissal lawsuit shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits federal securities laws state laws filed merck various current former officers directors “vioxx securities lawsuits” vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler consolidated purposes august 2011 judge chesler granted part denied part merck’s motion dismiss fifth amended class action complaint consolidated securities action among things claims based statements made voluntary withdrawal vioxx september 30 2004 dismissed october 2011 defendants answered fifth amended class action complaint april 10 2012 plaintiffs filed motion class certification january 30 2013 judge chesler granted motion discovery currently proceeding accordance court’s scheduling order previously disclosed several individual securities lawsuits filed foreign institutional investors also consolidated vioxx securities lawsuits october 2011 plaintiffs filed amended complaints pending individual securities lawsuits also october 2011 new individual securities lawsuit “kbc lawsuit” filed district new jersey several foreign institutional investors case also consolidated vioxx securities lawsuits january 20 2012 defendants filed motions dismiss one individual lawsuits “abp lawsuit” briefing motions dismiss completed march 26 2012 august 1 2012 judge chesler granted part denied part motions dismiss abp lawsuit among things certain alleged misstatements omissions dismissed inactionable state law claims dismissed full september 15 2012 defendants answered complaints individual actions kbc lawsuit day defendants moved dismiss complaint kbc lawsuit statute limitations grounds december 20 2012 judge chesler denied motion dismiss kbc lawsuit january 4 2013 defendants answered complaint kbc lawsuit discovery currently proceeding individual securities lawsuits together discovery class action insurance company directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 170 million currently used partially fund company’s legal fees result previously disclosed insurance arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx australia brazil canada europe israel collectively “vioxx international lawsuits” previously disclosed company entered agreement resolve claims related vioxx canada pursuant company pay minimum approximately 21 million aggregate maximum approximately 36 million agreement pending approval courts canada’s provinces reserves company believes meritorious defenses remaining vioxx product liability lawsuits vioxx securities lawsuits vioxx international lawsuits collectively “vioxx lawsuits” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect remaining vioxx lawsuits company established reserve respect canadian settlement respect certain vioxx product liability lawsuits including missouri matter discussed company also immaterial remaining reserve relating previously disclosed vioxx investigation nonparticipating states litigation continuing company established liability reserves respect vioxx litigation unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2012 approximately 4560 cases include approximately 5140 plaintiff groups filed pending merck either federal state court including one case seeks class action certification well damages andor medical monitoring approximately 1230 actions plaintiffs allege among things suffered osteonecrosis jaw “onj” generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 3330 actions generally allege sustained femur fractures andor bone injuries “femur fractures” association use fosamax cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation “jpml” ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax onj mdl” coordinated pretrial proceedings fosamax onj mdl transferred judge john keenan us district court southern district new york result jpml order approximately 960 cases judge keenan first fosamax onj mdl trial boles v merck fosamax onj mdl court declared mistrial eight person jury could reach unanimous verdict boles case retried june 2010 resulted verdict favor plaintiff amount 8 million merck filed posttrial motions seeking judgment matter law alternative new trial october 2010 court denied merck’s posttrial motions sua sponte ordered remittitur reducing verdict 15 million plaintiff rejected remittitur ordered court requested new trial damages plaintiff merck subsequently entered confidential stipulation amount plaintiff’s damages enabled merck appeal underlying judgment merck filed appeal boles case october 18 2012 prior 2013 three cases tried verdict fosamax onj mdl defense verdicts favor merck returned three cases plaintiffs filed appeal two cases graves v merck secrest v merck january 30 2013 us court appeals second circuit affirmed judgment merck’s favor secrest february 2011 judge keenan ordered two bellwether trials conducted fosamax onj mdl spano v merck jellema v merck selected court tried 2012 case dismissed plaintiffs march 28 2012 court selected scheinberg v merck next case tried trial scheinberg case began january 14 2013 february 5 2013 jury returned mixed verdict finding favor merck plaintiff’s design defect claim finding favor plaintiff failure warn claim awarding 285 thousand compensatory damages outside fosamax onj mdl florida carballo v merck set trial october 15 2012 plaintiff dismissed case refiled fosamax onj mdl anderson v merck set trial january 14 2013 plaintiff dismissed case prior trial addition july 2008 application made atlantic county superior court new jersey requesting fosamax cases pending new jersey considered mass tort designation centralized management one judge new jersey october 2008 new jersey supreme court ordered pending future actions filed new jersey arising use fosamax seeking damages existing dental jawrelated injuries including onj solely seeking medical monitoring designated mass tort centralized management purposes judge carol e higbee atlantic county superior court december 31 2012 approximately 260 onj cases pending merck atlantic county new jersey july 2009 judge higbee entered case management order various amendments thereto setting forth schedule contemplates completing fact expert discovery initial group cases reviewed trial february 2011 jury rosenberg v merck first trial new jersey coordinated proceeding returned verdict merck’s favor april 2012 jury sessner v merck second case tried new jersey also returned verdict merck’s favor plaintiffs filed appeal cases california parties reviewing claims two plaintiffs carrie smith et al v merck case claims pedrojetti v merck cases one plaintiffs may tried 2013 discovery ongoing fosamax onj mdl litigation new jersey coordinated proceeding remaining jurisdictions fosamax onj cases pending company intends defend lawsuits cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey “fosamax femur fracture mdl” result jpml order approximately 820 cases pending fosamax femur fracture mdl december 31 2012 case management order entered requires parties review 40 cases later reduced 33 cases judge joel pisano selected four cases group tried initial bellwether cases fosamax femur fracture mdl set april 8 2013 trial date first bellwether case glynn v merck zessin v merck case set tried september 2013 young v merck case set tried january 2014 johnson v merck case set tried may 2014 december 31 2012 approximately 2075 cases alleging femur fractures filed new jersey state court pending judge higbee atlantic county superior court parties selected initial group 30 cases reviewed fact discovery judge higbee set march 11 2013 date first trial new jersey state femur fracture cases su v merck december 31 2012 approximately 420 cases alleging femur fractures filed california state court petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge steven perk presiding coordinated proceedings scheduling order yet entered additionally eight femur fracture cases pending state courts trial date set august 12 2013 barnes v merck case pending alabama state court discovery ongoing fosamax femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits nuvaring previously disclosed beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” company arising organon’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough among things failed adequately design manufacture nuvaring failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation “nuvaring mdl” venued missouri coordinated proceeding new jersey state court december 31 2012 approximately 1315 nuvaring cases approximately 1105 pending nuvaring mdl us district court eastern district missouri judge rodney sippel approximately 200 pending coordinated discovery proceedings bergen county superior court new jersey judge brian r martinotti five additional cases pending various state courts pursuant orders judge sippel nuvaring mdl parties originally selected pool 20 cases prepare trial pool since narrowed eight cases first trials nuvaring mdl selected first nuvaring mdl trial expected take place summer 2013 pursuant judge martinotti’s order new jersey proceeding parties selected nine trial pool cases prepared trial first trial expected commence may 2013 parties completed fact discovery originally selected trial pool cases jurisdiction expert discovery completed first trial pool cases certain replacement trial pool cases remain fact discovery company filed motions related admissibility expert testimony motions summary judgment company expects substantive hearings motions summary judgment take place new jersey cases early 2013 followed substantive hearings admissibility expert testimony resolution summary judgment motions company expects substantive hearings motions summary judgment nuvaring mdl cases take place spring 2013 followed hearings admissibility expert testimony company certain insurance coverage available currently used partially fund company’s legal fees company intends defend lawsuits propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2012 approximately 385 lawsuits involving total approximately 550 plaintiffs instances spouses joined suits allege experienced persistent sexual side effects following cessation treatment propecia andor proscar filed merck lawsuits early stages filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal mdl judge john gleeson eastern district new york matters pending state court new jersey consolidated judge jessica mayer middlesex county company intends defend lawsuits vytorinzetia litigation previously disclosed april 2008 merck shareholder filed putative class action lawsuit federal court consolidated district new jersey another federal securities lawsuit caption merck co inc vytorin securities litigation amended consolidated complaint filed october 2008 named defendants merck merckscheringplough pharmaceuticals llc certain company’s current former officers directors complaint alleges merck delayed releasing unfavorable results enhance clinical trial regarding efficacy vytorin merck made false misleading statements expected earnings knowing results enhance study released sales vytorin would decline merck’s earnings would suffer december 2008 merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court denied defendants’ motion dismiss march 1 2012 defendants filed motion summary judgment september 25 2012 court granted lead plaintiffs’ amended motion class certification denied defendants’ motion summary judgment february 13 2013 merck announced reached agreement principle plaintiffs settle matter 215 million settlement subject court approval proposed settlement reflected company’s 2012 financial results discussed similar consolidated putative class action securities lawsuit pending district new jersey filed scheringplough shareholder scheringplough former chairman president chief executive officer fred hassan caption scheringplough corporationenhance securities litigation amended consolidated complaint filed september 2008 names defendants scheringplough merckscheringplough pharmaceuticals llc certain company’s current former officers directors underwriters participated august 2007 public offering scheringplough’s common preferred stock december 2008 scheringplough defendants filed motions dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court denied defendants’ motions dismiss march 1 2012 scheringplough defendants filed motion partial summary judgment underwriter defendants filed motion summary judgment september 25 2012 court granted lead plaintiffs’ amended motion class certification denied defendants’ motions summary judgment february 13 2013 merck announced reached agreement principle plaintiffs settle matter 473 million settlement subject court approval approved settlement exhaust remaining directors officers insurance coverage applicable vytorin lawsuits brought legacy scheringplough shareholders proposed settlement reflected company’s 2012 financial results together settlement described preceding paragraph resulted aggregate charge 493 million taking account anticipated insurance recoveries 195 million governmental proceedings previously disclosed merck received civil investigative demand “cid” issued department justice “doj” addressed inspire company acquired merck may 2011 cid advises relates false claims act investigation concerning allegations inspire caused submission false claims federal health benefits programs drug azasite marketing treatment indications approved fda company cooperating doj investigation previously disclosed company received subpoena us attorney’s office eastern district california 2010 requesting information civil federal health care investigation relating company’s marketing selling activities respect integrilin avelox january 2003 june 2010 december 2012 us district court eastern district california unsealed complaint former employee company filed 2009 federal false claims act false claims acts various states complaint alleges company caused false claims made federal state health care programs promoting integrilin unapproved indications providing unlawful payments benefits physicians others increase utilization integrilin avelox federal government states whose statutes suit filed right investigating allegations intervene suit assume responsibility direction notified court decline intervene company intends defend suit company also previously disclosed received subpoena requesting information related company’s marketing selling activities respect temodar pegintron intron january 1 2004 present federal health care investigation criminal statutes company informed us attorney’s office district massachusetts subpoena enforced action company’s part required previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperating agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries regard company received may continue receive additional requests information either doj sec previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition putative class action lawsuit filed company eastern district pennsylvania behalf direct purchasers mmr ii vaccine predicated allegations false claims act complaint charges company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws company intends defend lawsuits commercial litigation awp litigation previously disclosed company andor certain subsidiaries remain defendants cases brought various states alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used public private payors calculating provider reimbursement levels outcome lawsuits could include substantial damages imposition substantial fines penalties injunctive administrative remedies since start 2012 company settled certain awp cases brought states alabama alaska kansas kentucky louisiana oklahoma mississippi company andor certain subsidiaries continue defendants cases brought six states company also reinstated defendant putative class action new jersey superior court alleges behalf thirdparty payers individuals manufacturers inflated drug prices manipulation awps means case originally dismissed company without prejudice 2007 company intends defend lawsuit kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications “andas” following commencement administrative proceeding us federal trade commission “ftc” 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case march 2010 district court granted summary judgment defendants remaining lawsuits dismissed matter entirety however july 2012 3rd circuit court appeals reversed district court’s judgment remanded case proceedings time 3rd circuit upheld december 2008 decision district court certify certain direct purchaser plaintiffs’ claims class action august 2012 company filed petition certiorari us supreme court seeking review third circuit’s reversal summary judgment supreme court taken action petition december 2012 granted certiorari unrelated case 11th circuit court appeals reached decision appears conflict 3rd circuit’s holding company’s case company expects issue sought raise supreme court resolved supreme court’s pending decision 11th circuit case nexium antitrust litigation previously disclosed september 2012 company certain subsidiaries among defendants named putative class action lawsuit brought behalf direct purchasers nexium federal court new jersey lawsuit alleges violations federal antitrust law arising settlements reached among defendants resolve certain patent litigation relating entry generic esomeprazole us market specifically plaintiffs contend settlements effect impermissibly delaying entry generic esomeprazole united states extending monopoly power nexium leading higher average market prices january 8 2013 company subsidiaries dismissed without prejudice lawsuit coupon litigation previously disclosed since march 2012 number private health plans filed separate putative class action lawsuits company alleging merck’s coupon programs injured health insurers reducing beneficiary copayment amounts thereby allegedly causing beneficiaries purchase higherpriced drugs otherwise would purchased increasing insurers’ reimbursement costs actions pending us district court district new jersey seek damages injunctive relief barring company issuing coupons would reduce beneficiary copays behalf putative nationwide classes health insurers similar actions relating manufacturer coupon programs filed several pharmaceutical manufacturers variety federal courts company intends defend lawsuits patent litigation time generic manufacturers pharmaceutical products file andas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company marketed via agreements companies currently involved patent infringement litigation united states include azasite emend injection integrilin nasonex nexium vytorin zetia similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired mergers acquisitions potentially significant intangible asset impairment charges azasite may 2011 patent infringement lawsuit filed united states sandoz inc “sandoz” respect sandoz’s application fda seeking prepatent expiry approval market generic version azasite lawsuit automatically stays fda approval sandoz’s anda october 2013 adverse court decision whichever may occur earlier emend injection may 2012 patent infringement lawsuit filed united states sandoz respect sandoz’s application fda seeking prepatent expiry approval market generic version emend injection lawsuit automatically stays fda approval sandoz’s anda july 2015 adverse court decision whichever may occur earlier june 2012 patent infringement lawsuit filed united states accord healthcare inc us accord healthcare inc intas pharmaceuticals ltd collectively “intas” respect intas’ application fda seeking prepatent expiry approval market generic version emend injection lawsuit automatically stays fda approval intas’ anda july 2015 adverse court decision whichever may occur earlier integrilin february 2009 patent infringement lawsuit filed jointly millennium pharmaceuticals inc united states teva parenteral medicines inc “tpm” respect tpm’s application fda seeking approval sell generic version integrilin prior expiry last expire listed patent october 2011 parties entered settlement agreement allowing tpm sell generic version integrilin beginning june 2 2015 november 2012 patent infringement lawsuit filed app pharmaceuticals inc fresenius kabi usa inc collectively “app” respect app’s application fda seeking approval sell generic version integrilin prior expiry last expire listed patent lawsuit automatically stays fda approval app’s anda april 2015 adverse court decision whichever may occur earlier nasonex december 2009 patent infringement lawsuit filed united states apotex corp “apotex” respect apotex’s application fda seeking prepatent expiry approval market generic version nasonex trial matter held april 2012 decision issued june 15 2012 holding merck patent covering mometasone furoate monohydrate valid infringed apotex’s proposed product finding noninfringement appeal nexium patent infringement lawsuits brought jointly astrazeneca united states following generic companies ranbaxy laboratories ltd ivax pharmaceuticals inc later acquired teva pharmaceuticals inc “teva” dr reddy’s laboratories sandoz lupin ltd hetero drugs limited unit iii torrent pharmaceuticals ltd response generic company’s application seeking prepatent expiry approval sell generic version nexium settlements reached lawsuits terms provide respective generic company may bring generic version esomeprazole product market may 27 2014 addition patent infringement lawsuit also filed jointly astrazeneca february 2010 united states sun pharma global fze “sun pharma” respect application fda seeking prepatent expiry approval sell generic version nexium iv lawsuit settled agreement provides sun pharma entitled bring generic esomeprazole iv product market united states january 1 2014 finally additional patent infringement lawsuits filed jointly astrazeneca united states hamni usa inc “hamni” mylan laboratories limited “mylan labs” related applications fda seeking prepatent expiry approval sell generic versions nexium hamni mylan labs applications fda remain stayed may 2013 august 2014 respectively earlier adverse court decisions whichever may occur earlier vytorin december 2009 patent infringement lawsuit filed united states mylan pharmaceuticals inc “mylan” respect mylan’s application fda seeking prepatent expiry approval sell generic version vytorin trial mylan jointly respect zetia vytorin conducted december 2011 april 2012 court issued decision finding patent valid enforceable accordingly mylan’s anda approvable april 25 2017 february 7 2013 court appeals federal circuit affirmed lower court decision february 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version vytorin july 2011 patent infringement lawsuit dismissed teva agreed sell generic versions zetia vytorin company’s exclusivity rights expire april 25 2017 except certain circumstances august 2010 patent infringement lawsuit filed united states impax laboratories inc “impax” respect impax’s application fda seeking prepatent expiry approval sell generic version vytorin agreement reached impax stay lawsuit pending outcome lawsuit mylan october 2011 patent infringement lawsuit filed united states actavis inc “actavis” respect actavis’ application fda seeking prepatent expiry approval sell generic version vytorin agreement reached actavis stay lawsuit pending outcome lawsuit mylan zetia march 2007 patent infringement lawsuit filed united states glenmark pharmaceuticals inc usa parent corporation collectively “glenmark” respect glenmark’s application fda seeking prepatent expiry approval sell generic version zetia may 2010 glenmark agreed settlement virtue glenmark permitted launch generic product united states december 12 2016 subject receiving final fda approval june 2010 patent infringement lawsuit filed united states mylan respect mylan’s application fda seeking prepatent expiry approval sell generic version zetia trial mylan jointly respect zetia vytorin conducted december 2011 april 2012 court issued decision finding patent valid enforceable accordingly mylan’s anda approvable april 25 2017 february 7 2013 court appeals federal circuit affirmed lower court decision september 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version zetia july 2011 patent infringement lawsuit dismissed without rights granted teva september 2012 patent infringement suit filed united states sandoz respect sandoz’s application fda seeking prepatent expiry approval market generic version zetia lawsuit automatically stays fda approval sandoz’s anda february 2015 adverse court decision whichever may occur earlier environmental litigation previously disclosed approximately 2200 plaintiffs filed amended complaint merck 12 defendants us district court eastern district california asserting claims clean water act resource conservation recovery act well negligence nuisance suit seeks damages personal injury diminution property value medical monitoring alleged real personal property damage associated groundwater surface water soil contamination found site former merck subsidiary merced california certain defendants suit settled plaintiffs regarding aspects plaintiffs’ claims lawsuit proceeding phased manner jury trial commenced february 2011 jury asked make certain factual findings regarding whether contamination moved offsite areas plaintiffs could exposed contamination amounts defendants “phase 1” trial included merck three original 12 defendants march 2011 phase 1 jury returned mixed verdict finding favor merck defendants plaintiffs’ claims specifically jury found contamination site enter affect plaintiffs’ municipal water supply wells private domestic wells jury found however plaintiffs could exposed contamination via air emissions prior 1994 well via surface water form storm drainage channeled adjacent irrigation canal including flood april 2006 response posttrial motions merck defendants september 7 2011 court entered order setting aside part phase 1 jury’s findings favor plaintiffs specifically court held plaintiffs could exposed contamination surface flood water april 2006 flood fact time later 1991 merck’s motion reconsideration remainder jury’s phase verdict adverse merck denied following retirement judge handling case september 21 2011 case assigned judge david carter us district court central district california judge carter selected 10 plaintiffs whose claims would reviewed depending outcome merck’s summary judgment motions possibly tried early 2013 plaintiffs subsequently withdrew claim one 10 plaintiffs leaving nine whose claims may proceed trial court dismissed claims 1083 plaintiffs action whose claims precluded aspects phase jury findings court’s subsequent orders subject court’s anticipated rulings defendants’ potentially dispositive summary judgment pretrial motions trial nine selected trial plaintiffs’ claims anticipated begin near end march 2013 litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2012 december 31 2011 approximately 260 million 240 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 145 million 171 million december 31 2012 2011 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 112 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 12 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock authorized shares preferred stock series 11500000 shares designated 6 mandatory convertible preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 2 2010 remaining outstanding 6 mandatory convertible preferred stock converted connection merger automatically converted terms right receive cash shares merck common stock result conversion approximately 72 million paid holders approximately 4 million merck common shares issued noncontrolling interests connection 1998 restructuring ami merck assumed 24 billion par value preferred stock dividend rate 5 per annum carried kbi included noncontrolling interests astrazeneca exercises option acquire merck’s interest azlp see note 9 preferred stock obligation retired 13 sharebased compensation plans company sharebased compensation plans company grants restricted stock units “rsus” performance share units “psus” certain management level employees addition employees nonemployee directors employees certain company’s equity method investees may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2012 180 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2012 2011 2010 335 million 369 million 509 million respectively related income tax benefits 105 million 118 million 173 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield risk free interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2012 2011 2010 3951 3647 3430 per option respectively weighted average fair value options granted 2012 2011 2010 547 539 799 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2012 370 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 18 years segment reporting sharebased compensation costs unallocated expenses 14 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries december 2011 compensation benefits committee company’s board directors approved management’s proposal change merck’s primary us defined benefit pension plans’ benefit formulas “cash balance” formulas beginning service january 1 2013 active participants plans december 31 2012 accruing pension benefits prospectively using new cash balance formulas based age service pay interest however transition period january 1 2013 december 31 2019 participants earn greater benefit calculated employee’s legacy final average pay formula new cash balance formula years service december 31 2019 participants earn future benefits cash balance formula addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans december 2011 company approved changes us retiree healthcare plans including changes certain employees contribution subsidy level eligibility criteria subsidized retiree medical coverage elimination certain retiree dental coverage company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components decline net periodic benefit cost pension postretirement benefit plans 2012 compared 2011 2010 largely attributable benefit plan design changes discussed changes merck’s primary us defined benefit pension plans us retiree healthcare plans reduced benefit obligations december 31 2011 752 million 150 million respectively corresponding offset aoci amortized reduction net periodic benefit cost employees’ future service period approximately 11 years net periodic benefit cost attributable us pension plans included table 268 million 2012 406 million 2011 289 million 2010 connection restructuring actions see note 3 termination charges recorded 2012 2011 2010 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2012 2011 2010 pension postretirement benefit plans addition settlements recorded 2012 2011 2010 certain domestic international pension plans obligations funded status summarized information changes plan assets benefit obligation funded status amounts recorded december 31 follows fair value us pension plan assets included preceding table 87 billion 68 billion december 31 2012 2011 respectively projected benefit obligation us pension plans 100 billion 87 billion respectively approximately 44 40 company’s pension projected benefit obligation december 31 2012 2011 respectively relates international defined benefit plans individual plan significant relative total projected benefit obligation december 31 2012 2011 accumulated benefit obligation 159 billion 129 billion respectively pension plans 90 billion 78 billion respectively related us pension plans pension plans projected benefit obligations excess plan assets december 31 2012 2011 fair value plan assets 128 billion 93 billion respectively benefit obligations 155 billion 119 billion respectively plans accumulated benefit obligations excess plan assets december 31 2012 2011 fair value plan assets 61 billion 36 billion respectively accumulated benefit obligations 77 billion 54 billion respectively plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2012 2011 692 million 637 million respectively approximately 5 company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions pension plans postretirement benefit plans 2013 expected approximately 340 million 40 million respectively expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2013 410 million 72 million respectively pension plans 25 million 73 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining pension plan us pension postretirement benefit plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined country basis developing expected rate return within country longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return country’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2013 company’s expected rate return range 600 875 compared range 575 875 2012 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2012 2011 2010 146 million 166 million 155 million respectively 15 income expense net increase interest income 2012 compared 2011 reflects accretion time value money discounts related certain accounts receivables including accelerated accretion related significant collections accounts receivable spain see note 6 increase interest income 2011 compared 2010 primarily reflects higher average investment balances exchange losses 2010 reflect 200 million losses due two venezuelan currency devaluations discussed net presented table 2012 reflects 493 million net charge related settlement enhance litigation see note 11 net 2011 reflects 500 million charge related resolution arbitration proceeding involving company’s rights market remicade simponi see note 5 136 million gain disposition company’s interest jjmcp joint venture see note 9 127 million gain sale certain manufacturing facilities related assets see note 4 net 2010 reflects 950 million charge settle certain vioxx litigation charges related settlement certain pending awp litigation partially offset 443 million income recognized upon astrazeneca’s asset option exercise see note 9 102 million income recognized settlement certain disputed royalties january 2010 company required remeasure local currency operations venezuela us dollars venezuelan economy determined hyperinflationary addition noted exchange losses 2010 reflect losses relating venezuelan currency devaluations effective january 11 2010 venezuelan government devalued currency twotiered official exchange rate “essentials rate” “nonessentials rate” december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 result announcement company remeasured december 31 2010 monetary assets liabilities new official rate interest paid 898 million 2012 600 million 2011 763 million 2010 excludes commitment fees interest paid 2011 net 288 million received company termination certain interest rate swap contracts year see note 6 16 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits miscellaneous items foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly singapore ireland switzerland puerto rico operates tax incentive grant earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 35 us statutory rate foreign earnings tax rate differentials include impact iprd impairment charges amortization purchase accounting adjustments restructuring costs arbitration settlement charge items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 35 us statutory rate income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss “nol” carryforwards several jurisdictions december 31 2012 approximately 194 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant approximately 107 million valuation allowances established foreign nol carryforwards addition company approximately 231 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2012 2011 2010 25 billion 27 billion 16 billion respectively tax benefits relating stock option exercises reflected paidin capital 94 million 2012 amounts material 2011 2010 reconciliation beginning ending amount unrecognized tax benefits follows 1 amount 2012 reflects settlement cra discussed amount 2011 reflects conclusion irs examination merck’s 20022005 federal income tax returns resolution interest rate swap dispute irs discussed company recognize unrecognized tax benefits 44 billion december 31 2012 income tax provision would reflect favorable net impact 38 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2012 could decrease 900 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted benefit expense 88 million 2012 95 million 2011 144 million 2010 liabilities accrued interest penalties 12 billion 13 billion december 31 2012 2011 respectively previously disclosed canada revenue agency “cra” proposed adjustments 1999 2000 relating intercompany pricing matters july 2011 cra issued assessments miscellaneous audit issues tax years 20012004 2012 merck cra reached settlement years calls merck pay additional canadian tax approximately 65 million company’s unrecognized tax benefits related matters exceeded settlement amount therefore company recorded net 112 million tax provision benefit 2012 portion taxes paid expected creditable us tax purposes company previously established reserves matters resolution matters material effect company’s results operations financial position liquidity april 2011 internal revenue service “irs” concluded examination merck’s 20022005 federal income tax returns result company required make net payments approximately 465 million company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 700 million tax provision benefit 2011 net benefit reflects decrease unrecognized tax benefits years examination partially offset increases unrecognized tax benefits years subsequent examination period result settlement company disagrees irs treatment one issue raised examination appealing matter irs administrative process 2010 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards additionally company seeking resolution one issue raised examination irs administrative appeals process company’s reserves uncertain tax positions adequate cover adjustments related examination period irs began examination 20072009 tax years 2010 addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2001 2012 december 31 2012 foreign earnings 534 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2013 17 earnings per share company calculates earnings per share pursuant twoclass method earnings allocation formula determines earnings per share common stock participating securities according dividends declared participation rights undistributed earnings method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted december 31 2009 certain management level employees see note 13 participate dividends basis common shares dividends nonforfeitable holder result rsus psus meet definition participating security rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting therefore rsus psus meet definition participating security calculations earnings per share twoclass method follows 1 issuable primarily sharebased compensation plans 2012 2011 2010 104 million 169 million 174 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 18 comprehensive loss income components comprehensive loss income follows also included cumulative translation adjustment pretax gains losses approximately 392 million 12 billion 2011 2010 respectively relating translation impacts intangible assets recorded conjunction merger components accumulated comprehensive loss follows 19 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances includes revenue equity income company’s relationship azlp animal health consumer care alliances segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels accounting policies segments described note 2 sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health consumer care alliances segment includes revenue company’s relationship azlp 4 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits losses primarily comprised miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales unallocated net includes expenses corporate manufacturing cost centers product intangible asset impairment charges gain losses sales businesses miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2012 december 31 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america also opinion merck maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso merck’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report item 9a responsibility express opinions financial statements merck’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 26 2013 b supplementary data selected quarterly financial data 2012 2011 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2012 include net charge related litigation settlement see note 11 2 amounts 2011 include net benefit relating settlement federal income tax audit see note 16 3 amounts 2011 include charge relating resolution arbitration proceeding jj see note 5 4 amounts 2012 2011 reflect acquisitionrelated costs see note 8 impact restructuring actions see note 3 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2013 2012 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2013 notes consolidated financial statements report dated february 27 2014 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc “merck” “the company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products certain products awaiting regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income “oci” declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 87 million 16 billion respectively december 31 2013 120 million 18 billion respectively december 31 2012 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings depreciation expense 22 billion 2013 20 billion 2012 24 billion 2011 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 25 billion 28 billion 31 billion 2013 2012 2011 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 529 million 428 million december 31 2013 2012 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed based upon company’s recent annual impairment test completed october 1 2013 company concluded goodwill impaired acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 40 years see note 7 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows inprocess research development inprocess research development “iprd” represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life amounts due collaborative partners related development activities generally reflected reduction research development expenses specific milestone achieved nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges periods sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards first quarter 2013 company adopted guidance issued financial accounting standards board “fasb” simplifies entity tests indefinitelived intangibles impairment amended guidance allows companies first assess qualitative factors determine whether morelikelythannot indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test adoption guidance impact company’s financial position results operations 3 restructuring 2013 restructuring program october 2013 company announced new global restructuring program “2013 restructuring program” part global initiative sharpen commercial research development focus part new program company expects reduce total workforce approximately 8500 positions workforce reductions primarily come elimination positions sales administrative headquarters organizations well research development company also reduce global real estate footprint continue improve efficiency manufacturing supply network company continue hire employees strategic growth areas business necessary company recorded total pretax costs 12 billion 2013 related restructuring program actions 2013 restructuring program expected substantially completed end 2015 cumulative pretax costs estimated approximately 25 billion 30 billion company estimates approximately twothirds cumulative pretax costs result cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested merger restructuring program 2010 subsequent merck scheringplough corporation “scheringplough” merger “merger” company commenced actions global restructuring program “merger restructuring program” designed streamline cost structure combined company actions program initiated 2011 actions program primarily reflect elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities october 1 2013 company sold active pharmaceutical ingredient “api” manufacturing business including related manufacturing facility netherlands aspen holdings “aspen” part planned manufacturing facility rationalizations merger restructuring program conjunction sale parties entered strategic longterm supply agreement whereby aspen supply api company approximately 960 employees support api business transferred merck aspen also connection sale aspen acquired certain branded products merck transferred aspen effective december 31 2013 consideration transaction included cash 705 million notes receivable present value 198 million time disposition notes receivable consist 261 million note present value 138 million due 2023 675 million note present value 60 million payable five years beginning december 31 2014 cash portion consideration company received 172 million fourth quarter 2013 remaining 533 million received company january 2014 therefore december 31 2013 amount recorded receivable within deferred income taxes current assets consolidated balance sheet conjunction transaction company transferred inventory 420 million property plant equipment 220 million cash 125 million aspen reduced goodwill 45 million intangible assets 45 million assets 23 million recorded 90 million transactionrelated liabilities transaction resulted loss 65 million recorded within restructuring costs 2013 company recorded total pretax costs 11 billion 2013 951 million 2012 18 billion 2011 related restructuring program since inception merger restructuring program december 31 2013 merck recorded total pretax accumulated costs approximately 72 billion eliminated approximately 26880 positions comprised employee separations well elimination contractors vacant positions approximately 6300 position eliminations remain pending program december 31 2013 include remaining actions 2008 restructuring program reported part merger restructuring program discussed restructuring actions merger restructuring program substantially completed end 2013 exception certain actions principally manufacturingrelated subsequent merger company rationalized number manufacturing sites worldwide remaining actions program result additional manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 74 billion 77 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested 2008 restructuring program october 2008 merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness pretax costs 54 million 48 million 45 million recorded 2013 2012 2011 respectively related 2008 restructuring program since inception 2008 restructuring program june 30 2013 merck recorded total pretax accumulated costs 17 billion eliminated approximately 6460 positions comprised employee separations elimination contractors vacant positions 2008 restructuring program substantially completed 2011 exception certain manufacturingrelated actions expected completed 2015 july 1 2013 remaining accrued liability future separations 2008 restructuring program transferred merger restructuring program remaining activities 2008 restructuring program accounted part merger restructuring program segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated 2013 approximately 1540 positions eliminated 2013 restructuring program positions eliminated merger restructuring program approximately 4475 2013 3975 2012 6880 2011 positions eliminated 2008 restructuring program approximately 55 2013 155 2012 450 2011 position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather record impairment charge anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2013 2012 2011 includes 259 million 155 million 72 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation activity also reflects net pretax losses gains resulting sales facilities related assets 64 million 2013 primarily reflecting loss transaction aspen discussed 28 million 2012 10 million 2011 adjustments recorded amounts material period following table summarizes charges spending relating restructuring activities program 1 cash outlays associated 2013 restructuring program expected substantially completed end 2015 cash outlays associated merger restructuring program substantially completed end 2013 exception certain actions principally manufacturingrelated expected substantially completed 2016 legacy scheringplough program prior merger scheringplough commenced productivity transformation program designed reduce avoid costs increase productivity 2011 company recorded 20 million accelerated depreciation costs included materials production costs program substantially complete end 2011 4 acquisitions divestitures research collaborations license agreements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations licensing preclinical clinical compounds technology platforms drive near longterm growth company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds arrangements often include upfront payments royalty profit share payments contingent upon occurrence certain future events linked success asset development well expense reimbursements payments third party september 2013 merck astrazeneca announced worldwide outlicensing agreement merck’s oral small molecule inhibitor wee1 kinase mk1775 currently evaluated phase 2a clinical studies combination standardofcare therapies treatment patients certain types ovarian cancer terms agreement astrazeneca paid merck 50 million upfront fee company recorded revenue addition merck eligible receive future payments tied development regulatory milestones plus salesrelated payments tiered royalties astrazeneca responsible future clinical development manufacturing marketing april 2013 merck pfizer inc “pfizer” announced entered worldwide except japan collaboration agreement development commercialization pfizer’s ertugliflozin investigational oral sodium glucose cotransporter “sglt2” inhibitor evaluated treatment type 2 diabetes company initiated phase 3 clinical trials ertugliflozin pfizer terms agreement merck pfizer collaborate clinical development commercialization ertugliflozin ertugliflozincontaining fixeddose combinations metformin januvia sitagliptin tablets merck continue retain rights existing portfolio sitagliptincontaining products end 2013 merck recorded research development expenses 125 million upfront milestone payments made pfizer eligible additional payments associated achievement prespecified future clinical regulatory commercial milestones companies share potential revenues certain costs 60 merck 40 pfizer party certain manufacturing supply obligations company pfizer right terminate agreement due material uncured breach insolvency party event safety issue pfizer right terminate agreement upon 12 months notice time following first anniversary first commercial sale collaboration product must assign rights ertugliflozin merck upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization ertugliflozin certain payment obligations february 2013 merck supera farma laboratorios sa “supera” brazilian pharmaceutical company coowned cristália eurofarma established previously announced joint venture markets distributes sells portfolio pharmaceutical branded generic products merck cristália eurofarma brazil merck owns 51 joint venture cristália eurofarma collectively 49 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values resulted merck recognizing intangible assets currently marketed products 89 million iprd 100 million goodwill 103 million deferred tax liabilities 64 million company also recorded increases noncontrolling interests paidin capital amounts 112 million 116 million respectively transaction closed february 1 2013 accordingly results operations acquired business included company’s results operations beginning date fourth quarter 2013 result changes cash flows assumptions certain compounds company recorded 15 million impairment charges related iprd recorded supera transaction october 2012 merck aicuris entered exclusive licensing agreement provides merck worldwide rights develop commercialize candidates aicuris’ novel portfolio investigational medicines targeting human cytomegalovirus “hcmv” including letermovir mk8228 oral latestage antiviral candidate investigated treatment prevention hcmv infection transplant recipients aicuris received upfront payment €110 million approximately 140 million company recorded research development expense eligible milestone payments €3325 million based successful achievement development regulatory commercialization goals hcmv candidates including letermovir additional backup candidate well phase 1 candidates designed act via alternate mechanism addition aicuris entitled receive royalty payments reflecting advanced stage clinical program potential products result agreement merck responsible development activities costs agreement may terminated either party event material uncured breach insolvency agreement may terminated merck time event compounds licensed aicuris develop adverse safety profile material adverse issue arises related development efficacy dosing regimen compounds andor event certain patents invalid andor unenforceable certain jurisdictions merck may terminate agreement respect certain compounds successful completion first proof concept clinical trial ii must terminate agreement respect certain compounds merck fails minimally invest compounds addition merck may terminate agreement whole time upon six months prior written notice time completion first phase 3 clinical trial compound aicuris may terminate agreement event merck challenges aicuris patent covering compounds licensed aicuris upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization compounds case termination cause merck certain royalty obligations april 2012 company entered agreement endocyte inc “endocyte” develop commercialize endocyte’s novel investigational therapeutic candidate vintafolide mk8109 vintafolide currently evaluated phase 3 clinical trial folatereceptor positive platinumresistant ovarian cancer proceed phase 2 trial nonsmall cell lung cancer agreement merck gained worldwide rights develop commercialize vintafolide endocyte received 120 million upfront payment company recorded research development expense eligible milestone payments 880 million based successful achievement development regulatory commercialization goals vintafolide total six cancer indications addition vintafolide receives regulatory approval merck endocyte share equally profits losses united states endocyte receive royalty sales product rest world endocyte retained right copromote vintafolide merck united states merck exclusive right promote vintafolide rest world endocyte responsible majority funding completion proceed trial merck responsible development activities development costs decision rights vintafolide merck right terminate agreement 90 days notice merck endocyte right terminate agreement due material breach insolvency party endocyte right terminate agreement event merck challenges endocyte patent right relating vintafolide upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization vintafolide case termination cause merck certain royalty obligations us profit loss sharing may 2011 merck completed acquisition inspire pharmaceuticals inc “inspire” specialty pharmaceutical company focused developing commercializing ophthalmic products terms merger agreement merck acquired outstanding shares common stock inspire price 500 per share cash total approximately 420 million transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated inspire’s product right intangible assets related deferred tax liabilities deferred tax asset relating inspire’s net operating loss carryforwards goodwill november 2013 merck sold us rights certain ophthalmic products akorn inc including azasite acquired inspire transaction march 2011 company sold merck biomanufacturing network provider contract manufacturing development services biopharmaceutical industry wholly owned merck fujifilm corporation “fujifilm” terms agreement fujifilm purchased equity interests two merck subsidiaries together owned assets merck biomanufacturing network comprising facilities located research triangle park north carolina billingham united kingdom part agreement fujifilm merck committed purchase certain development manufacturing services fair value fujifilm threeyear period following closing transaction resulted gain 127 million 2011 reflected income expense net remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc “centocor” johnson “jj” company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company exclusive marketing rights products throughout europe russia turkey december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi european union “eu” following receipt pricing reimbursement approval within eu profits derived merck’s exclusive distribution two products equally divided merck jj april 2011 connection agreement merck jj amend agreement governing distribution rights remicade simponi jj received onetime payment merck 500 million company recorded charge income expense net 2011 5 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax losses 84 million 2013 31 million 2012 pretax gains 6 million 2011 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk 2013 company entered 15 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes four swaps maturing 2016 notional amounts 250 million effectively convert company’s 070 fixedrate notes due 2016 floatingrate instruments four swaps maturing 2018 notional amounts 250 million effectively convert company’s 130 fixedrate notes due 2018 floatingrate instruments four swaps maturing 2017 one notional amount 200 million two notional amounts 250 million one notional amount 300 million effectively convert company’s 600 fixedrate notes due 2017 floatingrate instruments three swaps maturing 2019 two notional amounts 200 million one notional amount 150 million effectively convert portion company’s 500 notes due 2019 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes libor recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows interest rate swaps outstanding december 31 2012 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted certain fixedrate notes floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 288 million cash included 43 million accrued interest corresponding 245 million basis adjustment debt associated terminated interest rate swap contracts deferred amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated foreign currency cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 2 million ineffectiveness hedge 2013 2 ineffectiveness hedge represents amount excluded hedge effectiveness testing 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2013 company estimates 66 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information availableforsale investments december 31 follows availableforsale debt securities included shortterm investments totaled 19 billion december 31 2013 remaining debt securities 88 billion mature within five years december 31 2013 2012 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2013 december 31 2013 cash equivalents 156 billion included 147 billion cash equivalents considered level 2 fair value hierarchy company liabilities related contingent consideration considered level 3 fair value hierarchy associated business combinations fair values 69 million 49 million december 31 2013 2012 respectively fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2013 255 billion compared carrying value 251 billion december 31 2012 228 billion compared carrying value 206 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines approximately onethird company’s cash equivalents invested five highly rated money market funds majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic conditions ongoing sovereign debt issues certain european countries company continues monitor credit economic conditions within greece italy spain portugal among members eu economic conditions well inherent variability timing cash receipts resulted may continue result increase average length time takes collect accounts receivable outstanding time value money discounts recorded customers collection accounts receivable expected excess one year december 31 2013 2012 assets included 275 million 473 million respectively accounts receivable expected collected within one year company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations december 31 2013 company’s accounts receivable greece italy spain portugal totaled approximately 900 million amount hospital public sector receivables approximately 600 million aggregate approximately 9 41 40 10 related greece italy spain portugal respectively december 31 2013 company’s total accounts receivable outstanding one year approximately 200 million approximately 50 related accounts receivable greece italy spain portugal mostly comprised hospital public sector receivables 2013 company completed nonrecourse factorings approximately 210 million hospital public sector receivables spain 2012 company collected approximately 500 million accounts receivable connection spanish government’s debt stabilizationstimulus plan addition company completed nonrecourse factorings approximately 230 million 2012 hospital public sector accounts receivable italy additionally company continues expand emerging markets payment terms markets tend longer resulting increase accounts receivable balances certain markets company’s customers largest accounts receivable balances amerisourcebergen corporation cardinal health inc mckesson corporation zuellig pharma ltd asia pacific alliance healthcare represented aggregate approximately onefourth total accounts receivable december 31 2013 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2013 2012 company received cash collateral 652 million 305 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2013 2012 6 inventories december 31 consisted inventories valued lifo method comprised approximately 23 billion 21 billion inventories december 31 2013 2012 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2013 2012 amounts included 15 billion 14 billion respectively inventories expected sold within one year addition amounts included 177 million 196 million december 31 2013 2012 respectively inventories produced preparation product launches 7 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments additions pharmaceutical segment goodwill 2013 resulted formation supera joint venture see note 4 reductions resulted divestiture company’s api manufacturing business related branded products see note 3 july 2013 company acquired remaining shares physicians interactive provider online mobile clinical resources solutions health care professionals merck existing 24 ownership interest 97 million november 2013 merck acquired health management resources corporation leader medical weight management 87 million transactions collectively resulted addition approximately 175 million goodwill 2013 included segments pro forma financial information included transactions historical financial results significant compared company’s financial results intangibles december 31 consisted acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles related marketed products december 31 2013 include zetia 47 billion vytorin 26 billion nasonex 13 billion claritin 15 billion nuvaring 867 million well 13 billion aggregate related several products marketed treatment chronic hepatitis c victrelis pegintron rebetol 2013 2011 company recorded impairment charges related marketed products 486 million 118 million respectively within material production costs amount recorded 2013 330 million resulted lower cash flow projections saphrissycrest due reduced expectations international markets united states revisions cash flows indicated saphrissycrest intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions considered several different scenarios determine best estimate fair value intangible asset related saphrissycrest compared related carrying value resulted impairment charge noted remaining 156 million impairment charges 2013 resulted lower cash flow projections rebetol due reduced expectations japan europe revisions cash flows indicated rebetol intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related rebetol compared related carrying value resulted impairment charge noted iprd represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization 2013 2012 2011 346 million 78 million 666 million respectively iprd reclassified products product rights upon receipt marketing approval major market 2013 company recorded 279 million iprd impairment charges within research development expenses amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period 2012 company recorded 200 million iprd impairment charges primarily pipeline programs previously deprioritized subsequently deemed alternative use period 2011 company recorded 587 million iprd impairment charges primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges 2011 related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within materials production costs 48 billion 2013 50 billion 2012 51 billion 2011 estimated aggregate amortization expense next five years follows 2014 43 billion 2015 41 billion 2016 34 billion 2017 31 billion 2018 16 billion 8 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 primarily reflects results sanofi pasteur msd johnson°merck consumer pharmaceuticals company disposed september 29 2011 astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 920 million 915 million 12 billion 2013 2012 2011 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates reflected table returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest 2014 astrazeneca option purchase merck’s interest kbi based part value merck’s interest nexium prilosec astrazeneca’s option exercisable march 1 2014 april 30 2014 astrazeneca chooses exercise option closing date expected june 30 2014 amended agreement astrazeneca make payment merck upon closing 327 million reflecting estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 exercise price also include additional amount equal multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise company believes likely astrazeneca exercise option 2014 summarized financial information azlp follows 1 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 12 billion 2013 11 billion 2012 11 billion 2011 johnson°merck consumer pharmaceuticals company 2011 merck sold 50 interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net partnership assets also included manufacturing facility sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date investments affiliates accounted using equity method including joint ventures totaled 16 billion december 31 2013 13 billion december 31 2012 amounts reported assets amounts due joint ventures included deferred income taxes current assets 277 million december 31 2013 302 million december 31 2012 summarized information affiliates excluding azlp disclosed separately follows 1 includes information jjmcp joint venture divestiture september 29 2011 9 loans payable longterm debt commitments loans payable december 31 2013 included 21 billion notes due 2014 16 billion commercial paper 402 million shortterm foreign borrowings 370 million longdated notes subject repayment option holder loans payable december 31 2012 included 18 billion notes due 2013 17 billion commercial paper 454 million shortterm foreign borrowings 328 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 009 015 december 31 2013 2012 respectively longterm debt december 31 consisted presented table included 119 million 165 million december 31 2013 2012 respectively borrowings variable rates averaging 00 2013 01 2012 also included foreign borrowings 64 million 70 million december 31 2013 2012 respectively varying rates 45 85 respectively exception 63 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices may 2013 company completed underwritten public offering 65 billion senior unsecured notes consisting 10 billion aggregate principal amount 070 notes due 2016 500 million aggregate principal amount floating rate notes due 2016 10 billion aggregate principal amount 130 notes due 2018 10 billion aggregate principal amount floating rate notes due 2018 175 billion aggregate principal amount 280 notes due 2023 125 billion aggregate principal amount 415 notes due 2043 interest notes payable semiannually notes series redeemable whole part time company’s option varying redemption prices substantial portion net proceeds notes used repurchase company’s common stock pursuant accelerated share repurchase agreement may 2013 see note 11 effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2013 company compliance covenants aggregate maturities longterm debt next five years follows 2014 21 billion 2015 21 billion 2016 24 billion 2017 11 billion 2018 30 billion may 2012 company entered 40 billion fiveyear credit facility maturing may 2017 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 367 million 2013 396 million 2012 411 million 2011 minimum aggregate rental commitments noncancellable leases follows 2014 259 million 2015 208 million 2016 132 million 2017 91 million 2018 64 million thereafter 144 million company significant capital leases 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions environmental matters except vioxx litigation defined separate assessment provided note opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed including vioxx litigation complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 vioxx litigation product liability lawsuits previously disclosed merck defendant approximately 90 federal state lawsuits “vioxx product liability lawsuits” alleging personal injury economic loss result purchase use vioxx remaining cases coordinated multidistrict litigation us district court eastern district louisiana “vioxx mdl” judge eldon e fallon merck reached resolution approved judge fallon remaining federal court putative class actions brought behalf individual purchasers users vioxx seeking reimbursement alleged economic loss settlement merck pay 23 million pay properly documented claims submitted class members approved attorneys’ fees expenses approved settlement notice costs certain administrative expenses court entered order approving settlement january 6 2014 period members submit claims settlement still pending merck also settled missouri state court class action plaintiffs sought reimbursement outofpocket costs relating vioxx company established reserve 39 million 2012 connection settlement agreement minimum amount company required pay agreement settlement approved final judgment action entered courtapproved process class members submit claims settlement closed october 2013 indiana plaintiffs filed motion certify class indiana vioxx purchasers case pending circuit court marion county indiana case dormant several years april 2010 kentucky state court denied merck’s motion summary judgment certified class kentucky plaintiffs seeking reimbursement outofpocket costs relating vioxx trial court subsequently entered amended class certification order january 2011 matter settled namedplaintiffonly basis december 2013 merck also defendant lawsuits brought state attorneys general four states alaska mississippi montana utah actions pending vioxx mdl proceeding actions allege merck misrepresented safety vioxx suits seek recovery expenditures vioxx governmentfunded health care programs medicaid andor penalties alleged consumer fraud act violations november 2013 circuit court franklin county kentucky approved settlement action filed kentucky attorney general merck agreed pay kentucky 25 million resolve lawsuit related appeals shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits federal securities laws state laws filed merck various current former officers directors “vioxx securities lawsuits” vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler consolidated purposes august 2011 judge chesler granted part denied part merck’s motion dismiss fifth amended class action complaint consolidated securities action among things claims based statements made voluntary withdrawal vioxx september 30 2004 dismissed october 2011 defendants answered fifth amended class action complaint april 2012 plaintiffs filed motion class certification january 2013 judge chesler granted motion march 2013 plaintiffs filed motion leave amend complaint add certain allegations expand class period may 2013 court denied plaintiffs’ motion leave amend complaint expand class period granted plaintiffs’ leave amend complaint add certain allegations within existing class period june 2013 plaintiffs filed sixth amended class action complaint july 2013 defendants answered sixth amended class action complaint discovery completed closed court’s scheduling order dispositive motions filed january 17 2014 previously disclosed several individual securities lawsuits filed foreign institutional investors also consolidated vioxx securities lawsuits october 2011 plaintiffs filed amended complaints pending individual securities lawsuits also october 2011 new individual securities lawsuit “kbc lawsuit” filed district new jersey several foreign institutional investors case also consolidated vioxx securities lawsuits january 2012 defendants filed motions dismiss one individual lawsuits “abp lawsuit” briefing motions dismiss completed march 2012 august 2012 judge chesler granted part denied part motions dismiss abp lawsuit among things certain alleged misstatements omissions dismissed inactionable state law claims dismissed full september 2012 defendants answered complaints individual actions kbc lawsuit day defendants moved dismiss complaint kbc lawsuit statute limitations grounds december 2012 judge chesler denied motion dismiss kbc lawsuit january 2013 defendants answered complaint kbc lawsuit discovery completed closed court’s scheduling order dispositive motions filed january 24 2014 insurance company directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 165 million currently used partially fund company’s legal fees result previously disclosed insurance arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx brazil canada europe israel collectively “vioxx international lawsuits” previously disclosed company entered agreement resolve claims related vioxx canada pursuant company pay minimum approximately 21 million aggregate maximum approximately 36 million agreement approved courts canada’s provinces reserves company believes meritorious defenses remaining vioxx product liability lawsuits vioxx securities lawsuits vioxx international lawsuits collectively “vioxx litigation” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect remaining vioxx litigation company established reserve respect canadian settlement certain vioxx product liability lawsuits immaterial settlements related certain vioxx international lawsuits company also immaterial remaining reserve relating previously disclosed vioxx investigation nonparticipating states litigation continuing company established liability reserves respect vioxx litigation unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2013 approximately 5415 cases include approximately 5680 plaintiff groups filed pending merck either federal state court including one case seeks class action certification well damages andor medical monitoring approximately 1140 actions plaintiffs allege among things suffered osteonecrosis jaw “onj” generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 4275 actions generally allege sustained femur fractures andor bone injuries “femur fractures” association use fosamax december 2013 merck reached agreement principle plaintiffs’ steering committee fosamax onj mdl defined resolve pending onj cases appeal fosamax onj mdl state courts aggregate amount 277 million company recorded liability fourth quarter 2013 plaintiffs’ counsel advised company intend participate settlement plan condition settlement 100 state federal onj plaintiffs must also agree participate settlement plan march 31 2014 100 participation achieved merck may 15 2014 determine whether terminate agreement waive 100 participation requirement agree lesser funding amount settlement fund tentative settlement effect cases alleging femur fractures discussed cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation “jpml” ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax onj mdl” coordinated pretrial proceedings fosamax onj mdl transferred judge john keenan us district court southern district new york result jpml order approximately 855 cases judge keenan first fosamax onj mdl trial boles v merck fosamax onj mdl court declared mistrial eight person jury could reach unanimous verdict boles case retried june 2010 resulted verdict favor plaintiff amount 8 million merck filed posttrial motions seeking judgment matter law alternative new trial october 2010 court denied merck’s posttrial motions sua sponte ordered remittitur reducing verdict 15 million plaintiff rejected remittitur ordered court requested new trial damages plaintiff merck subsequently entered confidential stipulation amount plaintiff’s damages enabled merck appeal underlying judgment merck filed appeal boles case october 2012 prior 2013 three cases tried verdict fosamax onj mdl defense verdicts favor merck returned three cases plaintiffs filed appeal two cases graves v merck secrest v merck january 2013 us court appeals second circuit affirmed judgment merck’s favor secrest plaintiff secrest case subsequently filed petition writ certiorari us supreme court denied june 2013 february 2011 judge keenan ordered two bellwether trials conducted fosamax onj mdl spano v merck jellema v merck selected court tried 2012 case dismissed plaintiffs march 2012 court selected scheinberg v merck next case tried trial scheinberg case began january 2013 february 2013 jury returned mixed verdict finding favor merck plaintiff’s design defect claim finding favor plaintiff failure warn claim awarded 285 thousand compensatory damages merck’s posttrial motion judgment matter law scheinberg case denied july 2013 company filed appeal us court appeals second circuit november 2012 judge keenan issued order requiring plaintiffs allege certain types specific injuries provide expert reports support claims deadlines submission reports staggered throughout first half 2013 date claims approximately 425 plaintiffs subject order dismissed prejudice august 2013 judge keenan denied merck’s request extend order additional groups plaintiffs also decided start winding fosamax onj mdl remandtransfer remaining cases back proper venues rate 200 cases per month beginning november 1 2013 date subsequently changed plaintiffs’ request december 1 2013 later suspended indefinitely addition july 2008 application made atlantic county superior court new jersey requesting fosamax cases pending new jersey considered mass tort designation centralized management one judge new jersey october 2008 new jersey supreme court ordered pending future actions filed new jersey arising use fosamax seeking damages existing dental jawrelated injuries including onj solely seeking medical monitoring designated mass tort centralized management purposes judge carol e higbee atlantic county superior court december 31 2013 approximately 280 onj cases pending merck atlantic county new jersey july 2009 judge higbee entered case management order various amendments thereto setting forth schedule contemplates completing fact expert discovery initial group cases reviewed trial february 2011 jury rosenberg v merck first trial new jersey coordinated proceeding returned verdict merck’s favor april 2012 jury sessner v merck second case tried new jersey also returned verdict merck’s favor plaintiffs filed appeal cases march 2013 new jersey appellate division affirmed judgment merck’s favor rosenberg case cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey “fosamax femur fracture mdl” result jpml order approximately 1105 cases pending fosamax femur fracture mdl december 31 2013 case management order entered requiring parties review 40 cases later reduced 33 cases judge joel pisano selected four cases group tried initial bellwether cases fosamax femur fracture mdl first bellwether case glynn v merck began april 8 2013 jury returned verdict merck’s favor april 29 2013 addition june 27 2013 judge pisano granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law judge pisano set may 5 2014 trial date bellwether trial case alleged injury took place january 31 2011 following completion fact discovery court selected sweet v merck next fosamax femur fracture mdl case tried may 5 2014 plaintiffs subsequently dismissed case result may 2014 trial date withdrawn court expected set october 1 2014 trial date next bellwether trial fosamax femur fracture mdl addition judge pisano entered order august 2013 requiring plaintiffs fosamax femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case plaintiffs filed responses show cause order end september 2013 merck filed reply responses end october 2013 hearing show cause order held january 29 2014 final ruling court pending december 31 2013 approximately 2655 cases alleging femur fractures filed new jersey state court pending judge higbee atlantic county superior court parties selected initial group 30 cases reviewed fact discovery first trial new jersey state femur fracture cases su v merck began early march 2013 mistrial declared later march 2013 plaintiff suffered serious medical issue unrelated use fosamax prevented proceeding trial next trial unanski v merck set tried beginning november 2013 continued set trial potentially along one two cases love v merck caravello v merck beginning march 17 2014 additional group 50 cases reviewed fact discovery selected november 2013 december 31 2013 approximately 510 cases alleging femur fractures filed california state court petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge steven perk presiding coordinated proceedings november 2013 court ordered fact discovery commence parties expected select first round cases included bellwether discovery pool may 2014 additionally seven femur fracture cases pending state courts discovery ongoing fosamax femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2013 approximately 165 cases served pending merck alleging generally use januvia andor janumet caused development pancreatic cancer complaints filed several different state federal courts claims pending consolidated multidistrict litigation proceeding us district court southern district california called “in incretinbased therapies products liability litigation” proceeding includes federal lawsuits alleging pancreatic cancer due use following medicines januvia janumet byetta victoza latter two products manufactured pharmaceutical companies addition cases noted company agreed december 31 2013 toll statute limitations two additional claims company intends defend lawsuits nuvaring previously disclosed beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” company arising organon’s marketing sale nuvaring “nuvaring litigation” combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough among things failed adequately design manufacture nuvaring failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation “nuvaring mdl” venued missouri coordinated proceeding new jersey state court december 31 2013 approximately 1880 filed nuvaring cases approximately 1405 unfiled claims identified response census orders issued nuvaring mdl new jersey proceedings filed cases approximately 1660 pending nuvaring mdl us district court eastern district missouri judge rodney sippel approximately 210 pending coordinated proceedings bergen county superior court new jersey judge brian r martinotti proceedings nuvaring mdl new jersey stayed may 31 2014 seven additional cases pending various state courts including cases coordinated state proceeding san francisco superior court california judge john e munter certain state court cases scheduled trial 2014 merck negotiating plaintiffs’ counsel agreed settlement nuvaring litigation intended resolve least 95 cases filed february 7 2014 unfiled claims retainer counsel prior date merck agreed lump total settlement 100 million provided participation settlement least 95 plaintiffs eligible claimants overall certain categories company certain insurance coverage available currently used partially fund company’s legal fees insurance coverage also used fund settlement accordingly december 31 2013 company’s consolidated balance sheet includes current liability settlement amount corresponding current asset reflecting anticipated insurance recoveries propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2013 approximately 1140 lawsuits involving total approximately 1390 plaintiffs instances spouses joined plaintiffs suits allege experienced persistent sexual side effects following cessation treatment propecia andor proscar filed merck approximately 20 plaintiffs also allege propecia proscar caused cause prostate cancer male breast cancer lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge john gleeson eastern district new york matters pending state court new jersey consolidated judge jessica mayer middlesex county addition one matter pending federal court massachusetts one matter pending state court st louis missouri company intends defend lawsuits vytorinzetia litigation previously disclosed april 2008 merck shareholder filed putative class action lawsuit federal court consolidated district new jersey caption merck co inc vytorinzetia securities litigation complaint alleged merck defendants delayed releasing unfavorable results enhance clinical trial regarding efficacy vytorin merck made false misleading statements expected earnings knowing results enhance study released sales vytorin would decline merck’s earnings would suffer february 2013 merck announced agreement principle plaintiffs settle matter 215 million settlement agreement executed parties june 2013 approved court october 2013 settlement reflected company’s 2012 financial results discussed similar consolidated securities class action lawsuit pending district new jersey scheringplough defendants caption scheringplough corporationenhance securities litigation february 2013 merck announced agreement principle plaintiffs settle matter 473 million settlement agreement executed june 2013 approved court october 2013 settlement reflected company’s 2012 financial results together settlement described preceding paragraph collectively “enhance litigation” resulted aggregate charge 493 million taking account anticipated insurance recoveries 195 million second quarter 2013 company paid 480 million settlement fund company’s insurers subsequently paid remaining 208 million reflects additional 13 million insurance recoveries previously recognized november 14 2013 two complaints filed district new jersey merck successor scheringplough defendants certain institutional investors “optedout” enhance securities class action scheringplough addition january 14 2014 two complaints filed district new jersey merck defendants certain institutional investors “optedout” vytorinzetia securities class action merck “optout” complaints contain allegations similar made plaintiffs settled class actions scheringplough merck company intends move dismiss complaints otherwise defend litigation governmental proceedings previously disclosed merck received civil investigative demand “cid” issued us department justice “doj” addressed inspire company acquired merck may 2011 cid advises relates false claims act investigation concerning allegations inspire caused submission false claims federal health benefits programs drug azasite marketing treatment indications approved us food drug administration “fda” company cooperating doj investigation previously disclosed company received subpoena us attorney’s office eastern district california 2010 requesting information civil federal health care investigation relating company’s marketing selling activities respect integrilin avelox january 2003 june 2010 december 2012 us district court eastern district california unsealed complaint former employee company filed 2009 federal false claims act false claims acts various states complaint alleges company caused false claims made federal state health care programs promoting integrilin unapproved indications providing unlawful payments benefits physicians others increase utilization integrilin avelox federal government states whose statutes suit filed right investigating allegations intervene suit assume responsibility direction notified court decline intervene company intends defend lawsuit previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition putative class action lawsuit filed company eastern district pennsylvania behalf direct purchasers mmr ii vaccine predicated allegations false claims act complaint charges company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws company intends defend lawsuits company received subpoena office inspector general us department health human services behalf us attorney’s office district maryland civil division doj requests information relating company’s marketing singulair dulera certain marketing activities january 1 2006 present company cooperating government previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperated agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries company advised doj based information received closed inquiry matter relates company future company may receive additional requests information either doj sec company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate commercial litigation awp litigation previously disclosed company andor certain subsidiaries named defendants cases brought various states alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used public private payors calculating provider reimbursement levels outcome lawsuits could include substantial damages imposition substantial fines penalties injunctive administrative remedies since start 2012 company settled awp cases brought states alabama alaska kansas illinois kentucky louisiana oklahoma mississippi wisconsin subsidiary company continues defendant case brought one state utah company also reinstated defendant putative class action new jersey superior court alleges behalf thirdparty payers individuals manufacturers inflated drug prices manipulation awps means case originally dismissed company without prejudice 2007 company intends defend lawsuit kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications “andas” following commencement administrative proceeding us federal trade commission “ftc” 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case march 2010 district court granted summary judgment defendants remaining lawsuits dismissed matter entirety july 2012 third circuit court appeals reversed district court’s grant summary judgment remanded case proceedings time third circuit upheld december 2008 decision district court certify certain direct purchaser plaintiffs’ claims class action august 2012 company filed petition certiorari us supreme court seeking review third circuit’s decision june 2013 supreme court granted petition vacated judgment third circuit remanded case consideration light recent decision ftc v actavis inc decision held whether socalled “reverse payment” ie payment holder pharmaceutical patent party challenging patent made connection settlement dispute violates antitrust laws determined basis “rule reason” analysis september 2013 third circuit returned case district court proceedings accordance actavis standard coupon litigation 2012 previously disclosed number private health plans filed separate putative class action lawsuits company alleging merck’s coupon programs injured health insurers reducing beneficiary copayment amounts thereby allegedly causing beneficiaries purchase higherpriced drugs otherwise would purchased increasing insurers’ reimbursement costs actions assigned district judge us district court district new jersey sought damages injunctive relief barring company issuing coupons would reduce beneficiary copays behalf putative nationwide classes health insurers similar actions relating manufacturer coupon programs filed several pharmaceutical manufacturers variety federal courts april 29 2013 district court dismissed actions merck without prejudice grounds plaintiffs failed demonstrate standing sue plaintiffs subsequently filed consolidated amended complaint merck filed motion dismiss complaint sales force litigation may 9 2013 ms kelli smith filed complaint company united states district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws november 27 2013 company filed motion dismiss class claims plaintiffs sought granted leave file amended complaint january 16 2014 plaintiffs filed amended complaint adding four additional named plaintiffs company intends refile motion dismiss class allegations otherwise defend patent litigation time generic manufacturers pharmaceutical products file andas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company products marketed via agreements companies currently involved patent infringement litigation united states include emend injection integrilin nexium nuvaring similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired mergers acquisitions potentially significant intangible asset impairment charges emend injection may 2012 patent infringement lawsuit filed united states sandoz inc “sandoz” respect sandoz’s application fda seeking prepatent expiry approval market generic version emend injection lawsuit automatically stays fda approval sandoz’s application july 2015 adverse court decision whichever may occur earlier june 2012 patent infringement lawsuit filed united states accord healthcare inc us accord healthcare inc intas pharmaceuticals ltd collectively “intas” respect intas’ application fda seeking prepatent expiry approval market generic version emend injection company agreed intas stay lawsuit pending outcome lawsuit sandoz integrilin february 2009 patent infringement lawsuit filed jointly millennium pharmaceuticals inc united states teva parenteral medicines inc “tpm” respect tpm’s application fda seeking prepatent expiry approval sell generic version integrilin october 2011 parties entered settlement agreement allowing tpm sell generic version integrilin beginning june 2 2015 november 2012 patent infringement lawsuit filed app pharmaceuticals inc fresenius kabi usa inc collectively “app” respect app’s application fda seeking prepatent expiry approval sell generic version integrilin march 2013 parties entered settlement agreement allowing app sell generic version integrilin beginning june 2 2015 september 2013 patent infringement lawsuit filed ben venue laboratories dba bedford laboratories “bedford” respect bedford’s application fda seeking prepatent expiry approval sell generic version integrilin lawsuit automatically stays fda approval bedford’s application february 2016 adverse court decision whichever may occur earlier nexium patent infringement lawsuits brought jointly astrazeneca united states following generic companies ranbaxy laboratories ltd ivax pharmaceuticals inc later acquired teva pharmaceuticals inc dr reddy’s laboratories sandoz lupin ltd hetero drugs limited unit iii torrent pharmaceuticals ltd response generic company’s application seeking prepatent expiry approval sell generic version nexium settlements reached lawsuits terms provide respective generic company may bring generic version esomeprazole product market may 27 2014 addition patent infringement lawsuit also filed jointly astrazeneca february 2010 united states sun pharma global fze “sun pharma” respect application fda seeking prepatent expiry approval sell generic version nexium iv lawsuit settled agreement provided sun pharma entitled bring generic esomeprazole iv product market united states january 1 2014 patent infringement lawsuit also filed jointly astrazeneca united states hanmi usa inc “hanmi” related application fda seeking prepatent expiry approval sell different salt esomeprazole found nexium “hanmi product” may 2013 agreement hanmi conceded validity enforceability patents lawsuit parties also agreed hanmi product would infringe patents district court’s december 2012 claim interpretation order astrazeneca kbi appealed december 19 2013 court appeals federal circuit denied appeal affirmed district court’s claim interpretation order hanmi launched esomeprazole product risk company continues believe court’s order incorrect considering options review finally additional patent infringement lawsuits filed jointly astrazeneca united states mylan laboratories limited “mylan labs” actavis incwatson pharma company collectively “actaviswatson” related applications fda seeking prepatent expiry approval sell generic versions nexium mylan labs actaviswatson applications fda remain stayed august 2014 october 2015 respectively earlier adverse court decisions whichever may occur earlier nuvaring december 2013 company filed lawsuit warner chilcott company llc “warner chilcott” united states respect warner chilcott’s application fda seeking prepatent expiry approval sell generic version nuvaring patent oppositions ono pharmaceutical co “ono” european patent broadly claims use antipd1 antibody company’s immunotherapy mk3475 treatment cancer ono previously licensed commercial rights antipd1 antibody bristolmyers squibb “bms” certain markets company believes patent invalid filed opposition european patent office “epo” seeking revocation opposition division epo scheduled hearing june 2014 hearing panel issued preliminary opinion claims patent valid hearing panel usually renders decision subject appeal close hearing patent survives proceedings similar breadth merck file actions seeking revoke patent relevant national court europe ono could file patent infringement actions company relevant national court europe around time company launches mk3475 approved national court determines company infringed valid claim ono’s patent ono may entitled monetary damages including royalties future sales mk3475 potentially could seek injunction prevent company marketing mk3475 country addition ono bms similar patents applications company closely monitoring pending united states japan countries company confident able market mk3475 country approved prevented ono patent pending patent environmental litigation previously disclosed merck involved pending litigation related alleged injuries caused alleged emissions site former merck subsidiary merced california also previously disclosed parties litigation reached agreement 2013 intended resolve litigation subject sufficient plaintiff participation obtained parties finalized settlement litigation dismissed prejudice january 16 2014 plaintiffs litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2013 december 31 2012 approximately 160 million 260 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 213 million 145 million december 31 2013 2012 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 84 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 purchases treasury stock 2013 include 105 million shares purchased pursuant accelerated share repurchase agreement discussed 2 issuances primarily reflect activity sharebased compensation plans may 20 2013 merck entered accelerated share repurchase “asr” agreement goldman sachs co “goldman sachs” asr merck agreed purchase 50 billion merck’s common stock total initial delivery approximately 995 million shares merck’s common stock based current market price made goldman sachs merck payment 50 billion made merck goldman sachs may 21 2013 upon settlement asr october 31 2013 merck received additional 55 million shares determined average daily volume weightedaverage price merck’s common stock term asr program bringing total shares received merck program 105 million asr entered pursuant share repurchase program announced may 1 2013 noncontrolling interests connection 1998 restructuring ami merck assumed 24 billion par value preferred stock dividend rate 5 per annum carried kbi included noncontrolling interests astrazeneca exercises option acquire merck’s interest azlp see note 8 preferred stock obligation retired 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units “rsus” performance share units “psus” certain management level employees addition employees nonemployee directors employees certain company’s equity method investees may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2013 143 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2013 2012 2011 276 million 335 million 369 million respectively related income tax benefits 84 million 105 million 118 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2013 2012 2011 4501 3951 3647 per option respectively weighted average fair value options granted 2013 2012 2011 621 547 539 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2013 374 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries result plan design changes approved 2011 beginning january 1 2013 active participants merck’s primary us defined benefit pension plans accruing pension benefits using new cash balance formulas based age service pay interest however transition period january 1 2013 december 31 2019 participants earn greater benefit calculated employee’s legacy final average pay formula new cash balance formula years service december 31 2019 participants earn future benefits cash balance formula addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components increase net periodic benefit cost pension postretirement benefit plans 2013 compared 2012 largely attributable change discount rate net periodic benefit cost attributable us pension plans included table 348 million 2013 268 million 2012 406 million 2011 connection restructuring actions see note 3 termination charges recorded 2013 2012 2011 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2013 2012 2011 pension postretirement benefit plans addition settlements recorded 2013 2012 2011 certain domestic international pension plans obligations funded status summarized information changes plan assets benefit obligation funded status amounts recorded december 31 follows fair value us pension plan assets included preceding table 100 billion 87 billion december 31 2013 2012 respectively projected benefit obligation us pension plans 87 billion 100 billion respectively approximately 46 44 company’s pension projected benefit obligation december 31 2013 2012 respectively relates international defined benefit plans individual plan significant relative total projected benefit obligation december 31 2013 2012 accumulated benefit obligation 148 billion 159 billion respectively pension plans 80 billion 90 billion respectively related us pension plans pension plans projected benefit obligations excess plan assets december 31 2013 2012 fair value plan assets 15 billion 128 billion respectively benefit obligations 30 billion 155 billion respectively plans accumulated benefit obligations excess plan assets december 31 2013 2012 fair value plan assets 14 billion 61 billion respectively accumulated benefit obligations 25 billion 77 billion respectively plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2013 2012 622 million 692 million respectively approximately 4 5 respectively company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions pension plans postretirement benefit plans 2014 expected approximately 250 million 75 million respectively expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2014 214 million 146 million respectively pension plans 2 million 75 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining pension plan us pension postretirement benefit plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis developing expected rate return within plan longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2014 company’s expected rate return range 730 875 compared range 600 875 2013 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2013 2012 2011 138 million 146 million 166 million respectively 14 income expense net income expense net consisted increase interest income 2012 compared 2011 reflects accretion time value money discounts related certain accounts receivables including accelerated accretion related significant collections accounts receivable spain see note 5 increase interest expense 2013 compared 2012 driven part issuances debt september 2012 may 2013 exchange losses 2013 reflect 140 million losses due venezuelan currency devaluation february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations net presented table 2012 reflects 493 million net charge related settlement enhance litigation see note 10 net 2011 reflects 500 million charge related resolution arbitration proceeding involving company’s rights market remicade simponi see note 4 136 million gain disposition company’s interest jjmcp joint venture see note 8 127 million gain sale certain manufacturing facilities related assets see note 4 interest paid 922 million 2013 808 million 2012 600 million 2011 interest paid 2011 net 288 million received company termination certain interest rate swap contracts year see note 5 15 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits miscellaneous items foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly singapore ireland switzerland puerto rico operates tax incentive grant earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 350 us statutory rate foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs arbitration settlement charge items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 350 us statutory rate american taxpayer relief act 2012 signed law january 2 2013 extending research credit controlled foreign corporation lookthrough provisions two years retroactively january 1 2012 december 31 2013 company recorded entire 2012 benefit legislation 2013 financial statements period includes date enactment impact reflected reconciliation income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss “nol” carryforwards several jurisdictions december 31 2013 approximately 170 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant approximately 205 million valuation allowances established foreign nol carryforwards foreign deferred tax assets addition company approximately 55 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2013 2012 2011 23 billion 25 billion 27 billion respectively tax benefits relating stock option exercises reflected paidin capital 61 million 2013 94 million 2012 amounts material 2011 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs cra discussed company recognize unrecognized tax benefits 35 billion december 31 2013 income tax provision would reflect favorable net impact 33 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2013 could decrease 128 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted benefit 319 million 2013 88 million 2012 95 million 2011 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 665 million 12 billion december 31 2013 2012 respectively 2013 internal revenue service “irs” finalized examination scheringplough’s 20072009 tax years company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 165 million tax provision benefit 2013 2010 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards company’s reserves uncertain tax positions adequate cover adjustments related examination period additionally previously disclosed company seeking resolution one issue raised examination irs administrative appeals process 2013 company recorded outofperiod net tax benefit 160 million related issue settled fourth quarter 2012 final resolution relating interest owed reached first quarter 2013 company’s unrecognized tax benefits related issue exceeded settlement amount management concluded exclusion benefit material current prior year financial statements previously disclosed canada revenue agency “cra” proposed adjustments 1999 2000 relating intercompany pricing matters july 2011 cra issued assessments miscellaneous audit issues tax years 20012004 2012 merck cra reached settlement years calls merck pay additional canadian tax approximately 65 million company’s unrecognized tax benefits related matters exceeded settlement amount therefore company recorded net 112 million tax provision benefit 2012 portion taxes paid expected creditable us tax purposes company previously established reserves matters resolution matters material effect company’s results operations financial position liquidity 2011 irs concluded examination merck’s 20022005 federal income tax returns result company required make net payments approximately 465 million company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 700 million tax provision benefit 2011 net benefit reflects decrease unrecognized tax benefits years examination partially offset increases unrecognized tax benefits years subsequent examination period result settlement company disagrees irs treatment one issue raised examination appealing matter irs administrative process addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2003 2013 december 31 2013 foreign earnings 571 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants began expire 2013 16 earnings per share prior 2013 company calculated earnings per share pursuant twoclass method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted december 31 2009 generally three year vesting period certain management level employees met definition participating securities rsus psus issued january 1 2010 meet definition participating securities therefore beginning 2013 company longer applies twoclass method calculations earnings per share follows 1 issuable primarily sharebased compensation plans 2013 2012 2011 25 million 104 million 169 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss first quarter 2013 company adopted guidance issued fasb requires additional disclosure related impact reclassification adjustments aoci net income changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 17 billion 41 billion december 31 2013 2012 respectively postretirement benefit plan net loss 80 million 414 million december 31 2013 2012 respectively well pension plan prior service credit 559 million 449 million december 31 2013 2012 respectively postretirement benefit plan prior service credit 331 million 354 million december 31 2013 2012 included cumulative translation adjustment pretax gains approximately 392 million 2011 relating translation impacts intangible assets recorded conjunction merger 18 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances includes revenue equity income company’s relationship azlp animal health consumer care alliances segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets well club stores specialty channels accounting policies segments described note 2 sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health consumer care alliances segment includes revenue company’s relationship azlp 4 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results october 1 2013 company divested substantial portion thirdparty manufacturing sales see note 3 addition revenues 2013 reflect 50 million revenue outlicense pipeline compound consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits losses primarily comprised miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales unallocated net includes expenses corporate manufacturing cost centers product intangible asset impairment charges gain losses sales businesses miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2013 december 31 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework issued 1992 committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 27 2014 b supplementary data selected quarterly financial data 2013 2012 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2012 include net charge related settlement certain shareholder litigation see note 10 2 amounts 2013 include net benefits relating settlements certain federal income tax issues see note 15 3 amounts 2013 2012 reflect acquisitionrelated costs see note 7 impact restructuring actions see note 3 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2014 2013 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2014 notes consolidated financial statements report dated february 27 2015 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc “merck” “the company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products markets directly joint ventures company’s operations principally managed products basis comprised three operating segments pharmaceutical animal health alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers october 1 2014 company divested consumer care segment see note 4 developed manufactured marketed overthecounter foot care sun care products 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income “oci” declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized title risk loss passes customer typically upon delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 112 million 20 billion respectively december 31 2014 87 million 16 billion respectively december 31 2013 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings depreciation expense 25 billion 2014 22 billion 2013 20 billion 2012 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 23 billion 25 billion 28 billion 2014 2013 2012 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 505 million 548 million net accumulated amortization december 31 2014 2013 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 20 years see note 7 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development acquired inprocess research development “iprd” company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes recorded earnings changes inputs may result significantly different fair value adjustment research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life amounts due collaborative partners related development activities generally reflected reduction research development expenses specific milestone achieved nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges periods addition research development expenses 2014 include charge increase fair value liability contingent consideration sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently issued accounting standards may 2014 financial accounting standards board issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements guidance effective annual interim periods beginning 2017 early adoption permitted company currently assessing impact adoption consolidated financial statements 3 restructuring 2013 restructuring program 2013 company announced global restructuring program “2013 restructuring program” part global initiative sharpen commercial research development focus part program company expects reduce total workforce approximately 8500 positions workforce reductions primarily come elimination positions sales administrative headquarters organizations well research development company also reduce global real estate footprint continue improve efficiency manufacturing supply network company continue hire employees strategic growth areas business necessary company recorded total pretax costs 12 billion 2014 2013 related restructuring program since inception 2013 restructuring program december 31 2014 merck recorded total pretax accumulated costs approximately 25 billion eliminated approximately 6095 positions comprised employee separations well elimination contractors vacant positions actions 2013 restructuring program expected substantially completed end 2015 cumulative pretax costs estimated approximately 30 billion company estimates approximately twothirds cumulative pretax costs result cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested merger restructuring program 2010 subsequent merck scheringplough corporation “scheringplough” merger “merger” company commenced actions global restructuring program “merger restructuring program” designed streamline cost structure combined company actions program initiated 2011 actions program primarily reflect elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities october 1 2013 company sold active pharmaceutical ingredient “api” manufacturing business including related manufacturing facility netherlands aspen holdings “aspen” part planned manufacturing facility rationalizations merger restructuring program conjunction sale parties entered strategic longterm supply agreement whereby aspen supply api company approximately 960 employees support api business transferred merck aspen also connection sale aspen acquired certain branded products merck transferred aspen effective december 31 2013 consideration transaction included cash 705 million notes receivable present value 198 million time disposition notes receivable consist 261 million note present value 138 million due 2023 675 million note present value 60 million payable five years beginning december 31 2014 cash portion consideration company received 172 million fourth quarter 2013 remaining 533 million received company january 2014 therefore december 31 2013 amount recorded receivable within deferred income taxes current assets consolidated balance sheet conjunction transaction company transferred inventory 420 million property plant equipment 220 million cash 125 million aspen reduced goodwill 45 million intangible assets 45 million assets 23 million recorded 90 million transactionrelated liabilities transaction resulted loss 65 million recorded within restructuring costs 2013 company recorded total pretax costs 730 million 2014 11 billion 2013 951 million 2012 related restructuring program since inception merger restructuring program december 31 2014 merck recorded total pretax accumulated costs approximately 79 billion eliminated approximately 28410 positions comprised employee separations well elimination contractors vacant positions approximately 3440 position eliminations remain pending program december 31 2014 include remaining actions 2008 restructuring program reported part merger restructuring program discussed nonmanufacturing related restructuring actions merger restructuring program substantially completed end 2013 remaining actions program primarily relate ongoing manufacturing facility rationalizations expected substantially completed 2016 company expects estimated total cumulative pretax costs program approximately 85 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested 2008 restructuring program 2008 merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness pretax costs 54 million 48 million recorded 2013 2012 respectively related 2008 restructuring program effective july 1 2013 remaining activities 2008 restructuring program accounted part merger restructuring program segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated positions eliminated 2013 restructuring program approximately 4555 2014 1540 2013 positions eliminated merger restructuring program approximately 1530 2014 4475 2013 3975 2012 position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather record impairment charge anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2014 2013 2012 includes 240 million 259 million 155 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation activity also reflects net pretax losses gains resulting sales facilities related assets 133 million 2014 64 million 2013 primarily reflecting loss transaction aspen discussed 28 million 2012 adjustments previously recorded amounts material period following table summarizes charges spending relating restructuring activities program 1 cash outlays associated 2013 restructuring program expected substantially completed end 2015 nonmanufacturing cash outlays associated merger restructuring program substantially completed end 2013 remaining cash outlays expected substantially completed end 2016 4 acquisitions divestitures research collaborations license agreements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations licensing preclinical clinical compounds drive near longterm growth company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share payments contingent upon occurrence certain future events linked success asset development company also reviews pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain products december 2014 merck cubist pharmaceuticals inc “cubist” announced definitive agreement merck would acquire cubist total purchase price approximately 95 billion cubist leader development new therapies treat serious potentially lifethreatening infections caused broad range increasingly drugresistant bacteria transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date also december 2014 merck acquired oncoethix privately held biotechnology company specializing oncology drug development total purchase consideration transaction 153 million included upfront cash payment 110 million future additional milestone payments 265 million contingent upon certain clinical regulatory milestones achieved company determined fair value 43 million acquisition date transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions merck recognized intangible asset iprd 143 million related mk8628 formerly otx015 investigational novel oral bet bromodomain inhibitor currently phase 2 studies treatment hematological malignancies advanced solid tumors well liability contingent consideration 43 million net assets liabilities 10 million fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probability adjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 fair value contingent consideration determined utilizing probability weighted estimated cash flow stream adjusted expected timing payment also utilizing discount rate 115 transaction closed december 18 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included oncoethix’s historical financial results significant compared company’s financial results october 1 2014 company completed sale merck consumer care “mcc” business bayer ag “bayer” 142 billion 140 billion net cash divested less customary closing adjustments well certain contingent amounts held back payable upon manufacturing site transfer canada regulatory approval korea terms agreement bayer acquired merck’s existing overthecounter business including global trademark prescription rights claritin afrin company recognized pretax gain sale mcc 112 billion 2014 also october 1 2014 company entered worldwide clinical development collaboration bayer market develop portfolio soluble guanylate cyclase “sgc” modulators includes bayer’s adempas riociguat first member novel class compounds adempas approved treat pulmonary arterial hypertension “pah” first drug treatment approved patients chronic thromboembolic pulmonary hypertension “cteph” adempas currently marketed united states europe pah cteph japan cteph two companies equally share costs profits collaboration implement joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat currently phase 2 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn make available earlystage sgc compounds similar terms return broad collaboration rights merck made upfront payment bayer 10 billion potential additional milestone payments upon achievement agreedupon sales goals adempas bayer continue lead commercialization americas merck lead commercialization rest world vericiguat potential optin products bayer lead rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead company determined merck’s payment access bayer’s compounds constituted acquisition asset 10 billion consideration paid merck 915 million fair value related currently marketed product adempas capitalized intangible asset subject amortization estimated useful life 12 years remaining 85 million fair value related vericiguat compound currently clinical development expensed within research development expenses fair values adempas vericiguat determined using income approach fair value estimated based upon probability adjusted future net cash flows vericiguat also stage development project associated probability successful completion net cash flows discounted present value using discount rate 100 adempas 105 vericiguat future sales based milestones accrued probable reasonably estimable company bayer right terminate agreement cause productbyproduct basis products developed commercialized agreement adempas bayer termination rights event party’s material uncured breach related product september 2014 merck sun pharmaceutical industries ltd “sun pharma” entered exclusive worldwide licensing agreement merck’s investigational therapeutic antibody candidate mk3222 tildrakizumab treatment chronic plaque psoriasis skin ailment terms agreement sun pharma acquired worldwide rights tildrakizumab use human indications merck exchange upfront payment 80 million merck continue clinical development regulatory activities funded sun pharma upon product approval sun pharma responsible regulatory activities including subsequent submissions pharmacovigilance post approval studies manufacturing commercialization approved product merck also eligible receive future payments associated regulatory including product approval sales milestones well tiered royalties ranging midsingle digit teen percentage rates sales merck recorded loss 47 million transaction included income expense net august 2014 merck completed acquisition idenix pharmaceuticals inc “idenix” approximately 39 billion cash 37 billion net cash acquired idenix biopharmaceutical company engaged discovery development medicines treatment human viral diseases whose primary focus development nextgeneration oral antiviral therapeutics treat hepatitis c virus “hcv” infection transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions merck recognized intangible asset iprd 32 billion related mk3682 formerly idx21437 net deferred tax liabilities 856 million net assets liabilities approximately 20 million mk3682 nucleotide prodrug phase 2 clinical development evaluated potential inclusion development oral pangenotypic fixeddose combination regimens excess consideration transferred fair value net assets acquired 14 billion recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probability adjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 transaction closed august 5 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included idenix’s historical financial results significant compared company’s financial results may 2014 merck entered agreement sell certain ophthalmic products santen pharmaceutical co ltd “santen” japan markets europe asia pacific ophthalmic products included agreement cosopt dorzolamide hydrochloridetimolol maleate ophthalmic solution cosopt pf dorzolamide hydrochloridetimolol maleate ophthalmic solution 205 trusopt dorzolamide hydrochloride ophthalmic solution sterile ophthalmic solution 2 trusopt pf dorzolamide hydrochloride ophthalmic solution preservativefree timoptic timolol maleate ophthalmic solution timoptic pf timolol maleate preservative free ophthalmic solution unit dose dispenser timoptic xe timolol maleate ophthalmic gel forming solution saflutan tafluprost taptiqom tafluprosttimolol maleate ophthalmic solution development agreement provides santen make upfront payments additional payments based defined sales milestones santen also purchase supply ophthalmology products covered agreement two fiveyear period upon closing transaction markets july 1 2014 company received 515 million upfront payments santen net certain adjustments additional 50 million upon closing remaining markets october 1 2014 merck recognized gains 480 million transactions 2014 included income expense net march 2014 merck divested sirna therapeutics inc “sirna” subsidiary alnylam pharmaceuticals inc “alnylam” consideration 25 million 2520044 shares alnylam common stock merck eligible receive future payments associated achievement certain regulatory commercial milestones well royalties future sales terms agreement merck received 85 alnylam shares first quarter 2014 valued 172 million time closing remaining 15 shares second quarter 2014 valued 22 million time shares received merck recorded gains 204 million 2014 related transaction included income expense net excess merck’s tax basis investment sirna value received resulted approximate 300 million tax benefit recorded 2014 january 2014 merck sold us marketing rights saphris asenapine antipsychotic indicated treatment schizophrenia bipolar disorder adults forest laboratories inc “forest” terms agreement forest made upfront payments 232 million recorded sales 2014 make additional payments merck based defined sales milestones addition part transaction merck agreed supply product forest subsequently acquired actavis plc patent expiry september 2013 merck astrazeneca announced worldwide outlicensing agreement merck’s oral small molecule inhibitor wee1 kinase mk1775 evaluated clinical studies combination standardofcare therapies treatment patients certain types ovarian cancer terms agreement astrazeneca paid merck 50 million upfront fee company recorded revenue addition merck eligible receive future payments tied development regulatory milestones plus salesrelated payments tiered royalties astrazeneca responsible future clinical development manufacturing marketing april 2013 merck pfizer inc “pfizer” announced worldwide except japan collaboration agreement development commercialization pfizer’s ertugliflozin investigational oral sodium glucose cotransporter “sglt2” inhibitor evaluated treatment type 2 diabetes company initiated phase 3 clinical trials ertugliflozin pfizer terms agreement merck pfizer collaborate clinical development commercialization ertugliflozin ertugliflozincontaining fixeddose combinations metformin januvia sitagliptin tablets merck continue retain rights existing portfolio sitagliptincontaining products end 2013 merck recorded research development expenses 125 million upfront milestone payments made pfizer eligible additional payments associated achievement prespecified future clinical regulatory commercial milestones companies share potential revenues certain costs 60 merck 40 pfizer party certain manufacturing supply obligations company pfizer right terminate agreement due material uncured breach insolvency party event safety issue pfizer right terminate agreement upon 12 months notice time following first anniversary first commercial sale collaboration product must assign rights ertugliflozin merck upon termination agreement depending upon circumstances parties varying rights obligations respect continued development commercialization ertugliflozin certain payment obligations february 2013 merck supera farma laboratorios sa “supera” brazilian pharmaceutical company coowned cristália eurofarma established joint venture markets distributes sells portfolio pharmaceutical branded generic products merck cristália eurofarma brazil merck owns 51 joint venture cristália eurofarma collectively 49 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values resulted merck recognizing intangible assets currently marketed products 89 million iprd 100 million goodwill 103 million deferred tax liabilities 64 million company also recorded increases noncontrolling interests paidin capital amounts 112 million 116 million respectively transaction closed february 1 2013 accordingly results operations acquired business included company’s results operations beginning date 2014 result changes cash flow assumptions certain compounds company recorded 31 million asset impairment charges related iprd recorded supera transaction changes cash flow assumptions compounds well certain currently marketed products also resulted writeoff goodwill balance related joint venture supera 93 million existing exchange rates company previously recorded 15 million impairment charges fourth quarter 2013 related iprd recorded supera transaction result changes cash flow assumptions certain compounds remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc “centocor” johnson “jj” company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company exclusive marketing rights products throughout europe russia turkey december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi european union “eu” following receipt pricing reimbursement approval within eu remicade lost market exclusivity major european markets february 2015 profits derived merck’s exclusive distribution two products equally divided merck jj 5 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax gains 294 million 2014 pretax losses 84 million 2013 31 million 2012 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2014 company party 17 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes libor recorded interest expense offset fair value changes swap contracts 2014 company terminated interest rate swap contracts effectively converted company’s 600 fixedrate notes due 2017 floatingrate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 3 million cash flows contracts reported operating activities consolidated statement cash flows february 2015 connection company’s february debt offering see note 9 merck entered ten additional interest rate swap contracts notional amounts 250 million effectively convert company’s 185 notes due 2020 company’s 235 notes due 2022 floatingrate instruments presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated foreign currency cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 3 million 2 million ineffectiveness hedge 2014 2013 respectively 2 ineffectiveness hedge represents amount excluded hedge effectiveness testing 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2014 company estimates 457 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information availableforsale investments december 31 follows availableforsale debt securities included shortterm investments totaled 83 billion december 31 2014 remaining debt securities 120 billion mature within five years december 31 2014 2013 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2014 december 31 2014 cash equivalents 74 billion included 61 billion cash equivalents considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration follows 2014 fair value liability contingent consideration related acquisition occurred 2010 increased 316 million resulting progression program preclinical phase 1 increase resulted higher fair value future regulatory milestone royalty payments due increased probability success program given progression phase 1 addition 2014 company recognized liability 43 million contingent consideration related acquisition oncoethix 2014 see note 4 fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2014 225 billion compared carrying value 214 billion december 31 2013 255 billion compared carrying value 251 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic conditions ongoing sovereign debt issues certain european countries company continues monitor credit economic conditions within greece italy spain portugal among members eu economic conditions well inherent variability timing cash receipts resulted may continue result increase average length time takes collect accounts receivable outstanding time value money discounts recorded customers collection accounts receivable expected excess one year december 31 2014 2013 assets included 80 million 275 million respectively accounts receivable expected collected within one year company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations december 31 2014 company’s accounts receivable greece italy spain portugal totaled approximately 600 million amount hospital public sector receivables approximately 330 million aggregate approximately 14 27 46 13 related greece italy spain portugal respectively december 31 2014 company’s total net accounts receivable outstanding one year approximately 100 million approximately 31 related accounts receivable greece italy spain portugal mostly comprised hospital public sector receivables 2014 company completed nonrecourse factorings spain approximately 100 million italy approximately 100 million hospital public sector receivables 2013 company completed nonrecourse factorings approximately 210 million hospital public sector receivables spain 2012 company collected approximately 500 million accounts receivable connection spanish government’s debt stabilizationstimulus plan addition company completed nonrecourse factorings approximately 230 million 2012 hospital public sector accounts receivable italy additionally company continues expand emerging markets payment terms markets tend longer resulting increase accounts receivable balances certain markets company’s customers largest accounts receivable balances amerisourcebergen corporation cardinal health inc mckesson corporation aah pharmaceuticals ltd uk zuellig pharma ltd asia pacific represented aggregate approximately 30 total accounts receivable december 31 2014 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2014 2013 company received cash collateral 14 billion 652 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2014 2013 6 inventories december 31 consisted inventories valued lifo method comprised approximately 26 billion 23 billion inventories december 31 2014 2013 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2014 2013 amounts included 16 billion 15 billion respectively inventories expected sold within one year addition amounts included 74 million 177 million december 31 2014 2013 respectively inventories produced preparation product launches 7 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2014 93 million 2014 additions goodwill pharmaceutical segment primarily resulted acquisition idenix reductions resulted sale mcc divestiture certain ophthalmic products several international markets see note 4 reductions goodwill segments 2014 resulted termination company’s relationship astrazeneca lp “azlp” see note 8 divestiture mcc also third quarter 2014 company recorded impairment charge goodwill related supera joint venture see note 4 company performed recent annual impairment test october 1 2014 concluded goodwill impaired additions pharmaceutical segment goodwill 2013 resulted formation supera joint venture see note 4 reductions resulted divestiture company’s api manufacturing business related branded products see note 3 july 2013 company acquired remaining shares physicians interactive provider online mobile clinical resources solutions health care professionals merck existing 24 ownership interest 97 million november 2013 merck acquired health management resources corporation leader medical weight management 87 million transactions collectively resulted addition approximately 175 million goodwill 2013 included segments pro forma financial information included transactions historical financial results significant compared company’s financial results intangibles december 31 consisted acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles related marketed products included product rights december 31 2014 include zetia 36 billion vytorin 21 billion nasonex 719 million nuvaring 684 million implanonnexplanon 703 million 2014 company recognized intangible asset related adempas result formation collaboration bayer see note 4 carrying value 858 million december 31 2014 reflected table also 2014 22 billion intangible assets divested connection sale mcc see note 4 2014 2013 company recorded impairment charges related marketed products 11 billion 486 million respectively within material production costs amount recorded 2014 793 million related pegintron 244 million related victrelis 35 million related rebetol products marketed company treatment chronic hcv 2014 sales products adversely affected loss market share patient treatment delays markets anticipating availability new therapeutic options 2014 trends accelerated rapidly previously anticipated company addition developments competitive hcv treatment market led market share losses greater company predicted factors caused changes cash flow projections pegintron victrelis rebetol indicated intangible asset values recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair values intangible assets related pegintron victrelis rebetol compared related carrying values resulted impairment charges noted amount recorded 2013 330 million resulted lower cash flow projections saphrissycrest due reduced expectations international markets united states revisions cash flows indicated saphrissycrest intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions considered several different scenarios determine best estimate fair value intangible asset related saphrissycrest compared related carrying value resulted impairment charge noted remaining 156 million impairment charges 2013 resulted lower cash flow projections rebetol due reduced expectations japan europe revisions cash flows indicated rebetol intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related rebetol compared related carrying value resulted impairment charge noted iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects 2014 company recorded iprd 32 billion related acquisition idenix see note 4 upon successful completion project company make separate determination useful life assets begin amortization 2014 2013 2012 654 million 346 million 78 million respectively iprd reclassified products product rights upon receipt marketing approval major market 2014 company recorded 49 million iprd impairment charges within research development expenses primarily result changes cash flow assumptions certain compounds obtained connection supera joint venture well discontinuation certain animal health programs 2013 company recorded 279 million iprd impairment charges amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period 2012 company recorded 200 million iprd impairment charges primarily pipeline programs previously deprioritized subsequently deemed alternative use period iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within materials production costs 42 billion 2014 48 billion 2013 50 billion 2012 estimated aggregate amortization expense next five years follows 2015 39 billion 2016 32 billion 2017 29 billion 2018 14 billion 2019 638 million 8 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 noted july 1 2014 company longer records equity income azlp 2 includes results sanofi pasteur msd astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products revenue 463 million 920 million 915 million 2014 2013 2012 respectively primarily relating sales nexium well prilosec addition merck earned certain partnership returns recorded equity income affiliates reflected table returns included priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest june 30 2014 astrazeneca exercised option purchase merck’s interest kbi 419 million cash amount 327 million reflects estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized time income expense net contingency eliminated sales occur 2014 140 million deferred revenue recognized income expense net remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net result astrazeneca’s option exercise company’s remaining interest azlp redeemed accordingly company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion kbi preferred stock see note 11 elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance result astrazeneca exercising option july 1 2014 company longer records equity income azlp supply sales azlp terminated summarized financial information azlp follows 1 includes results june 30 2014 termination date 2 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 11 billion 2014 12 billion 2013 11 billion 2012 investments affiliates accounted using equity method including joint ventures totaled 337 million december 31 2014 16 billion december 31 2013 amounts reported assets amounts due joint ventures included deferred income taxes current assets 45 million december 31 2014 277 million december 31 2013 summarized information affiliates excluding azlp disclosed separately follows 9 loans payable longterm debt commitments loans payable december 31 2014 included 10 billion notes due 2015 15 billion commercial paper 55 million shortterm foreign borrowings 143 million longdated notes subject repayment option holder loans payable december 31 2013 included 21 billion notes due 2014 16 billion commercial paper 402 million shortterm foreign borrowings 370 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 015 009 december 31 2014 2013 respectively longterm debt december 31 consisted presented table included 309 million 119 million december 31 2014 2013 respectively borrowings variable rates averaging 00 2014 2013 also included foreign borrowings 53 million 64 million december 31 2014 2013 respectively varying rates 625 450 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices october 2014 company issued eurodenominated senior unsecured notes consisting €10 billion principal amount 1125 notes due 2021 €10 billion principal amount 1875 notes due 2026 €500 million principal amount 25 notes due 2034 interest notes payable annually notes series redeemable whole part time company’s option varying redemption prices net proceeds offering 31 billion used part repay debt validly tendered connection tender offers launched company certain outstanding notes debentures company paid 25 billion aggregate consideration applicable purchase price together accrued interest redeem 18 billion principal amount debt addition november 2014 merck redeemed 10 billion 400 notes due 2015 10 billion 600 notes due 2017 company recorded pretax loss 628 million 2014 connection transactions february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes consisting 300 million principal amount floating rate notes due 2017 700 million principal amount floating rate notes due 2020 125 billion principal amount 185 notes due 2020 125 billion aggregate principal amount 235 notes due 2022 25 billion aggregate principal amount 275 notes due 2025 20 billion aggregate principal amount 370 notes due 2045 company used substantial portion net proceeds offering repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including without limitation repurchases company’s common stock repayment outstanding commercial paper borrowings upcoming debt maturities december 2014 company entered bridge loan agreement certain banks pursuant company ability borrow 80 billion purpose obtaining shortterm financing acquisition cubist company borrow funds bridge loan issuing 80 billion senior unsecured notes discussed terminated bridge loan february 20 2015 effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp “msd” msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2014 company compliance covenants aggregate maturities longterm debt next five years follows 2015 10 billion 2016 24 billion 2017 19 million 2018 30 billion 2019 13 billion amounts reflect debt maturities related company’s february 2015 debt issuance described august 2014 company terminated existing credit facility entered new 60 billion fiveyear credit facility matures august 2019 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 350 million 2014 367 million 2013 396 million 2012 minimum aggregate rental commitments noncancellable leases follows 2015 232 million 2016 122 million 2017 92 million 2018 55 million 2019 46 million thereafter 97 million company significant capital leases 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including environmental matters except vioxx litigation defined separate assessment provided note opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed including vioxx litigation complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 vioxx litigation product liability lawsuits previously disclosed merck defendant approximately 25 active federal state lawsuits “vioxx product liability lawsuits” alleging personal injury result use vioxx cases coordinated multidistrict litigation us district court eastern district louisiana “vioxx mdl” judge eldon e fallon previously disclosed merck also defendant approximately 30 putative class action lawsuits alleging economic injury result purchase vioxx one cases vioxx mdl merck reached resolution approved judge fallon class actions vioxx mdl settlement merck pay 23 million pay properly documented claims submitted class members approved attorneys’ fees expenses approved settlement notice costs certain administrative expenses court entered order approving settlement january 2014 merck also defendant lawsuits brought state attorneys general three states alaska montana utah actions pending vioxx mdl proceeding october 10 2014 judicial panel multidistrict litigation “jpml” issued order remanding actions back original federal courts actions allege merck misrepresented safety vioxx seek recovery expenditures vioxx governmentfunded health care programs medicaid andor penalties alleged consumer fraud act violations february 6 2015 federal district judge anchorage remanded alaska lawsuit state court montana attorney general filed renewed motion remand case federal district court montana state court motion yet decided shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits federal securities laws state laws filed merck various current former officers directors “vioxx securities lawsuits” vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler consolidated purposes august 2011 judge chesler granted part denied part merck’s motion dismiss fifth amended class action complaint consolidated securities action among things claims based statements made voluntary withdrawal vioxx september 30 2004 dismissed october 2011 defendants answered fifth amended class action complaint april 2012 plaintiffs filed motion class certification january 2013 judge chesler granted motion march 2013 plaintiffs filed motion leave amend complaint add certain allegations expand class period may 2013 court denied plaintiffs’ motion leave amend complaint expand class period granted plaintiffs’ leave amend complaint add certain allegations within existing class period june 2013 plaintiffs filed sixth amended class action complaint july 2013 defendants answered sixth amended class action complaint discovery completed closed dispositive motions fully briefed previously disclosed several individual securities lawsuits filed foreign institutional investors also consolidated vioxx securities lawsuits october 2011 plaintiffs filed amended complaints pending individual securities lawsuits also october 2011 individual securities lawsuit “kbc lawsuit” together prior individual actions “direct actions” filed district new jersey several foreign institutional investors case also consolidated vioxx securities lawsuits january 2012 defendants filed motions dismiss one individual lawsuits “abp lawsuit” briefing motions dismiss completed march 2012 august 2012 judge chesler granted part denied part motions dismiss abp lawsuit among things certain alleged misstatements omissions dismissed inactionable state law claims dismissed full september 2012 defendants answered complaints direct actions kbc lawsuit day defendants moved dismiss complaint kbc lawsuit statute limitations grounds december 2012 judge chesler denied motion dismiss kbc lawsuit january 2013 defendants answered complaint kbc lawsuit discovery completed direct actions closed dispositive motions fully briefed direct actions march 2014 february 2015 six additional individual securities complaints filed institutional investors opted class action referred new complaints substantially similar complaints direct actions consolidated vioxx securities lawsuits insurance company directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 145 million result previously disclosed insurance arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx brazil canada europe israel collectively “vioxx international lawsuits” previously disclosed company entered agreement resolve claims related vioxx canada pursuant company pay minimum approximately 21 million aggregate maximum approximately 36 million agreement approved courts canada’s provinces reserves company believes meritorious defenses remaining vioxx product liability lawsuits vioxx securities lawsuits vioxx international lawsuits collectively “vioxx litigation” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect remaining vioxx litigation company established reserve respect canadian settlement certain vioxx product liability lawsuits immaterial settlements related certain vioxx international lawsuits company also immaterial remaining reserve relating previously disclosed vioxx investigation nonparticipating states litigation continuing company established liability reserves respect vioxx litigation unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2014 approximately 5575 cases include approximately 5805 plaintiff groups filed pending merck either federal state court including one case seeks class action certification well damages andor medical monitoring approximately 1015 actions plaintiffs allege among things suffered osteonecrosis jaw “onj” generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax however substantially actions subject settlement discussed addition plaintiffs approximately 4560 actions generally allege sustained femur fractures andor bone injuries “femur fractures” association use fosamax cases alleging onj andor jaw related injuries august 2006 jpml ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax onj mdl” coordinated pretrial proceedings december 2013 merck reached agreement principle plaintiffs’ steering committee “psc” fosamax onj mdl resolve pending onj cases appeal fosamax onj mdl state courts aggregate amount 277 million merck psc subsequently formalized terms agreement master settlement agreement “onj master settlement agreement” executed april 2014 condition settlement 100 state federal onj plaintiffs agree participate settlement plan merck could either terminate onj master settlement agreement waive 100 participation requirement agree lesser funding amount settlement fund july 14 2014 merck elected proceed onj master settlement agreement reduced funding level since current participation level approximately 95 addition judge overseeing fosamax onj mdl granted motion filed merck entered order requires approximately 30 nonparticipants whose cases remain fosamax onj mdl submit expert reports order cases proceed onj master settlement agreement effect cases alleging femur fractures discussed cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey “fosamax femur fracture mdl” result jpml order approximately 1035 cases pending fosamax femur fracture mdl december 31 2014 case management order entered requiring parties review 33 cases judge joel pisano selected four cases group tried initial bellwether cases fosamax femur fracture mdl first bellwether case glynn v merck began april 8 2013 jury returned verdict merck’s favor april 29 2013 addition june 27 2013 judge pisano granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law addition judge pisano entered order august 2013 requiring plaintiffs fosamax femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case hearing show cause order held january 2014 march 26 2014 judge pisano issued opinion finding claims approximately 650 plaintiffs allegedly suffered injuries prior september 14 2010 preempted ordered cases dismissed majority plaintiffs appealing ruling us court appeals third circuit furthermore june 17 2014 judge pisano granted merck summary judgment gaynor v merck case found merck’s updates january 2011 fosamax label regarding atypical femur fractures adequate matter law merck adequately communicated changes plaintiffs gaynor appealed judge pisano’s decision third circuit august 2014 merck filed motion requesting judge pisano enter order requiring remaining plaintiffs fosamax femur fracture mdl claim 2011 fosamax label inadequate proximate cause alleged injuries show cause cases dismissed based court’s preemption decision ruling gaynor case plaintiffs opposed motion asked court stay remaining cases fosamax femur fracture mdl third circuit rules appeal judge pisano’s preemption decision judge pisano granted merck’s motion entered requested show cause order november 2014 september 2014 judge pisano also ordered parties participate mediation process december 31 2014 approximately 3005 cases alleging femur fractures filed new jersey state court pending judge jessica mayer middlesex county parties selected initial group 30 cases reviewed fact discovery two additional groups 50 cases reviewed fact discovery selected november 2013 march 2014 respectively december 31 2014 approximately 515 cases alleging femur fractures filed california state court petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge thierry colaw currently presiding coordinated proceedings march 2014 court directed group 10 discovery pool cases reviewed fact discovery subsequently scheduled galper v merck case first trial february 2015 two additional trials scheduled may july 2015 additionally four femur fracture cases pending state courts discovery ongoing fosamax femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2014 approximately 785 product user claims served pending merck alleging generally use januvia andor janumet caused development pancreatic cancer complaints filed several different state federal courts claims pending consolidated multidistrict litigation proceeding us district court southern district california called “in incretinbased therapies products liability litigation” proceeding includes federal lawsuits alleging pancreatic cancer due use following medicines januvia janumet byetta victoza latter two products manufactured pharmaceutical companies addition cases noted company agreed december 31 2014 toll statute limitations 19 additional claims company intends defend lawsuits nuvaring previously disclosed beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” company arising organon’s marketing sale nuvaring “nuvaring litigation” combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough among things failed adequately design manufacture nuvaring failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation “nuvaring mdl” venued missouri coordinated proceeding new jersey state court pursuant settlement agreement merck negotiating plaintiffs’ counsel became effective june 4 2014 merck paid lump total settlement 100 million resolve 95 cases filed retainer counsel february 7 2014 plaintiffs 1868 cases joined settlement program cases dismissed prejudice settlement administration process completed company expects first dismissals begin second quarter continue rolling basis throughout 2015 company certain insurance coverage available currently used partially fund company’s legal fees insurance coverage also used fund settlement december 31 2014 approximately 80 cases outside settlement program remained plaintiff participating settlement chooses proceed case well future plaintiffs nuvaring mdl new jersey state court obligated meet various discovery evidentiary requirements case management orders nuvaring mdl new jersey state court plaintiffs fail fully timely satisfy requirements set deadlines subject order show cause case dismissed prejudice propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2014 approximately 1235 lawsuits involving total approximately 1500 plaintiffs instances spouses joined plaintiffs suits allege experienced persistent sexual side effects following cessation treatment propecia andor proscar filed merck approximately 50 plaintiffs also allege propecia proscar caused cause prostate cancer male breast cancer lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge john gleeson eastern district new york matters pending state court new jersey consolidated judge jessica mayer middlesex county company intends defend lawsuits governmental proceedings previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 4 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceed discovery company intends defend lawsuits previously disclosed company received subpoena office inspector general us department health human services behalf us attorney’s office district maryland civil division us department justice “doj” requests information relating company’s marketing singulair dulera inhalation aerosol certain marketing activities january 1 2006 present company cooperating government prior company’s acquisition cubist acquired optimer pharmaceuticals inc “optimer” previously disclosed cubist prior acquisition optimer became aware attempted share grant september 2011 optimer’s thensubsidiary obi pharma inc certain related matters including potentially improper 300 thousand payment research laboratory july 2011 involving individual associated share grant may violated certain applicable laws including us foreign corrupt practices act april 2012 optimer selfreported results preliminary findings us securities exchange commission “sec” doj terminated thenchief financial officer thenvice president clinical development removed chairman board directors february 2013 independent members optimer’s board directors determined additional remedial action taken light prior compliance record keeping conflictofinterest issues surrounding potentially improper payment research laboratory certain related matters february 26 2013 optimer’s thenpresident chief executive officer thengeneral counsel chief compliance officer resigned request independent members board directors company continuing cooperate investigations relevant us authorities review matters optimer taken remedial steps response internal investigation prior cubist acquisition nonetheless events could result lawsuits filed optimer certain optimer’s former employees directors company may required indemnify persons costs losses incurred connection proceedings company cannot predict ultimate resolution matters whether optimer persons charged violations applicable civil criminal laws whether scope investigations extended new issues company also cannot predict potential penalties remedies authorities may seek collateral consequences may government actions previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperated agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries previously disclosed company advised doj based information received closed inquiry matter relates company future company may receive additional requests information either doj sec previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate commercial litigation awp litigation previously disclosed past company andor certain subsidiaries named defendants cases brought various states alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used public private payors calculating provider reimbursement levels 2014 company settled remaining awp cases subsidiary defendant kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications “andas” following commencement administrative proceeding us federal trade commission “ftc” 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case march 2010 district court granted summary judgment defendants remaining lawsuits dismissed matter entirety july 2012 third circuit court appeals reversed district court’s grant summary judgment remanded case proceedings time third circuit upheld december 2008 decision district court certify certain direct purchaser plaintiffs’ claims class action august 2012 company filed petition certiorari us supreme court seeking review third circuit’s decision june 2013 supreme court granted petition vacated judgment third circuit remanded case consideration light recent decision ftc v actavis inc decision held whether socalled “reverse payment” ie payment holder pharmaceutical patent party challenging patent made connection settlement dispute violates antitrust laws determined basis “rule reason” analysis september 2013 third circuit returned case district court proceedings accordance actavis standard sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company united states district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws november 2013 company filed motion dismiss class claims plaintiffs sought granted leave file amended complaint january 2014 plaintiffs filed amended complaint adding four additional named plaintiffs october 8 2014 court denied company’s motion dismiss strike class claims premature patent litigation time generic manufacturers pharmaceutical products file andas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company products marketed via agreements companies currently involved patent infringement litigation united states include cancidas cubicin emend injection invanz nasonex nuvaring similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired mergers acquisitions potentially significant intangible asset impairment charges cancidas february 2014 patent infringement lawsuit filed united states xellia pharmaceuticals aps “xellia” respect xellia’s application fda seeking prepatent expiry approval market generic version cancidas lawsuit automatically stays fda approval xellia’s application july 2016 adverse court decision whichever may occur earlier august 2014 patent infringement lawsuit filed united states fresenius kabi usa llc “fresenius” respect fresenius’s application fda seeking prepatent expiry approval market generic version cancidas lawsuit automatically stays fda approval fresenius’s application december 2016 adverse court decision whichever may occur earlier cubicin march 2012 patent infringement lawsuit filed united states hospira inc “hospira” respect hospira’s application fda seeking prepatent expiry approval market generic version cubicin trial held february 2014 december 2014 district court found composition patent expires june 2016 valid infringed later patents expiring september 2019 november 2020 found invalid hospira appealed finding composition patent invalid company crossappealed finding later patents invalid decision upheld appeal hospira’s application approved least june 2016 october 2013 patent infringement lawsuit filed united states strides inc agila specialties private limited “stridesagila” respect stridesagila’s application fda seeking prepatent expiry approval market generic version cubicin lawsuit automatically stays fda approval stridesagila’s application february 2016 adverse court decision whichever may occur earlier hospira decision upheld appeal stridesagila’s application approved least june 2016 july 2014 patent infringement lawsuit filed united states fresenius kabi usa llc “fresenius” respect fresenius’s application fda seeking prepatent expiry approval market generic version cubicin lawsuit automatically stays fda approval fresenius’s application november 2016 adverse court decision whichever may occur earlier hospira decision upheld appeal fresenius’s application approved least june 2016 earlier district court action teva parenteral medicines inc teva pharmaceuticals usa inc teva pharmaceutical industries ltd collectively “teva” resulted settlement whereby teva launch december 2017 june 2018 company obtains pediatric marketing exclusivity cubicin hospira decision upheld appeal teva able launch june 2016 october 2014 agila specialties inc mylan pharmaceuticals inc filed petitions inter partes review “ipr” united states patent trademark office “uspto” seeking invalidity september 2019 november 2020 patents november 2014 fresenius filed petitions ipr uspto seeking invalidity september 2019 patents uspto six months filing determine whether institute requested ipr proceedings emend injection may 2012 patent infringement lawsuit filed united states sandoz inc “sandoz” respect sandoz’s application fda seeking prepatent expiry approval market generic version emend injection lawsuit automatically stays fda approval sandoz’s application july 2015 adverse court decision whichever may occur earlier june 2012 patent infringement lawsuit filed united states accord healthcare inc us accord healthcare inc intas pharmaceuticals ltd collectively “intas” respect intas’ application fda seeking prepatent expiry approval market generic version emend injection company agreed intas stay lawsuit pending outcome lawsuit sandoz july 2014 patent infringement lawsuit filed united states fresenius respect fresenius’s application fda seeking prepatent expiry approval market generic version emend injection lawsuit automatically stays fda approval fresenius’s application november 2016 adverse court decision whichever may occur earlier december 2014 apotex inc filed petition ipr uspto seeking invalidity claims compound patent covering emend injection uspto six months determine whether institute requested ipr proceedings invanz july 2014 patent infringement lawsuit filed united states hospira respect hospira’s application fda seeking prepatent expiry approval market generic version invanz lawsuit automatically stays fda approval hospira’s application november 2016 adverse court decision whichever may occur earlier also july 2014 patent infringement lawsuit filed united states sandoz respect sandoz’s application fda seeking prepatent approval market generic version invanz neither hospira sandoz challenged earlier patent covering invanz parties’ application fda approved least patent expires may 2016 nasonex july 2014 patent infringement lawsuit filed united states teva pharmaceuticals usa inc “teva pharma” respect teva pharma’s application fda seeking prepatent expiry approval market generic version nasonex lawsuit automatically stays fda approval teva pharma’s application november 2016 adverse court decision whichever may occur earlier decision issued june 2013 held merck patent covering mometasone furoate monohydrate valid infringed apotex corp’s proposed product nuvaring december 2013 company filed lawsuit subsidiary actavis plc united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring antipd1 antibody patent oppositions litigation previously disclosed ono pharmaceutical co “ono” european patent ep 1 537 878 “’878” broadly claims use antipd1 antibody company’s immunotherapy keytruda treatment cancer ono previously licensed commercial rights antipd1 antibody bristolmyers squibb “bms” certain markets company believes ’878 patent invalid filed opposition european patent office “epo” seeking revocation june 2014 opposition division epo found claims ’878 patent valid company received opposition division’s written opinion september 2014 company submitted substantive appeal february 2015 april 2014 company three companies opposed another european patent ep 2 161 336 “’336” owned bms ono believes invalid ’336 patent valid broadly claims antipd1 antibodies could include keytruda bms ono recently submitted request amend claims ’336 patent epo allows amendment claims ’336 patent would longer broadly claim antipd1 antibodies keytruda may 2014 company filed lawsuit united kingdom “uk” seeking revocation uk national versions ’878 ’336 patents july 2014 ono bms sued company seeking declaration ’878 patent would infringed uk marketing keytruda company sought declaration uk court keytruda infringe ’336 patent uk anticipated issues validity infringement patents heard time uk court scheduled trial begin july 2015 bms ono recently notified company request amend claims epo ’336 patent intention seek permission court similarly amend uk national version claims ’336 patent would longer broadly claim antipd1 antibodies keytruda company file lawsuits seeking revocation ’336 ’878 patents national courts europe time ono bms file patent infringement actions company national courts europe around time company launches keytruda approved national court determines company infringed valid claim ’878 ’336 patent ono bms may entitled monetary damages including royalties future sales keytruda potentially could seek injunction prevent company marketing keytruda country uspto granted us patent nos 8728474 ono 8779105 ono bms patents equivalent ’878 ’336 patents respectively september 2014 bms ono filed lawsuit united states alleging marketing keytruda company infringe us patent 8728474 bms ono seeking prevent stop marketing keytruda united states trial matter currently scheduled begin november 2016 company believes 8728474 patent 8779105 patent invalid september 2014 company filed lawsuit australia seeking revocation australian patent 2011203119 equivalent ’336 patent ono bms similar patents applications company closely monitoring pending united states japan countries company confident able market keytruda country approved prevented ono bms patents pending applications litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2014 december 31 2013 approximately 215 million 160 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters mercks facilities oss netherlands inspected province brabant “province” pursuant dutch hazards major accidents decree sites’ environmental permits province issued penalties alleged violations regulations governing preventing managing accidents hazardous substances government also issued fine alleged environmental violations one oss facilities together totaled 235 thousand company subsequently advised criminal investigation initiated based upon certain issues formed basis administrative enforcement action province company intends defend enforcement action may result investigation company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 125 million 213 million december 31 2014 2013 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 66 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 purchases treasury stock 2013 include 105 million shares purchased pursuant accelerated share repurchase agreement discussed 2 issuances primarily reflect activity sharebased compensation plans 2013 pursuant accelerated share repurchase “asr” agreement goldman sachs co company purchased 105 million shares merck common stock 50 billion asr entered pursuant share repurchase program announced may 1 2013 noncontrolling interests connection 1998 restructuring ami merck assumed 24 billion par value preferred stock dividend rate 5 per annum carried kbi included noncontrolling interests december 31 2013 2014 astrazeneca exercised option acquire merck’s interest azlp see note 8 preferred stock obligation retired 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units “rsus” performance share units “psus” certain management level employees company also issues rsus employees certain company’s equity method investees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2014 139 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2014 2013 2012 278 million 276 million 335 million respectively related income tax benefits 86 million 84 million 105 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2014 2013 2012 5814 4501 3951 per option respectively weighted average fair value options granted 2014 2013 2012 679 621 547 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2014 401 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries result plan design changes approved 2011 beginning january 1 2013 active participants merck’s primary us defined benefit pension plans accruing pension benefits using new cash balance formulas based age service pay interest however transition period january 1 2013 december 31 2019 participants earn greater benefit calculated employee’s legacy final average pay formula new cash balance formula years service december 31 2019 participants earn future benefits cash balance formula addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components decrease net periodic benefit cost pension postretirement benefit plans 2014 compared 2013 largely attributable change discount rate connection restructuring actions see note 3 termination charges recorded 2014 2013 2012 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2014 2013 2012 pension postretirement benefit plans addition settlements recorded 2014 2013 2012 certain us international pension plans obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows december 31 2014 2013 accumulated benefit obligation 179 billion 148 billion respectively pension plans 101 billion 80 billion respectively related us pension plans actuarial losses 2014 reflect change discount rate us plans also reflect impact company’s adoption new retirement plan mortality assumptions issued society actuaries october 2014 information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2014 2013 580 million 622 million respectively approximately 3 4 respectively company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2015 approximately 40 million us pension plans approximately 150 million international pension plans approximately 65 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2015 353 million 72 million respectively pension plans 227 million 57 million respectively relates us pension plans 4 million 65 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis developing expected rate return within plan longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2015 company’s expected rate return range 730 875 range 2014 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2014 2013 2012 124 million 138 million 146 million respectively 14 income expense net income expense net consisted exchange losses 2013 reflect 140 million losses due venezuelan currency devaluation february 2013 venezuelan government devalued currency bolívar fuertes 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations net presented table 2014 includes 112 billion gain divestiture mcc gain 741 million related astrazeneca’s option exercise 480 million gain divestiture certain ophthalmic products several international markets gain 204 million related divestiture sirna partially offset 628 million loss extinguishment debt 93 million goodwill impairment charge related company’s joint venture supera see notes 4 8 9 additional information related transactions net 2012 reflects 493 million net charge related previously disclosed settlement enhance litigation interest paid 852 million 2014 922 million 2013 808 million 2012 15 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits tax rate changes miscellaneous items foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 350 us statutory rate foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 350 us statutory rate company’s 2014 effective tax rate reflects impact tax increase prevention act signed law december 19 2014 extending research credit controlled foreign corporation lookthrough provisions american taxpayer relief act 2012 signed law january 2 2013 extending research credit controlled foreign corporation lookthrough provisions two years retroactively january 1 2012 december 31 2013 company recorded entire 2012 benefit 269 million 2013 financial statement period included date enactment income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss “nol” carryforwards several jurisdictions december 31 2014 203 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant valuation allowances 265 million established foreign nol carryforwards foreign deferred tax assets addition company approximately 175 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2014 2013 2012 79 billion 23 billion 25 billion respectively income taxes paid 2014 reflects approximately 50 billion taxes paid divestiture mcc tax benefits relating stock option exercises 202 million 2014 70 million 2013 81 million 2012 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs cra discussed company recognize unrecognized tax benefits 35 billion december 31 2014 income tax provision would reflect favorable net impact 33 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2014 could decrease 13 billion next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted expense 9 million 2014 benefits 319 million 2013 88 million 2012 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 659 million 665 million december 31 2014 2013 respectively internal revenue service “irs” currently conducting examinations company’s tax returns years 2006 2008 well 2010 2011 although concluded one issue related refund claim taxes paid remains examination company’s 20022005 federal tax returns company currently appealing irs administrative appeals process addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2003 2014 2013 irs finalized examination scheringplough’s 20072009 tax years company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 165 million tax provision benefit 2013 2010 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards company’s reserves uncertain tax positions adequate cover adjustments related examination period additionally previously disclosed company seeking resolution one issue raised examination irs administrative appeals process 2013 company recorded outofperiod net tax benefit 160 million related issue settled fourth quarter 2012 final resolution relating interest owed reached first quarter 2013 company’s unrecognized tax benefits related issue exceeded settlement amount management concluded exclusion benefit material prior year financial statements previously disclosed canada revenue agency “cra” proposed adjustments 1999 2000 relating intercompany pricing matters issued assessments miscellaneous audit issues tax years 20012004 2012 merck cra reached settlement years calls merck pay additional canadian tax approximately 65 million company’s unrecognized tax benefits related matters exceeded settlement amount therefore company recorded net 112 million tax provision benefit 2012 portion taxes paid expected creditable us tax purposes company previously established reserves matters resolution matters material effect company’s results operations financial position liquidity december 31 2014 foreign earnings 600 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2022 16 earnings per share prior 2013 company calculated earnings per share pursuant twoclass method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted december 31 2009 generally three year vesting period certain management level employees met definition participating securities rsus psus issued january 1 2010 meet definition participating securities therefore beginning 2013 company longer applies twoclass method calculations earnings per share follows 1 issuable primarily sharebased compensation plans 2014 2013 2012 4 million 25 million 104 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 35 billion 17 billion december 31 2014 2013 respectively postretirement benefit plan net loss 228 million 80 million december 31 2014 2013 respectively well pension plan prior service credit 473 million 559 million december 31 2014 2013 respectively postretirement benefit plan prior service credit 257 million 331 million december 31 2014 2013 18 segment reporting company’s operations principally managed products basis comprised three operating segments pharmaceutical animal health alliances includes revenue equity income company’s relationship azlp june 30 2014 termination date animal health alliances segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers october 1 2014 company divested consumer care segment see note 4 developed manufactured marketed overthecounter foot care sun care products accounting policies segments described note 2 sales company’s products follows 1 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments animal health alliances well consumer care divestiture october 1 2014 see note 4 alliances segment includes revenue company’s relationship azlp termination june 30 2014 see note 8 4 revenues primarily comprised miscellaneous corporate revenues including revenue hedging activities sales related divested products businesses supply sales included segment results revenues 2014 include 232 million received merck connection sale us marketing rights saphris see note 4 revenues 2013 reflect 50 million revenue outlicense pipeline compound revenues also include thirdparty manufacturing sales substantial portion divested october 2013 see note 3 consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits losses primarily comprised miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales unallocated net includes expenses corporate manufacturing cost centers goodwill product intangible asset impairment charges gain losses sales businesses miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2014 december 31 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 27 2015 b supplementary data selected quarterly financial data 2014 2013 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2014 reflect divestiture merck’s consumer care business october 1 2014 see note 4 including 112 billion gain sale amounts 2014 also include loss extinguishment debt see note 9 2 amounts 2014 include gains sales businesses see note 4 additional year expense health care reform fee amounts 2013 include net benefits relating settlements certain federal income tax issues see note 15 3 amounts 2014 include gain astrazeneca’s option exercise see note 8 4 amounts 2014 include tax benefit relating sale sirna therapeutics inc see note 4 5 amounts 2014 2013 reflect acquisition divestiturerelated costs see note 7 impact restructuring actions see note 3 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2015 2014 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2015 notes consolidated financial statements report dated february 26 2016 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health alliances healthcare services segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers merck’s alliances segment primarily includes results company’s relationship astrazeneca lp termination relationship june 30 2014 company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients january 21 2015 company acquired cubist pharmaceuticals inc cubist july 31 2015 merck acquired ccam biotherapeutics ltd ccam results cubist’s ccam’s businesses included merck’s financial statements subsequent respective acquisition dates see note 4 october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products see note 4 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized title risk loss passes customer typically upon delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 145 million 27 billion respectively december 31 2015 112 million 20 billion respectively december 31 2014 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 16 billion 2015 25 billion 2014 22 billion 2013 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 21 billion 23 billion 25 billion 2015 2014 2013 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 421 million 505 million net accumulated amortization december 31 2015 2014 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 1 20 years see note 7 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development acquired inprocess research development iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event risk adjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life amounts due collaborative partners related development activities generally reflected reduction research development expenses specific milestone achieved nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges periods addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards november 2015 financial accounting standards board fasb issued accounting guidance balance sheet classification deferred taxes part simplification initiative aimed reducing complexity accounting standards new guidance requires deferred tax assets liabilities along related valuation allowance classified noncurrent balance sheet company elected early adopt new guidance fourth quarter 2015 see note 15 recently issued accounting standards may 2014 fasb issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements august 2015 fasb approved oneyear deferral effective date making guidance effective interim annual periods beginning 2018 reporting entities may choose adopt standard original effective date company currently assessing impact adoption consolidated financial statements april 2015 fasb issued accounting guidance requires debt issuance costs presented direct deduction carrying amount debt balance sheet opposed presented deferred charge new guidance effective interim annual periods beginning 2016 december 31 2015 company debt issuance costs recorded deferred charges approximately 100 million january 2016 fasb issued revised guidance accounting reporting financial instruments new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income new guidance also simplifies impairment testing equity investments without readily determinable fair values changes certain disclosure requirements guidance effective interim annual periods beginning 2018 early adoption permitted company currently assessing impact adoption consolidated financial statements 3 restructuring 2013 restructuring program 2013 company initiated actions global restructuring program 2013 restructuring program part global initiative sharpen commercial research development focus actions program primarily include elimination positions sales administrative headquarters organizations well research development additionally actions include reduction company’s global real estate footprint improvements efficiency manufacturing supply network company recorded total pretax costs 527 million 2015 12 billion 2014 2013 related restructuring program since inception 2013 restructuring program december 31 2015 merck recorded total pretax accumulated costs approximately 30 billion eliminated approximately 8630 positions comprised employee separations well elimination contractors vacant positions actions 2013 restructuring program substantially completed end 2015 accordingly january 1 2016 remaining accrued liability future separations 2013 restructuring program combined remaining accrued liability merger restructuring program see remaining activities programs accounted aggregate prospectively merger restructuring program 2010 subsequent merck scheringplough corporation scheringplough merger company commenced actions global restructuring program merger restructuring program designed streamline cost structure combined company actions program initiated 2011 actions program primarily include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company recorded total pretax costs 583 million 2015 730 million 2014 11 billion 2013 related restructuring program since inception merger restructuring program december 31 2015 merck recorded total pretax accumulated costs approximately 85 billion eliminated approximately 29645 positions comprised employee separations well elimination contractors vacant positions nonfacility related restructuring actions merger restructuring program substantially complete accordingly noted january 1 2016 remaining accrued liability future separations 2013 restructuring program combined remaining accrued liability merger restructuring program remaining activities programs primarily relate ongoing facility rationalizations accounted aggregate prospectively company expects complete actions end 2017 incur approximately 15 billion additional pretax costs company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested october 1 2013 company sold active pharmaceutical ingredient api manufacturing business including related manufacturing facility netherlands aspen holdings aspen part planned manufacturing facility rationalizations merger restructuring program connection sale aspen acquired certain branded products merck transferred aspen effective december 31 2013 consideration transaction included cash 705 million notes receivable present value 198 million time disposition cash portion consideration company received 172 million fourth quarter 2013 remaining 533 million received company january 2014 2008 restructuring program 2008 merck announced global restructuring program 2008 restructuring program reduce cost structure increase efficiency enhance competitiveness pretax costs 54 million recorded 2013 related 2008 restructuring program segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated positions eliminated 2013 restructuring program approximately 2535 2015 4555 2014 1540 2013 positions eliminated merger restructuring program approximately 1235 2015 1530 2014 4475 2013 position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather record impairment charge anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2015 2014 2013 includes 550 million 240 million 259 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation activity also reflects net pretax losses resulting sales facilities related assets 117 million 2015 133 million 2014 64 million 2013 primarily reflecting loss transaction aspen discussed adjustments previously recorded amounts material period following table summarizes charges spending relating restructuring activities program 1 nonfacility related cash outlays associated 2013 restructuring program merger restructuring program substantially completed end 2015 remaining cash outlays expected substantially completed end 2017 4 acquisitions divestitures research collaborations license agreements company continues strategy establishing external alliances complement internal research capabilities including research collaborations licensing preclinical clinical compounds drive near longterm growth company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well access new technologies arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share payments contingent upon occurrence certain future events linked success asset development company also reviews pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain products acquisition cubist pharmaceuticals inc january 2015 merck acquired cubist leader development therapies treat serious infections caused broad range bacteria acquisition complements merck’s existing hospital acute care business total consideration transferred 83 billion includes cash paid outstanding cubist shares 78 billion well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf cubist sharebased compensation payments settle nonvested equity awards attributable postcombination service recognized transaction expense 2015 addition company assumed outstanding convertible debt cubist fair value approximately 19 billion acquisition date merck redeemed debt february 2015 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date fair value assets acquired liabilities assumed cubist follows 1 included current liabilities noncurrent liabilities contingent consideration 73 million 50 million respectively 2 goodwill recognized largely attributable anticipated synergies expected arise acquisition allocated pharmaceutical segment goodwill deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach fair value estimated based market participant expectations asset’s discounted projected net cash flows company’s estimates projected net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing discount rate 8 actual cash flows likely different assumed significant intangible assets relate zerbaxa cubicin sivextro see note 7 company recorded fair value incomplete research project surotomycin mk4261 time acquisition reached technological feasibility alternative future use amount capitalized accounted indefinitelived intangible asset subject impairment testing completion abandonment project fair value surotomycin determined using income approach fair value estimated based asset’s probabilityadjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 9 second quarter 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge see note 7 connection cubist acquisition liabilities recorded potential future consideration contingent upon achievement future salesbased milestones fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate 8 used present value probabilityweighted cash flows changes inputs could result different fair value measurement transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date cubist contributed sales 13 billion 2015 merck’s revenues company longer able provide results operations attributable cubist 2015 operations cubist largely integrated 2015 company incurred 324 million transaction costs directly related acquisition cubist including sharebased compensation costs severance costs legal advisory fees reflected marketing administrative expenses following unaudited supplemental pro forma data presents consolidated information acquisition cubist completed january 1 2014 unaudited supplemental pro forma data reflects historical information merck cubist adjusted include additional amortization expense based fair value assets acquired additional interest expense would incurred borrowings used fund acquisition transaction costs associated acquisition related tax effects adjustments pro forma data considered indicative results would occurred acquisition consummated january 1 2014 indicative future results transactions december 2015 company divested remaining ophthalmics portfolio international markets mundipharma ophthalmology products limited merck received consideration approximately 170 million recognized gain 147 million recorded income expense net 2015 july 2015 merck acquired ccam privately held biopharmaceutical company focused discovery development novel cancer immunotherapies acquisition provides merck ccam’s lead pipeline candidate cm24 novel monoclonal antibody targeting immune checkpoint protein ceacam1 evaluated phase 1 study treatment advanced recurrent malignancies including melanoma nonsmallcell lung bladder gastric colorectal ovarian cancers total purchase consideration transaction 201 million included upfront payment 96 million cash future additional payments 510 million associated attainment certain clinical development regulatory commercial milestones company determined fair value 105 million acquisition date transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date merck recognized intangible asset iprd 180 million net assets 7 million excess consideration transferred fair value net assets acquired 14 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 105 fair value contingent consideration determined utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment also utilizing discount rate 105 actual cash flows likely different assumed transaction closed july 31 2015 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included ccam’s historical financial results significant compared company’s financial results also july 2015 merck allergan plc allergan entered agreement pursuant allergan acquired exclusive worldwide rights mk1602 mk8031 merck’s investigational small molecule oral calcitonin generelated peptide cgrp receptor antagonists developed treatment prevention migraine terms agreement allergan acquired rights upfront payments 250 million 125 million paid august 2015 upon closing transaction 125 million payable april 2016 merck additionally entitled receive potential development commercial milestone payments tiered doubledigit royalties based commercialization programs allergan fully responsible development cgrp programs well manufacturing commercialization upon approval launch products company recorded gain 250 million within income expense net 2015 related transaction february 2015 merck ngm biopharmaceuticals inc ngm privately held biotechnology company entered multiyear collaboration research discover develop commercialize novel biologic therapies across wide range therapeutic areas collaboration includes multiple drug candidates currently preclinical development ngm including np201 evaluated treatment diabetes obesity nonalcoholic steatohepatitis ngm lead research development existing preclinical candidates autonomy identify pursue discovery stage programs discretion merck option license resulting ngm programs following human proof concept trials merck exercises option merck lead global product development commercialization resulting products approved terms agreement merck made upfront payment ngm 94 million included research development expenses purchased 15 equity stake ngm 106 million merck committed 250 million fund ngm’s efforts initial fiveyear term collaboration potential additional funding certain conditions met prior merck initiating phase 3 study licensed program ngm may elect either receive milestone royalty payments certain cases cofund development participate global cost revenue share arrangement 50 agreement also provides ngm option participate copromotion cofunded program united states merck option extend research agreement two additional twoyear terms party certain termination rights agreement event uncured material breach party additionally merck certain termination rights event occurrence certain defined conditions upon termination event depending circumstances parties varying rights obligations respect continued development commercialization compounds discovered agreement certain related payment obligations december 2014 merck acquired oncoethix privately held biotechnology company specializing oncology drug development total purchase consideration transaction 153 million included upfront cash payment 110 million future additional milestone payments 265 million contingent upon certain clinical regulatory milestones achieved company determined fair value 43 million acquisition date transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date merck recognized intangible asset iprd 143 million related mk8628 formerly otx015 investigational novel oral bet bromodomain inhibitor currently phase 2 studies treatment hematological malignancies advanced solid tumors well liability contingent consideration 43 million net assets 10 million fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 115 fair value contingent consideration determined utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment also utilizing discount rate 115 actual cash flows likely different assumed transaction closed december 18 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included oncoethix’s historical financial results significant compared company’s financial results october 1 2014 company completed sale merck consumer care mcc business bayer ag bayer 142 billion 140 billion net cash divested less customary closing adjustments well certain contingent amounts held back payable upon manufacturing site transfer canada regulatory approval korea terms agreement bayer acquired merck’s existing overthecounter business including global trademark prescription rights claritin afrin company recognized pretax gain sale mcc 112 billion 2014 also october 1 2014 company entered worldwide clinical development collaboration bayer market develop portfolio soluble guanylate cyclase sgc modulators includes bayer’s adempas riociguat first member novel class compounds adempas approved treat pulmonary arterial hypertension pah approved patients chronic thromboembolic pulmonary hypertension cteph adempas marketed united states europe pah cteph japan cteph two companies equally share costs profits collaboration implement joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat currently phase 2 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn make available earlystage sgc compounds similar terms return broad collaboration rights merck made upfront payment bayer 10 billion potential additional milestone payments 11 billion upon achievement agreedupon sales goals adempas bayer continue lead commercialization americas merck lead commercialization rest world vericiguat potential optin products bayer lead rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead company determined merck’s payment access bayer’s compounds constituted acquisition asset 10 billion consideration paid merck 915 million fair value related adempas capitalized intangible asset subject amortization estimated useful life 12 years remaining 85 million fair value related vericiguat compound clinical development expensed within research development expenses fair values adempas vericiguat determined using income approach fair value estimated based upon probabilityadjusted future net cash flows vericiguat also stage development project associated probability successful completion net cash flows discounted present value using discount rate 100 adempas 105 vericiguat future sales based milestones accrued probable achieved related intangible asset recognized amortized materials production costs applicable useful life company bayer right terminate agreement cause productbyproduct basis products developed commercialized agreement adempas bayer termination rights event party’s material uncured breach related product september 2014 merck sun pharmaceutical industries ltd sun pharma entered exclusive worldwide licensing agreement merck’s investigational therapeutic antibody candidate mk3222 tildrakizumab treatment chronic plaque psoriasis skin ailment terms agreement sun pharma acquired worldwide rights tildrakizumab use human indications merck exchange upfront payment 80 million merck continue clinical development regulatory activities funded sun pharma upon product approval sun pharma responsible regulatory activities including subsequent submissions pharmacovigilance post approval studies manufacturing commercialization approved product merck also eligible receive future payments associated regulatory including product approval sales milestones well tiered royalties ranging midsingle digit teen percentage rates sales merck recorded loss 47 million 2014 transaction included income expense net august 2014 merck completed acquisition idenix pharmaceuticals inc idenix approximately 39 billion cash 37 billion net cash acquired idenix biopharmaceutical company engaged discovery development medicines treatment human viral diseases whose primary focus development nextgeneration oral antiviral therapeutics treat hepatitis c virus hcv infection transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date merck recognized intangible asset iprd 32 billion related mk3682 formerly idx21437 net deferred tax liabilities 951 million net liabilities 12 million mk3682 nucleotide prodrug phase 2 clinical development evaluated potential inclusion development oral pangenotypic fixeddose combination regimens excess consideration transferred fair value net assets acquired 15 billion recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 115 actual cash flows likely different assumed transaction closed august 5 2014 accordingly results operations acquired business included company’s results operations beginning date pro forma financial information included idenix’s historical financial results significant compared company’s financial results may 2014 merck entered agreement sell certain ophthalmic products santen pharmaceutical co ltd santen japan markets europe asia pacific agreement provided upfront payments santen additional payments based defined sales milestones santen also purchase supply ophthalmology products covered agreement two fiveyear period transaction closed markets july 1 2014 remaining markets october 1 2014 company received 565 million upfront payments santen net certain adjustments recognized gains 480 million transactions 2014 included income expense net march 2014 merck divested sirna therapeutics inc sirna subsidiary alnylam pharmaceuticals inc alnylam consideration 25 million 2520044 shares alnylam common stock merck eligible receive future payments associated achievement certain regulatory commercial milestones well royalties future sales merck recorded gain 204 million income expense net 2014 related transaction excess merck’s tax basis investment sirna value received resulted approximate 300 million tax benefit recorded 2014 january 2014 merck sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults forest laboratories inc forest terms agreement forest made upfront payments 232 million recorded sales 2014 make additional payments merck based defined sales milestones addition part transaction merck agreed supply product forest subsequently acquired allergan patent expiry february 2013 merck supera farma laboratorios sa supera brazilian pharmaceutical company coowned cristália eurofarma established joint venture markets distributes sells portfolio pharmaceutical branded generic products merck cristália eurofarma brazil merck owns 51 joint venture cristália eurofarma collectively 49 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values resulted merck recognizing intangible assets currently marketed products 89 million iprd 100 million goodwill 103 million deferred tax liabilities 64 million company also recorded increases noncontrolling interests paidin capital amounts 112 million 116 million respectively transaction closed february 1 2013 accordingly results operations acquired business included company’s results operations beginning date company recorded certain intangible asset impairments charges related supera joint venture see note 7 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi european union eu following receipt pricing reimbursement approval within eu remicade lost market exclusivity major european markets february 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj 5 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates primary objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premiums writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax gains 304 million 2015 294 million 2014 pretax losses 84 million 2013 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2015 company party 30 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated foreign currency cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 7 million 3 million 2 million ineffectiveness hedge 2015 2014 2013 respectively 2 ineffectiveness hedge represents amount excluded hedge effectiveness testing 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2015 company estimates 429 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information availableforsale investments december 31 follows availableforsale debt securities included shortterm investments totaled 48 billion december 31 2015 remaining debt securities 118 billion mature within five years december 31 2015 2014 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2015 december 31 2015 cash equivalents 85 billion included 77 billion cash equivalents considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration follows 1 recorded research development expenses materials production costs 2015 company recognized liabilities contingent consideration 123 million related acquisition cubist 105 million related acquisition ccam see note 4 addition 2015 company paid 50 million contingent consideration related first commercial sale zerbaxa united states 2014 fair value liability contingent consideration related acquisition occurred 2010 increased 316 million resulting progression program preclinical phase 1 increase resulted higher fair value future regulatory milestone royalty payments due increased probability success program given progression phase 1 addition 2014 company recognized liability 43 million contingent consideration related acquisition oncoethix 2014 see note 4 fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2015 270 billion compared carrying value 265 billion december 31 2014 225 billion compared carrying value 214 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic conditions ongoing sovereign debt issues certain european countries december 31 2015 2014 assets included 10 million 80 million respectively accounts receivable expected collected within one year december 31 2015 company’s total net accounts receivable outstanding one year approximately 125 million company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations company’s customers largest accounts receivable balances amerisourcebergen corporation cardinal health inc mckesson corporation zuellig pharma ltd asia pacific aah pharmaceuticals ltd uk represented aggregate approximately onethird total accounts receivable december 31 2015 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2015 2014 company received cash collateral 862 million 14 billion respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2015 2014 6 inventories december 31 consisted inventories valued lifo method comprised approximately 24 billion 26 billion inventories december 31 2015 2014 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2015 2014 amounts included 15 billion 16 billion respectively inventories expected sold within one year addition amounts included 63 million 74 million december 31 2015 2014 respectively inventories produced preparation product launches 7 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2015 2014 140 million 93 million respectively 2015 additions goodwill pharmaceutical segment resulted primarily acquisition cubist see note 4 reductions pharmaceutical segment goodwill resulted divestiture company’s remaining ophthalmics business international markets see note 4 impairments goodwill within nonreportable segments relates primarily certain businesses within healthcare services segment 2014 additions goodwill pharmaceutical segment primarily resulted acquisition idenix reductions resulted sale mcc divestiture certain ophthalmic products several international markets see note 4 reductions goodwill segments 2014 resulted termination company’s relationship astrazeneca lp azlp see note 8 divestiture mcc also third quarter 2014 company recorded impairment charge goodwill related supera joint venture result changes cash flow assumptions certain compounds currently marketed products intangibles december 31 consisted acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives increase intangible assets products product rights 2015 primarily relates acquisition cubist see note 4 company’s significant acquired intangibles related marketed products included product rights december 31 2015 include zerbaxa 35 billion zetia 24 billion vytorin 15 billion sivextro 10 billion implanonnexplanon 645 million dificid 644 million nuvaring 502 million nasonex 431 million cubicin 418 million 2014 company recognized intangible asset related adempas result formation collaboration bayer see note 4 carrying value 706 million december 31 2015 reflected “other” table 2015 2014 2013 company recorded impairment charges related marketed products intangibles 45 million 11 billion 486 million respectively within material production costs charges 2015 primarily relate impairment customer relationship tradename intangibles certain businesses within healthcare services segment amount recorded 2014 793 million related pegintron 244 million related victrelis 35 million related rebetol products marketed company treatment chronic hcv infection 2014 sales products adversely affected loss market share patient treatment delays markets anticipating availability newer therapeutic options 2014 trends accelerated rapidly previously anticipated company addition developments competitive hcv treatment market led market share losses greater company predicted factors caused changes cash flow projections pegintron victrelis rebetol indicated intangible asset values recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair values intangible assets related pegintron victrelis rebetol compared related carrying values resulted impairment charges noted impairment charges recorded 2013 330 million resulted lower cash flow projections saphrissycrest due reduced expectations international markets united states revisions cash flows indicated saphrissycrest intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions considered several different scenarios determine best estimate fair value intangible asset related saphrissycrest compared related carrying value resulted impairment charge noted remaining 156 million impairment charges 2013 resulted lower cash flow projections rebetol due reduced expectations japan europe revisions cash flows indicated rebetol intangible asset value recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related rebetol compared related carrying value resulted impairment charge noted iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization 2015 2014 2013 280 million 654 million 346 million respectively iprd reclassified products product rights upon receipt marketing approval major market 2015 company recorded 63 million iprd impairment charges within research development expenses amount 50 million relates surotomycin clinical development program obtained connection acquisition cubist 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted 2014 company recorded 49 million iprd impairment charges primarily result changes cash flow assumptions certain compounds obtained connection supera joint venture well discontinuation certain animal health programs 2013 company recorded 279 million iprd impairment charges amount 181 million related writeoff intangible asset associated preladenant result discontinuation clinical development program compound addition company recorded impairment charges resulting changes cash flow assumptions certain compounds well pipeline programs previously deprioritized subsequently deemed alternative use period iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within materials production costs 48 billion 2015 42 billion 2014 48 billion 2013 estimated aggregate amortization expense next five years follows 2016 40 billion 2017 35 billion 2018 20 billion 2019 12 billion 2020 10 billion 8 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates including sanofi pasteur msd certain investments funds well azlp termination company’s relationship azlp june 30 2014 discussed equity income affiliates 205 million 2015 257 million 2014 404 million 2013 included income expense net see note 14 investments affiliates accounted using equity method including joint ventures totaled 702 million december 31 2015 337 million december 31 2014 amounts reported assets amounts due joint ventures included current assets 34 million december 31 2015 45 million december 31 2014 astrazeneca lp 1982 merck entered agreement astra ab astra develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc ami merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc kbi contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp partnership exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp azlp upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products revenue 463 million 2014 920 million 2013 primarily relating sales nexium well prilosec addition merck earned certain partnership returns azlp 192 million 2014 352 million 2013 recorded equity income affiliates june 30 2014 astrazeneca exercised option purchase merck’s interest kbi 419 million cash amount 327 million reflects estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized time income expense net contingency eliminated sales occur 2015 2014 182 million 140 million respectively deferred income recognized bringing cumulative deferred income recognized december 31 2015 322 million remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net result astrazeneca’s option exercise company’s remaining interest azlp redeemed accordingly company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion kbi preferred stock see note 11 elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance result astrazeneca exercising option july 1 2014 company longer records equity income azlp supply sales azlp terminated summarized financial information azlp follows 1 includes results june 30 2014 termination date 2 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 923 million 2015 11 billion 2014 12 billion 2013 9 loans payable longterm debt commitments loans payable december 31 2015 included 23 billion notes due 2016 10 million shortterm foreign borrowings 226 million longdated notes subject repayment option holder loans payable december 31 2014 included 10 billion notes due 2015 15 billion commercial paper 55 million shortterm foreign borrowings 143 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 007 015 years ended december 31 2015 2014 respectively longterm debt december 31 consisted presented table included 225 million 309 million december 31 2015 2014 respectively borrowings variable rates resulted effective interest rates zero 2015 2014 also included foreign borrowings 43 million 53 million december 31 2015 2014 respectively varying rates 475 625 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices february 2015 merck issued 80 billion aggregate principal amount senior unsecured notes consisting 300 million principal amount floating rate notes due 2017 700 million principal amount floating rate notes due 2020 125 billion principal amount 185 notes due 2020 125 billion aggregate principal amount 235 notes due 2022 25 billion aggregate principal amount 275 notes due 2025 20 billion aggregate principal amount 370 notes due 2045 company used portion net proceeds offering 79 billion repay commercial paper issued substantially finance company’s acquisition cubist remaining net proceeds used general corporate purposes including repurchases company’s common stock repayment outstanding commercial paper borrowings debt maturities also february 2015 company redeemed 19 billion legacy cubist debt acquired acquisition see note 4 october 2014 company issued €25 billion principal amount senior unsecured notes net proceeds offering 31 billion used part repay debt validly tendered connection tender offers launched company certain outstanding notes debentures company paid 25 billion aggregate consideration applicable purchase price together accrued interest redeem 18 billion principal amount debt november 2014 merck redeemed additional 20 billion principal amount senior unsecured notes company recorded pretax loss 628 million 2014 connection transactions effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2015 company compliance covenants aggregate maturities longterm debt next five years follows 2016 24 billion 2017 317 million 2018 30 billion 2019 13 billion 2020 20 billion august 2014 company terminated existing credit facility entered 60 billion fiveyear credit facility matures august 2019 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 303 million 2015 350 million 2014 367 million 2013 minimum aggregate rental commitments noncancellable leases follows 2016 213 million 2017 136 million 2018 114 million 2019 97 million 2020 69 million thereafter 160 million company significant capital leases 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including environmental matters opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities effective august 1 2004 vioxx litigation product liability lawsuits previously disclosed merck defendant approximately 10 active federal state lawsuits vioxx product liability lawsuits alleging personal injury result use vioxx cases coordinated multidistrict litigation us district court eastern district louisiana vioxx mdl judge eldon e fallon previously disclosed merck also defendant approximately 30 putative class action lawsuits alleging economic injury result purchase vioxx one cases vioxx mdl merck reached resolution approved judge fallon class actions vioxx mdl settlement merck pay 23 million resolve properly documented claims submitted class members approved attorneys’ fees expenses approved settlement notice costs certain administrative expenses court entered order approving settlement january 2014 claims review process recently completed merck also defendant lawsuits brought state attorneys general three states alaska montana utah lawsuits pending state courts actions allege merck misrepresented safety vioxx seek recovery expenditures vioxx governmentfunded health care programs medicaid andor penalties alleged consumer fraud act violations trial scheduled montana case september 12 2016 trial set alaska case january 9 2017 motions judgment pleadings alaska montana cases currently pending motion dismiss recently filed utah case shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits filed merck certain former employees alleging defendants violated federal securities laws making alleged material misstatements omissions respect cardiovascular safety vioxx securities lawsuits vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler consolidated purposes august 2011 judge chesler granted part denied part merck’s motion dismiss fifth amended class action complaint consolidated securities class action among things court dismissed certain defendants case also dismissed claims based statements made voluntary withdrawal vioxx september 30 2004 october 2011 remaining defendants answered fifth amended class action complaint april 2012 plaintiffs filed motion class certification period may 21 1999 september 29 2004 court granted january 2013 march 2013 plaintiffs filed motion leave amend complaint add certain allegations expand class period may 2013 court denied plaintiffs’ motion leave amend complaint expand class period granted plaintiffs’ leave amend complaint add certain allegations within existing class period june 2013 plaintiffs filed sixth amended class action complaint class action july 2013 defendants answered class action discovery completed closed may 13 2015 court granted part denied part defendants’ motions summary judgment court granted judgment defendants’ favor five alleged misstatements including statements prior march 27 2000 denied motion respect remaining statements january 15 2016 company announced reached agreement plaintiffs settle class action 830 million plus additional amount attorneys’ fees expenses exchange among things dismissal prejudice class action full releases claims defendants available funds certain insurance policies merck’s net cash payment settlement fees approximately 680 million proposed settlement covers claims relating vioxx settlement class members purchased merck securities may 21 1999 october 29 2004 settlement admission wrongdoing part settlement agreement defendants continue deny allegations proposed settlement including award attorneys’ fees expenses subject final court approval february 8 2016 parties filed stipulation settlement court preliminarily approved february 11 2016 court set final approval hearing june 28 2016 proposed settlement resolve individual securities lawsuits discussed previously disclosed 13 individual securities lawsuits filed foreign domestic institutional investors also consolidated vioxx securities lawsuits allegations individual securities lawsuits substantially similar allegations vioxx securities lawsuits discovery completed actions proposed settlement class action discussed resolve individual securities lawsuits although individual plaintiff right option join settlement class additional cost merck light proposed settlement class action court adjourned previouslyscheduled trial date march 1 2016 cases consolidated action court scheduled conference february 26 2016 discuss pretrial schedule parties individual lawsuits settlement reached insurance result previously disclosed insurance arbitration company receive insurance proceeds approximately 380 million connection settlement class action company also directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 145 million disputes insurers availability company’s directors officers insurance coverage claims amounts actually recovered directors officers policies discussed paragraph may less stated upper limits international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx brazil europe collectively vioxx international lawsuits previously disclosed january 2012 company entered agreement resolve claims related vioxx canada april 2013 company paid approximately 21 million settlement fund agreement approved courts canada’s provinces december 2015 claims administrator finalized claimant eligibility determinations company made final payment approximately 5 million settlement fund reserves connection settlement class action remains subject final court approval company established net reserve 680 million fourth quarter 2015 company believes meritorious defenses remaining vioxx product liability lawsuits vioxx securities lawsuits vioxx international lawsuits collectively remaining vioxx litigation vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect remaining vioxx litigation company established reserve respect certain vioxx product liability lawsuits company also immaterial remaining reserve relating previously disclosed vioxx investigation nonparticipating states litigation continuing company established liability reserves respect remaining vioxx litigation product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2015 approximately 4675 cases filed pending merck either federal state court including one case seeks class action certification well damages andor medical monitoring approximately 210 actions plaintiffs allege among things suffered osteonecrosis jaw onj generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax however large majority actions subject settlement discussed addition plaintiffs approximately 4460 actions generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation jpml ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation fosamax onj mdl coordinated pretrial proceedings december 2013 merck reached agreement principle plaintiffs’ steering committee psc fosamax onj mdl resolve pending onj cases appeal fosamax onj mdl state courts aggregate amount 277 million merck psc subsequently formalized terms agreement master settlement agreement onj master settlement agreement executed april 2014 condition settlement 100 state federal onj plaintiffs agree participate settlement plan merck could either terminate onj master settlement agreement waive 100 participation requirement agree lesser funding amount settlement fund july 14 2014 merck elected proceed onj master settlement agreement reduced funding level since participation level approximately 95 merck fully funded onj master settlement agreement escrow agent agreement begun making settlement payments qualifying plaintiffs approximately 40 nonparticipants’ cases remain settlement complete onj master settlement agreement effect cases alleging femur fractures discussed cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey femur fracture mdl judge pisano presided femur fracture mdl march 10 2015 time femur fracture mdl reassigned judge pisano judge freda l wolfson following judge pisano’s retirement bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 27 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 26 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 500 cases appealing decision us court appeals third circuit june 2015 femur fracture mdl court dismissed without prejudice another approximately 520 cases pending plaintiffs’ appeal preemption ruling third circuit june 17 2014 judge pisano granted merck summary judgment gaynor v merck case found merck’s updates january 2011 fosamax label regarding atypical femur fractures adequate matter law merck adequately communicated changes plaintiffs gaynor appealed judge pisano’s decision third circuit august 2014 merck filed motion requesting judge pisano enter order requiring plaintiffs femur fracture mdl claim 2011 fosamax label inadequate proximate cause alleged injuries show cause cases dismissed based court’s preemption decision ruling gaynor case november 2014 court granted merck’s motion entered requested show cause order december 31 2015 approximately 30 cases pending femur fracture mdl excluding 500 cases dismissed prejudice preemption grounds pending appeal 520 cases dismissed without prejudice also pending aforementioned appeal december 31 2015 approximately 3100 cases alleging femur fractures filed new jersey state court pending judge jessica mayer middlesex county parties selected initial group 30 cases reviewed fact discovery two additional groups 50 cases reviewed fact discovery selected november 2013 march 2014 respectively group 25 cases reviewed fact discovery selected merck july 2015 december 31 2015 approximately 305 cases alleging femur fractures filed pending california state court petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge thierry colaw currently presiding coordinated proceedings march 2014 court directed group 10 discovery pool cases reviewed fact discovery subsequently scheduled galper v merck case plaintiffs’ selected first trial galper trial began february 17 2015 jury returned verdict merck’s favor april 3 2015 plaintiff appealed verdict california appellate court next femur fracture trial california scheduled held april 11 2016 currently set include several plaintiffs additionally six femur fracture cases pending state courts discovery ongoing femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2015 approximately 785 product user claims served merck alleging generally use januvia andor janumet caused development pancreatic cancer injuries complaints filed several different state federal courts claims filed consolidated multidistrict litigation proceeding us district court southern district california called “in incretinbased therapies products liability litigation” mdl includes federal lawsuits alleging pancreatic cancer due use following medicines januvia janumet byetta victoza latter two products manufactured pharmaceutical companies majority claims filed mdl filed superior court california county los angeles california state court 13 cases pending merck state courts california state court november 9 2015 mdl granted summary judgment grounds preemption claims alleging injury due pancreatic cancer based ruling november 30 2015 mdl entered final judgment resulting dismissal pancreatic cancer claims merck relating approximately 665 product users november 16 2015 california state court likewise granted summary judgment preemption grounds claims alleging injury due pancreatic cancer result dismissal pancreatic cancer claims merck relating approximately 350 product users plaintiffs appealing mdl preemption ruling expected likewise respect california state court ruling court enters final judgment addition claims noted company agreed december 31 2015 toll statute limitations approximately 20 additional claims company intends continue defending lawsuits nuvaring previously disclosed beginning may 2007 number product liability complaints filed various jurisdictions asserting claims company subsidiaries relating nuvaring combined hormonal contraceptive vaginal ring plaintiffs contended company among things failed adequately design manufacture nuvaring failed adequately warn alleged increased risk venous thromboembolism vte posed nuvaring andor downplayed risk vte plaintiffs sought damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases pending federal multidistrict litigation venued missouri pursuant settlement agreement merck negotiating plaintiffs’ counsel became effective june 4 2014 merck paid lump total settlement 100 million resolve 95 cases filed retainer counsel february 7 2014 plaintiffs approximately 3700 cases joined settlement program filed case dismissed prejudice settlement administration process completed dismissals began second quarter continued rolling basis throughout 2015 company certain insurance coverage available currently used partially fund company’s legal fees insurance coverage also used fund settlement december 31 2015 16 cases pending outside settlement program inclusive cases filed settlement program closed cases 15 pending multidistrict litigation subject individual case management orders requiring plaintiffs meet various discovery evidentiary requirements december 31 2015 15 plaintiffs meeting requirements continuing prosecute cases propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2015 approximately 1400 lawsuits filed plaintiffs allege experienced persistent sexual side effects following cessation treatment propecia andor proscar approximately 60 plaintiffs also allege propecia proscar caused cause prostate cancer testicular cancer male breast cancer lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge john gleeson eastern district new york matters pending state court new jersey consolidated judge jessica mayer middlesex county addition one matter pending state court massachusetts one matter pending state court new york company intends defend lawsuits governmental proceedings previously disclosed company received subpoena office inspector general us department health human services behalf us attorney’s office district maryland civil division us department justice doj requests information relating company’s marketing singulair dulera inhalation aerosol certain marketing activities january 1 2006 present company cooperating government previously disclosed company received civil investigative demand us attorney’s office eastern district pennsylvania requests information relating company’s contracting pricing dulera inhalation aerosol certain pharmacy benefit managers medicare part plans company cooperating investigation previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperated agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries previously disclosed company advised doj based information received closed inquiry matter relates company future company may receive additional requests information either doj sec previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate commercial litigation kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications andas following commencement administrative proceeding us federal trade commission ftc 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case march 2010 district court granted summary judgment defendants remaining lawsuits dismissed matter entirety july 2012 third circuit court appeals reversed district court’s grant summary judgment remanded case proceedings time third circuit upheld december 2008 decision district court certifying certain direct purchaser plaintiffs’ claims class action august 2012 company filed petition certiorari us supreme court seeking review third circuit’s decision june 2013 supreme court granted petition vacated judgment third circuit remanded case consideration light decision ftc v actavis inc decision held whether socalled “reverse payment” ie payment holder pharmaceutical patent party challenging patent made connection settlement dispute violates antitrust laws determined basis “rule reason” analysis september 2013 third circuit returned case district court proceedings accordance actavis standard april 2015 company filed motions summary judgment february 25 2016 district court denied company’s motion summary judgment relating direct purchasers’ claims concerning settlement upshersmith granted company’s motion summary judgment relating direct purchasers’ claims concerning settlement lederle trial date yet set sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company united states district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws november 2013 company filed motion dismiss class claims plaintiffs sought granted leave file amended complaint january 2014 plaintiffs filed amended complaint adding four additional named plaintiffs october 8 2014 court denied company’s motion dismiss strike class claims premature september 2015 plaintiffs filed additional motions including motion conditional certification equal pay act motion amend pleadings seeking add erisa constructive discharge claims company subsidiary named defendant motion equitable relief merck filed papers opposition motions currently pending court qui tam litigation previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 4 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery company intends defend lawsuits merck kgaa litigation january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france united kingdom uk germany alleging breach parties’ coexistence agreement unfair competition andor trademark infringement december 2015 paris court first instance issued judgment finding certain activities company directed towards france constitute trademark infringement unfair competition activities found infringe date kgaa taken steps appeal decision january 2016 uk high court issued judgment finding company breached coexistence agreement infringed kgaa’s trademark rights result certain activities directed towards uk based use word merck promotional information activity noted uk decision finding based company’s use sign merck connection sale products material pharmaceutical business transacted uk decision reflects one step litigation process taking place number countries appealed patent litigation time generic manufacturers pharmaceutical products file andas us food drug administration fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company products marketed via agreements companies currently involved patent infringement litigation united states include cancidas cubicin emend injection invanz nasonex noxafil nuvaring similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges cancidas february 2014 patent infringement lawsuit filed united states xellia pharmaceuticals aps xellia respect xellia’s application fda seeking prepatent expiry approval market generic version cancidas june 2015 district court found xellia infringed company’s patent ordered xellia’s application approved patent expires september 2017 including pediatric exclusivity xellia appealed decision appeal heard march 2016 august 2014 patent infringement lawsuit filed united states fresenius kabi usa llc fresenius respect fresenius’s application fda seeking prepatent expiry approval market generic version cancidas lawsuit automatically stays fda approval fresenius’s application december 2016 adverse court decision whichever may occur earlier cubicin march 2012 patent infringement lawsuit filed united states hospira inc hospira respect hospira’s application fda seeking prepatent expiry approval market generic version cubicin trial held february 2014 december 2014 district court found composition patent expires june 2016 valid infringed later patents expiring september 2019 november 2020 found invalid hospira appealed finding composition patent invalid company crossappealed finding later patents invalid november 2015 us court appeals federal circuit affirmed lower court decision hospira’s application approved least june 2016 october 2013 patent infringement lawsuit filed united states strides inc agila specialties private limited stridesagila respect stridesagila’s application fda seeking prepatent expiry approval market generic version cubicin result hospira decision stridesagila’s application approved least june 2016 july 2014 patent infringement lawsuit filed united states fresenius respect fresenius’s application fda seeking prepatent expiry approval market generic version cubicin result hospira decision fresenius’s application approved least june 2016 december 2015 patent infringement lawsuit filed united states sagent pharmaceuticals inc sagent respect sagent’s application fda seeking prepatent expiry approval market generic version cubicin result hospira decision sagent’s application approved least june 2016 december 2015 patent infringement lawsuit filed united states actavis llc actavis respect actavis’s application fda seeking prepatent expiry approval market generic version cubicin result hospira decision actavis’s application approved least june 2016 january 2016 patent infringement lawsuit filed united states dr reddy’s laboratories ltd dr reddy’s laboratories inc dr reddy respect dr reddy’s application fda seeking prepatent expiry approval market generic version cubicin result hospira decision dr reddy’s application approved least june 2016 earlier district court action teva parenteral medicines inc teva pharmaceuticals usa inc teva pharmaceutical industries ltd collectively teva resulted settlement whereby teva launch generic version cubicin latest december 2017 earlier certain conditions event june 2016 october 2014 agila specialties inc mylan pharmaceuticals inc agilamylan filed petitions inter partes review ipr united states patent trademark office uspto seeking invalidity september 2019 november 2020 patents april 2015 agilamylan withdrew petitions ipr exchange company agreeing narrow issues stridesagila lawsuit referenced november 2014 fresenius filed petitions ipr uspto seeking invalidity september 2019 patents may 2015 uspto granted fresenius’s petition ipr september 2019 patents ipr hearing held february 2016 july 2015 fresenius filed petitions ipr seeking invalidity november 2020 patents january 2016 uspto granted fresenius’s petition ipr november 2020 patents emend injection may 2012 patent infringement lawsuit filed united states sandoz inc sandoz respect sandoz’s application fda seeking prepatent expiry approval market generic version emend injection trial lawsuit sandoz held august 2015 court found company’s patent infringed invalid court ordered sandoz’s application approved expiration company’s patent 2019 december 2015 sandoz dropped appeal court’s decision june 2012 patent infringement lawsuit filed united states accord healthcare inc us accord healthcare inc intas pharmaceuticals ltd collectively intas respect intas’s application fda seeking prepatent expiry approval market generic version emend injection company agreed intas stay lawsuit outcome lawsuit sandoz october 2015 following sandoz decision court found company’s patent infringed invalid court ordered intas’s application approved expiration company’s patent 2019 july 2014 patent infringement lawsuit filed united states fresenius respect fresenius’s application fda seeking prepatent expiry approval market generic version emend injection january 2016 parties settled matter terms settlement fresenius entitled enter market prepatent expiry except certain conditions december 2014 apotex inc apotex filed petition ipr uspto seeking invalidity claims compound patent covering emend injection uspto rejected apotex’s petition june 2015 invanz july 2014 patent infringement lawsuit filed united states hospira respect hospira’s application fda seeking prepatent expiry approval market generic version invanz lawsuit automatically stays fda approval hospira’s application november 2016 adverse court decision whichever may occur earlier since hospira challenge earlier patent covering invanz application fda approved least patent expires may 2016 trial matter scheduled begin april 2016 august 2015 patent infringement lawsuit filed united states savior lifetec corporation savior respect savior’s application fda seeking prepatent expiry approval market generic version invanz lawsuit automatically stays fda approval savior’s application november 2017 adverse court decision whichever may occur earlier since savior challenge earlier patent covering invanz application fda approved least patent expires may 2016 nasonex july 2014 patent infringement lawsuit filed united states teva pharmaceuticals usa inc teva pharma respect teva pharma’s application fda seeking prepatent expiry approval market generic version nasonex lawsuit automatically stays fda approval teva pharma’s application november 2016 adverse court decision whichever may occur earlier trial matter scheduled begin may 2016 march 2015 patent infringement lawsuit filed united states amneal pharmaceuticals llc amneal respect amneal’s application fda seeking prepatent expiry approval market generic version nasonex lawsuit automatically stays fda approval amneal’s application august 2017 adverse court decision whichever may occur earlier trial matter scheduled begin june 2016 previous decision issued june 2013 held merck patent teva pharma amneal lawsuits covering mometasone furoate monohydrate valid infringed apotex corp’s proposed product april 2015 patent infringement lawsuit filed apotex inc apotex corp apotex respect apotex’s application fda seeking prepatent expiry approval market generic version nasonex allegedly differs generic version previous lawsuit noxafil august 2015 company filed lawsuit actavis laboratories fl inc actavis united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil lawsuit automatically stays fda approval actavis’s application december 2017 adverse court decision whichever may occur earlier nuvaring december 2013 company filed lawsuit subsidiary allergan united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring trial matter held january 2016 company awaiting court’s decision september 2015 company filed lawsuit teva pharma united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring antipd1 antibody patent oppositions litigation previously disclosed ono pharmaceutical co ono european patent ep 1 537 878 ’878 broadly claims use antipd1 antibody company’s immunotherapy keytruda treatment cancer ono previously licensed commercial rights antipd1 antibody bristolmyers squibb bms certain markets company believes ’878 patent invalid filed opposition european patent office epo seeking revocation june 2014 opposition division epo found claims ’878 patent valid company received opposition division’s written opinion september 2014 company submitted substantive appeal february 2015 april 2014 company three companies opposed another european patent ep 2 161 336 ’336 owned bms ono believes invalid ’336 patent valid broadly claims antipd1 antibodies could include keytruda bms ono recently submitted request amend claims ’336 patent epo allows amendment claims ’336 patent would longer broadly claim antipd1 antibodies keytruda may 2014 company filed lawsuit uk seeking revocation uk national versions ’878 ’336 patents july 2014 ono bms sued company seeking declaration ’878 patent would infringed uk marketing keytruda company sought declaration uk court keytruda infringe ’336 patent uk bms ono notified company request amend claims epo ’336 patent intention seek permission court similarly amend uk national version claims ’336 patent would longer broadly claim antipd1 antibodies keytruda trial held uk july 2015 trial issues validity infringement ’878 patent heard time court october 2015 court issued judgment finding ’878 patent valid infringed merck appealed judgment february 2015 company filed lawsuits netherlands seeking revocation dutch national versions ’878 ’336 patents bms ono amended claims ’336 patent claims ’336 patent longer broadly claim antipd1 antibodies keytruda trial regarding validity infringement ’878 patent held january 2016 company anticipating decision april 2016 december 2015 bms ono filed lawsuits company france ireland switzerland germany alleging infringement ’878 patent january 2016 bms ono filed lawsuit company spain alleging infringement ’878 patent france bms ono filed preliminary relief seeking payment damages france case pending hearing preliminary relief set february 2016 dates trials regarding validity infringement irish french swiss spanish national versions ’878 patent yet scheduled trial concerning infringement german version ’878 patent currently scheduled begin march 2017 company continues believe ’878 patent invalid company file lawsuits seeking revocation ’336 ’878 patents national courts europe time ono bms file patent infringement actions company national courts europe around time company launches keytruda national court determines company infringed valid claim ’878 ’336 patent ono bms may entitled monetary damages including royalties future sales keytruda potentially could seek injunction prevent company marketing keytruda country uspto granted us patent nos 8728474 ono 8779105 ono bms patents equivalent ’878 ’336 patents respectively september 2014 bms ono filed lawsuit united states alleging marketing keytruda company infringe us patent 8728474 bms ono seeking prevent stop marketing keytruda united states trial matter currently scheduled begin april 2017 company believes 8728474 patent 8779105 patent invalid recently ono filed lawsuits united states alleging marketing keytruda company infringe us patent nos 9067999 9073994 patents related 8728474 patent company believes 9067999 9073994 patents also invalid september 2014 company filed lawsuit australia seeking revocation australian patent 2011203119 equivalent ’336 patent march 2015 bms ono counterclaimed matter alleging company’s manufacture supply keytruda australian market infringe australian patent 2011203119 ono bms similar patents applications company closely monitoring pending united states japan countries company confident able market keytruda country approved prevented ono bms patents pending applications litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2015 december 31 2014 approximately 245 million 215 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters previously disclosed merck’s facilities oss netherlands inspected province brabant province pursuant dutch hazards major accidents decree sites’ environmental permits province issued penalties alleged violations regulations governing preventing managing accidents hazardous substances government also issued fine alleged environmental violations one oss facilities together totaled 235 thousand company subsequently advised criminal investigation initiated based upon certain issues formed basis administrative enforcement action province company intends defend enforcement action may result investigation may 2015 environmental protection agency conducted air compliance evaluation company’s pharmaceutical manufacturing facility elkton virginia result investigation company recently issued notice noncompliance show cause notification relating certain federally enforceable requirements applicable elkton facility company attempting resolve alleged violations way settlement defend settlement cannot reached company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 109 million 125 million december 31 2015 2014 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 57 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans noncontrolling interests connection 1998 restructuring ami merck assumed 24 billion par value preferred stock dividend rate 5 per annum carried kbi included noncontrolling interests 2014 astrazeneca exercised option acquire merck’s interest azlp see note 8 preferred stock obligation retired 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees company also issues rsus employees certain company’s equity method investees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2015 134 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2015 2014 2013 299 million 278 million 276 million respectively related income tax benefits 93 million 86 million 84 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2015 2014 2013 5973 5814 4501 per option respectively weighted average fair value options granted 2015 2014 2013 646 679 621 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2015 407 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries beginning january 1 2013 active participants merck’s primary us defined benefit pension plans accruing pension benefits using cash balance formulas based age service pay interest however transition period january 1 2013 december 31 2019 participants earn greater benefit calculated employee’s legacy final average pay formula cash balance formula years service december 31 2019 participants earn future benefits cash balance formula addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components changes net periodic benefit cost pension postretirement benefit plans year largely attributable changes discount rate affecting net amortization connection restructuring actions see note 3 termination charges recorded 2015 2014 2013 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2015 2014 2013 pension postretirement benefit plans addition settlements recorded 2015 2014 2013 certain us international pension plans obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows december 31 2015 2014 accumulated benefit obligation 167 billion 179 billion respectively pension plans 94 billion 101 billion respectively related us pension plans actuarial gains 2015 reflect change discount rate actuarial losses 2014 reflect change discount rate us plans also reflect impact company’s adoption new retirement plan mortality assumptions issued society actuaries october 2014 decline benefit obligation postretirement benefits 2015 resulting plan amendments primarily reflects changes merck’s retiree medical benefits approved company december 2015 changes provide beginning 2017 merck provide access retiree health insurance coverage supplements governmentsponsored medicare private insurance marketplace new approach allow medicareeligible retirees choose insurance terms cost coverage best fits needs still receiving financial support determined merck company’s subsidy retirees medical coverage 2017 expected comparable 2016 future changes support based number factors business conditions government actions marketplace changes general consumer inflation rate information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2015 2014 516 million 580 million respectively approximately 3 company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2016 approximately 50 million us pension plans approximately 150 million international pension plans approximately 60 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2016 202 million 67 million respectively pension plans 115 million 55 million respectively relates us pension plans estimated prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2016 postretirement benefit plans 106 million actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis developing expected rate return within plan longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2016 company’s expected rate return range 730 875 range 2015 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2015 2014 2013 125 million 124 million 138 million respectively 14 income expense net income expense net consisted increase exchange losses 2015 driven venezuela second quarter 2015 upon evaluation evolving economic conditions venezuela volatility country company determined unlikely outstanding net monetary assets would settled official rate 630 vef bolívar fuertes per us dollar accordingly second quarter 2015 company recorded charge 715 million devalue net monetary assets venezuela amount included company’s estimate us dollar amount would ultimately collected third quarter 2015 company recorded additional exchange losses 138 million aggregate reflecting ongoing effect translating transactions net monetary assets consistent second quarter fourth quarter 2015 result deterioration economic conditions venezuela continued declines transactions settled official rate company began using simadi rate report venezuelan operations company also revalued remaining net monetary assets simadi rate resulted additional charge fourth quarter 2015 161 million exchange losses 2013 reflect 140 million losses due venezuelan currency devaluation february 2013 venezuelan government devalued currency 430 vef per us dollar 630 vef per us dollar company recognized losses due exchange approximately 140 million 2013 resulting remeasurement local monetary assets liabilities new rate since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations decline equity income affiliates 2015 2014 compared 2013 driven primarily termination company’s relationship azlp june 30 2014 see note 8 2015 lower equity income azlp partially offset higher equity income certain research investment funds net presented table 2015 includes 680 million net charge related settlement vioxx shareholder class action litigation see note 10 expense 78 million contribution investments equity securities merck foundation partially offset 250 million gain sale certain migraine clinical development programs see note 4 147 million gain divestiture merck’s remaining ophthalmics business international markets see note 4 recognition 182 million deferred income related astrazeneca’s option exercise see note 8 net 2014 includes 112 billion gain divestiture mcc see note 4 gain 741 million related astrazeneca’s option exercise see note 8 480 million gain divestiture certain ophthalmic products several international markets see note 4 gain 204 million related divestiture sirna see note 4 recognition 140 million deferred income related astrazeneca’s option exercise partially offset 628 million loss extinguishment debt see note 9 93 million goodwill impairment charge related company’s joint venture supera see note 7 interest paid 653 million 2015 852 million 2014 922 million 2013 15 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits tax rate changes miscellaneous items foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 350 us statutory rate foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 350 us statutory rate company’s 2015 effective tax rate reflects impact protecting americans tax hikes act signed law december 18 2015 extending research credit permanently controlled foreign corporation lookthrough provisions five years company’s 2014 effective tax rate reflects impact tax increase prevention act signed law december 19 2014 extending research credit controlled foreign corporation lookthrough provisions one year american taxpayer relief act 2012 signed law january 2 2013 extending research credit controlled foreign corporation lookthrough provisions two years retroactively january 1 2012 december 31 2013 company recorded entire 2012 benefit 269 million 2013 financial statement period included date enactment income taxes consisted taxes income consisted deferred income taxes december 31 consisted discussed note 2 company elected retrospectively early adopt new accounting guidance requires deferred tax assets liabilities along related valuation allowance classified noncurrent balance sheet adoption standard following impact 2014 consolidated balance sheet amounts previously reported current assets reduced 568 million assets increased 400 million accrued current liabilities reduced 369 million deferred income taxes increased 201 million total assets total liabilities previously reported december 31 2014 reduced 168 million company net operating loss nol carryforwards several jurisdictions december 31 2015 257 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant valuation allowances 304 million established foreign nol carryforwards foreign deferred tax assets addition company 308 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2015 2014 2013 18 billion 79 billion 23 billion respectively income taxes paid 2014 reflects approximately 50 billion taxes paid divestiture mcc tax benefits relating stock option exercises 109 million 2015 202 million 2014 70 million 2013 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs discussed company recognize unrecognized tax benefits 34 billion december 31 2015 income tax provision would reflect favorable net impact 32 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2015 could decrease 12 billion next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures however one item currently discussion internal revenue service irs relating 2006 2008 examination company concluded position sustained upon audit however item result unfavorable outcome settlement could material adverse impact company’s financial position liquidity results operations interest penalties associated uncertain tax positions amounted expense 102 million 2015 9 million 2014 benefit 319 million 2013 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 766 million 659 million december 31 2015 2014 respectively irs currently conducting examinations company’s tax returns years 2006 2008 well 2010 2011 although irs’s examination company’s 20022005 federal tax returns concluded prior 2015 one issue relating refund claim remained open 2015 issue resolved company received refund approximately 715 million exceeded receivable previously recorded company resulting tax benefit 410 million addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2003 2015 2013 irs finalized examination scheringplough’s 20072009 tax years company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 165 million tax provision benefit 2013 company recorded outofperiod net tax benefit 160 million related open issue originally raised 20032006 irs examination issue settled fourth quarter 2012 final resolution relating interest owed reached first quarter 2013 company’s unrecognized tax benefits related issue exceeded settlement amount management concluded exclusion benefit material prior year financial statements december 31 2015 foreign earnings 592 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2022 16 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2015 2014 2013 9 million 4 million 25 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 33 billion 35 billion december 31 2015 2014 respectively postretirement benefit plan net loss 86 million 228 million december 31 2015 2014 respectively well pension plan prior service credit 414 million 473 million december 31 2015 2014 respectively postretirement benefit plan prior service credit 547 million 257 million december 31 2015 2014 18 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health alliances healthcare services animal health alliances healthcare services segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers merck’s alliances segment primarily includes results company’s relationship astrazeneca lp termination relationship june 30 2014 company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients october 1 2014 company divested consumer care segment see note 4 developed manufactured marketed overthecounter foot care sun care products accounting policies segments described note 2 sales company’s products follows 1 sales cubicin 2015 represent sales subsequent cubist acquisition date sales cubicin 2014 2013 reflect sales japan pursuant previously existing licensing agreement 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates included income expense net amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health alliances healthcare services well consumer care divestiture october 1 2014 see note 4 alliances segment includes revenue company’s relationship azlp termination june 30 2014 see note 8 5 revenues primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales revenues 2014 also include 232 million received merck connection sale us marketing rights saphris see note 4 revenues 2013 reflect 50 million revenue outlicense pipeline compound consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill product intangible asset impairment charges gains losses sales businesses miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2015 december 31 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 15 consolidated financial statements company changed manner classifies deferred taxes 2015 2014 due adoption accounting standards update 201517 balance sheet classification deferred taxes company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 26 2016 b supplementary data selected quarterly financial data 2015 2014 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2015 reflect net charge related settlement vioxx shareholder class action litigation see note 10 foreign exchange losses related venezuela see note 14 gain sale company’s remaining ophthalmics business international markets see note 4 amounts 2014 reflect divestiture merck’s consumer care business october 1 2014 see note 4 including 112 billion gain sale amounts 2014 also include loss extinguishment debt see note 9 2 amounts 2015 include gain sale certain migraine clinical development programs see note 4 amounts 2014 include gains sales businesses see note 4 additional year expense health care reform fee 3 amounts 2015 include foreign exchange losses related devaluation company’s net monetary assets venezuela see note 14 amounts 2014 include gain astrazeneca’s option exercise see note 8 4 amounts 2014 include tax benefit relating sale sirna therapeutics inc see note 4 5 amounts 2015 2014 reflect acquisition divestiturerelated costs see note 7 impact restructuring actions see note 3 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2016 2015 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2016 notes consolidated financial statements report dated february 28 2017 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities sales vaccines major european markets marketed company’s sanofi pasteur msd spmsd joint venture termination december 31 2016 beginning 2017 merck record vaccine sales european markets previously part joint venture company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients merck’s alliances segment primarily includes results company’s relationship astrazeneca lp termination relationship june 30 2014 see note 8 october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products see note 3 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized title risk loss passes customer typically upon delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 196 million 27 billion respectively december 31 2016 145 million 27 billion respectively december 31 2015 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 16 billion 2016 16 billion 2015 25 billion 2014 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 21 billion 21 billion 23 billion 2016 2015 2014 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 452 million 421 million net accumulated amortization december 31 2016 2015 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 2 20 years see note 7 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development acquired inprocess research development iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings changes inputs may result significantly different fair value adjustment research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life amounts due collaborative partners related development activities generally reflected reduction research development expenses specific milestone achieved nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges periods addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards first quarter 2016 company adopted accounting guidance issued financial accounting standards board fasb april 2015 requires debt issuance costs presented direct deduction carrying amount debt balance sheet opposed presented deferred charge approximately 100 million debt issuance costs reclassified first quarter 2016 result adoption new standard prior period amounts recast conform new presentation second quarter 2016 company elected early adopt accounting standards update issued fasb march 2016 intended simplify accounting reporting employee sharebased payment transactions among provisions new standard requires excess tax benefits deficiencies arise upon vesting exercise sharebased payments recognized income statement opposed previous guidance tax effects recorded paidincapital certain instances aspect new guidance required adopted prospectively resulted recognition 79 million excess tax benefits taxes income 2016 arising sharebased payments new guidance also amended presentation certain sharebased payment items statement cash flows cash flows related excess income tax benefits classified operating activity formerly included financing activity company elected adopt aspect new guidance prospectively standard also clarified cash payments made taxing authorities employees’ behalf shares withheld presented financing activity aspect guidance adopted retrospectively accordingly company reclassified 117 million 129 million payments operating activities financing activities consolidated statement cash flows years ended december 31 2015 2014 respectively conform current presentation company elected continue estimate impact forfeitures determining amount compensation cost recognized period rather account occur fourth quarter 2016 company elected early adopt accounting standards update issued fasb january 5 2017 intended clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses substantially fair value gross assets included transaction concentrated single asset group similar assets would represent business considered business assets transaction need include input substantive process together significantly contribute ability create outputs prior adoption new guidance acquisition disposition would considered business inputs well processes applied inputs ability create outputs entities permitted apply updated guidance transactions occurring guidance issued long applicable financial statements issued accordingly company elected adopt guidance prospectively october 1 2016 recently issued accounting standards may 2014 fasb issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements august 2015 fasb approved oneyear deferral effective date making guidance effective interim annual periods beginning 2018 new standard permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect adopting guidance recognized date initial application modified retrospective method company adopt new standard january 1 2018 currently plans use modified retrospective method majority company’s business ship bill primary revenue stream merck expect significant differences however company’s analysis preliminary subject change merck completed assessment multiple element arrangements certain discount trade promotion programs january 2016 fasb issued revised guidance accounting reporting financial instruments new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income new guidance also simplifies impairment testing equity investments without readily determinable fair values changes certain disclosure requirements guidance effective interim annual periods beginning 2018 early adoption permitted company currently assessing impact adoption consolidated financial statements february 2016 fasb issued new accounting guidance accounting reporting leases new guidance requires lessees recognize rightofuse asset lease liability recorded balance sheet leases meet definition shortterm lease leases classified either operating finance operating leases result straightline expense income statement similar current operating leases finance leases result expense recognized earlier years lease term similar current capital leases new guidance effective interim annual periods beginning 2019 early adoption permitted company currently evaluating impact adoption consolidated financial statements june 2016 fasb issued amended guidance accounting credit losses financial instruments within scope guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries new guidance effective interim annual periods beginning 2020 earlier application permitted 2019 company currently evaluating impact adoption consolidated financial statements august 2016 fasb issued guidance classification certain cash receipts payments statement cash flows intended reduce diversity practice guidance effective interim annual periods beginning 2018 early adoption permitted guidance applied retrospectively periods presented may applied prospectively retrospective application would impracticable company currently evaluating effect standard consolidated statement cash flows october 2016 fasb issued guidance accounting income tax consequences intraentity transfers assets inventory existing guidance recognition current deferred income taxes intraentity asset transfer prohibited asset sold third party new guidance require recognition income tax consequences intraentity transfer asset exception inventory intraentity transfer occurs guidance effective interim annual periods beginning 2018 early adoption permitted new guidance applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption company anticipate adoption new guidance material effect consolidated financial statements november 2016 fasb issued guidance requiring amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows guidance effective interim annual periods beginning 2018 applied using retrospective transition method period presented early adoption permitted company currently evaluating effect standard consolidated statement cash flows january 2017 fasb issued guidance provides elimination step 2 goodwill impairment test impairment charges recognized amount recorded amount carrying amount exceeds reporting unit’s fair value certain limitations new guidance effective interim annual periods 2021 company anticipate adoption new guidance material effect consolidated financial statements 3 acquisitions divestitures research collaborations license agreements company continues acquire businesses establish external alliances research collaborations licensing agreements complement internal research capabilities arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share payments contingent upon occurrence certain future events linked success asset development company also reviews marketed products pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain assets pro forma financial information acquired businesses presented historical financial results acquired entity significant compared company’s financial results 2016 transactions july 2016 merck acquired afferent pharmaceuticals afferent privately held pharmaceutical company focused development therapeutic candidates targeting p2x3 receptor treatment common poorlymanaged neurogenic conditions afferent’s lead investigational candidate mk7264 formerly af219 selective nonnarcotic orallyadministered p2x3 antagonist evaluated phase 2b clinical trial treatment refractory chronic cough well phase 2 clinical trial idiopathic pulmonary fibrosis cough total consideration transferred 510 million included cash paid outstanding afferent shares 487 million well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf afferent addition former afferent shareholders eligible receive total additional 750 million contingent upon attainment certain clinical development commercial milestones multiple indications candidates including mk7264 transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date company determined fair value contingent consideration 223 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment using appropriate discount rate dependent nature timing milestone payment merck recognized intangible asset inprocess research development iprd 832 million net deferred tax liabilities 258 million net assets 29 million primarily consisting cash acquired excess consideration transferred fair value net assets acquired 130 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach fair value estimated based upon asset’s probabilityadjusted future net cash flows reflects stage development project associated probability successful completion net cash flows discounted present value using discount rate 115 actual cash flows likely different assumed also july 2016 merck wholly owned subsidiary healthcare services solutions llc acquired majority ownership interest staywell company llc staywell portfolio company vestar capital partners vestar staywell health engagement company helps clients engage educate people improve health business results terms transaction merck paid 150 million majority ownership interest additionally merck provided staywell 150 million intercompany loan pay preexisting thirdparty debt merck option buy vestar option require merck buy vestar’s remaining ownership interest fair value beginning three years acquisition date transaction accounted acquisition business merck recognized intangible assets 238 million deferred tax liabilities 84 million net liabilities 5 million noncontrolling interest 124 million excess consideration transferred fair value net assets acquired 275 million recorded goodwill largely attributable anticipated synergies expected arise acquisition goodwill allocated healthcare services segment deductible tax purposes intangible assets recognized primarily relate customer relationships amortized 10year useful life medical information solutions content amortized fiveyear useful life additionally july 2016 merck announced executed agreement acquire controlling interest vallée sa vallée leading privately held producer animal health products brazil vallée extensive portfolio products spanning parasiticides antiinfectives vaccines include products livestock horses companion animals terms agreement merck acquire approximately 93 shares vallée approximately 400 million based exchange rates time announcement agreement subject regulatory review certain closing conditions june 2016 merck moderna therapeutics moderna entered strategic collaboration license agreement develop commercialize novel messenger rna mrnabased personalized cancer vaccines development program entail multiple studies several types cancer include evaluation mrnabased personalized cancer vaccines combination merck’s keytruda pursuant terms agreement merck made upfront cash payment moderna 200 million recorded research development expenses following human proof concept studies merck right elect make additional payment moderna merck exercises right two companies equally share cost profits worldwide collaboration development personalized cancer vaccines moderna right elect copromote personalized cancer vaccines united states agreement entails exclusivity around combinations keytruda moderna merck ability combine mrnabased personalized cancer vaccines nonpd1 agents january 2016 merck acquired iomet pharma ltd iomet privately held ukbased drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism acquisition provides merck iomet’s preclinical pipeline ido indoleamine23dioxygenase 1 tdo tryptophan23dioxygenase dualacting idotdo inhibitors transaction accounted acquisition business total purchase consideration transaction included cash payment 150 million future additional milestone payments 250 million contingent upon certain clinical regulatory milestones achieved company determined fair value contingent consideration 94 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment utilizing discount rate 105 merck recognized intangible assets iprd 155 million net deferred tax assets 32 million excess consideration transferred fair value net assets acquired 57 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach assets’ probabilityadjusted future net cash flows discounted present value also using discount rate 105 actual cash flows likely different assumed 2015 transactions december 2015 company divested remaining ophthalmics portfolio international markets mundipharma ophthalmology products limited merck received consideration approximately 170 million recognized gain 147 million recorded income expense net 2015 july 2015 merck acquired ccam biotherapeutics ltd ccam privately held biopharmaceutical company focused discovery development novel cancer immunotherapies total purchase consideration transaction included upfront payment 96 million cash future additional payments 510 million associated attainment certain clinical development regulatory commercial milestones transaction accounted acquisition business merck recognized intangible asset iprd 180 million related cm24 monoclonal antibody well liability contingent consideration 105 million goodwill 14 million net assets 7 million 2016 result unfavorable efficacy data company determined would discontinue development pipeline program accordingly company recorded iprd impairment charge 180 million related cm24 reversed related liability contingent consideration fair value 116 million time program discontinuation iprd impairment charge income related reduction liability contingent consideration recorded research development expenses 2016 also july 2015 merck allergan plc allergan entered agreement pursuant allergan acquired exclusive worldwide rights mk1602 mk8031 merck’s investigational small molecule oral calcitonin generelated peptide cgrp receptor antagonists developed treatment prevention migraine terms agreement allergan acquired rights upfront payments 250 million 125 million paid august 2015 upon closing transaction remaining 125 million paid april 2016 company recorded gain 250 million within income expense net 2015 related transaction allergan fully responsible development cgrp programs well manufacturing commercialization upon approval launch products agreement merck entitled receive potential development commercial milestone payments royalties tiered doubledigit rates based commercialization programs 2016 merck recognized gains 100 million within income expense net resulting payments allergan achievement research development milestones february 2015 merck ngm biopharmaceuticals inc ngm privately held biotechnology company entered multiyear collaboration research discover develop commercialize novel biologic therapies across wide range therapeutic areas terms agreement merck made upfront payment ngm 94 million included research development expenses purchased 15 equity stake ngm 106 million merck committed 250 million fund ngm’s efforts initial fiveyear term collaboration potential additional funding certain conditions met prior merck initiating phase 3 study licensed program ngm may elect either receive milestone royalty payments certain cases cofund development participate global cost revenue share arrangement 50 agreement also provides ngm option participate copromotion cofunded program united states merck option extend research agreement two additional twoyear terms january 2015 merck acquired cubist pharmaceuticals inc cubist leader development therapies treat serious infections caused broad range bacteria total consideration transferred 83 billion included cash paid outstanding cubist shares 78 billion well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf cubist sharebased compensation payments settle nonvested equity awards attributable postcombination service recognized transaction expense 2015 addition company assumed outstanding convertible debt cubist fair value approximately 19 billion acquisition date merck redeemed debt february 2015 transaction accounted acquisition business estimated fair value assets acquired liabilities assumed cubist follows 1 included current liabilities noncurrent liabilities contingent consideration 73 million 50 million respectively 2 goodwill recognized largely attributable anticipated synergies expected arise acquisition allocated pharmaceutical segment goodwill deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach fair value estimated based market participant expectations asset’s discounted projected net cash flows company’s estimates projected net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing discount rate 8 actual cash flows likely different assumed company recorded fair value incomplete research project surotomycin mk4261 time acquisition reached technological feasibility alternative future use second quarter 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge see note 7 connection cubist acquisition liabilities recorded potential future consideration contingent upon achievement future salesbased milestones fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate 8 used present value probabilityweighted cash flows changes inputs could result different fair value measurement transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date 2015 company incurred 324 million transaction costs directly related acquisition cubist including sharebased compensation costs severance costs legal advisory fees reflected marketing administrative expenses following unaudited supplemental pro forma data presents consolidated information acquisition cubist completed january 1 2014 unaudited supplemental pro forma data reflects historical information merck cubist adjusted include additional amortization expense based fair value assets acquired additional interest expense would incurred borrowings used fund acquisition transaction costs associated acquisition related tax effects adjustments pro forma data considered indicative results would occurred acquisition consummated january 1 2014 indicative future results 2014 transactions december 2014 merck acquired oncoethix privately held biotechnology company specializing oncology drug development total purchase consideration transaction included upfront cash payment 110 million future additional milestone payments 265 million contingent upon certain clinical regulatory milestones achieved transaction accounted acquisition business merck recognized intangible asset iprd 143 million related mk8628 formerly otx015 investigational novel oral bet bromodomain inhibitor well liability contingent consideration 43 million net assets 10 million 2016 result unfavorable efficacy data company determined would discontinue development mk8628 accordingly company recorded iprd impairment charge 143 million related mk8628 reversed related liability contingent consideration fair value 40 million time program discontinuation iprd impairment charge income related reduction liability contingent consideration recorded research development expenses 2016 october 1 2014 company completed sale merck consumer care mcc business bayer ag bayer 142 billion 140 billion net cash divested less customary closing adjustments well certain contingent amounts held back payable upon manufacturing site transfer canada regulatory approval korea terms agreement bayer acquired merck’s existing overthecounter business including global trademark prescription rights claritin afrin company recognized pretax gain sale mcc 112 billion recorded income expense net 2014 also october 1 2014 company entered worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including bayer’s adempas riociguat approved treat pulmonary arterial hypertension chronic thromboembolic pulmonary hypertension two companies equally share costs profits collaboration implement joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat phase 3 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn made available earlystage sgc compounds similar terms return broad collaboration rights merck made upfront payment bayer 10 billion potential additional milestone payments 11 billion upon achievement agreedupon sales goals agreement bayer lead commercialization adempas americas merck lead commercialization rest world vericiguat potential optin products bayer lead rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead company determined merck’s payment access bayer’s compounds constituted acquisition asset 10 billion consideration paid merck 915 million fair value related adempas capitalized intangible asset subject amortization estimated useful life 12 years remaining 85 million fair value related vericiguat compound clinical development expensed within research development expenses fair values adempas vericiguat determined using income approach probabilityadjusted future net cash flows discounted present value using discount rate 100 adempas 105 vericiguat second quarter 2016 company determined probable 2017 adempas sales would exceed threshold triggering 350 million milestone payment merck bayer accordingly second quarter 2016 company recorded 350 million liability corresponding intangible asset also recognized 50 million cumulative amortization expense within materials production costs remaining intangible asset june 30 2016 300 million amortized thenremaining estimated useful life 105 years supported projected future cash flows subject impairment testing remaining potential future milestone payments 775 million yet accrued deemed company probable time august 2014 merck completed acquisition idenix pharmaceuticals inc idenix approximately 39 billion cash 37 billion net cash acquired idenix biopharmaceutical company engaged discovery development medicines treatment human viral diseases whose primary focus development nextgeneration oral antiviral therapeutics treat hepatitis c virus hcv infection transaction accounted acquisition business merck recognized intangible asset iprd 32 billion related mk3682 formerly idx21437 uprifosbuvir well net deferred tax liabilities 951 million net liabilities 12 million uprifosbuvir nucleotide prodrug clinical development evaluated treatment hcv infection excess consideration transferred fair value net assets acquired 15 billion recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 115 2016 company recorded 29 billion iprd impairment charge related uprifosbuvir resulted recent changes product profile taken together changes company’s expectations pricing market opportunity see note 7 may 2014 merck entered agreement sell certain ophthalmic products santen pharmaceutical co ltd santen japan markets europe asia pacific agreement provided upfront payments santen additional payments based defined sales milestones santen also purchase supply ophthalmology products covered agreement two fiveyear period transaction closed markets july 1 2014 remaining markets october 1 2014 company received 565 million upfront payments santen net certain adjustments recognized gains 480 million transactions 2014 included income expense net march 2014 merck sold sirna therapeutics inc sirna subsidiary alnylam pharmaceuticals inc alnylam consideration 25 million 2520044 shares alnylam common stock merck eligible receive future payments associated achievement certain regulatory commercial milestones well royalties future sales merck recorded gain 204 million income expense net 2014 related transaction excess merck’s tax basis investment sirna value received resulted approximate 300 million tax benefit recorded 2014 january 2014 merck sold us marketing rights saphris antipsychotic indicated treatment schizophrenia bipolar disorder adults forest laboratories inc forest terms agreement forest made upfront payments 232 million recorded sales 2014 make additional payments merck based defined sales milestones addition part transaction merck agreed supply product forest subsequently acquired allergan patent expiry remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey remicade lost market exclusivity major european markets february 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj 4 restructuring company incurs substantial costs restructuring program activities related merck’s productivity cost reduction initiatives well connection integration certain acquired businesses 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network nonfacility related restructuring actions programs substantially complete remaining activities primarily relate ongoing facility rationalizations company recorded total pretax costs 11 billion 2016 11 billion 2015 20 billion 2014 related restructuring program activities since inception programs december 31 2016 merck recorded total pretax accumulated costs approximately 126 billion eliminated approximately 40900 positions comprised employee separations well elimination contractors vacant positions company expects substantially complete remaining actions programs end 2017 incur approximately 700 million additional pretax costs company estimates approximately twothirds cumulative pretax costs result cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated positions eliminated restructuring program activities approximately 2625 2016 3770 2015 6085 2014 position eliminations comprised actual headcount reductions elimination contractors vacant positions accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck recorded accelerated depreciation site assets anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2016 2015 2014 includes 409 million 550 million 240 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation activity also reflects net pretax losses resulting sales facilities related assets 151 million 2016 117 million 2015 133 million 2014 following table summarizes charges spending relating restructuring program activities 1 remaining cash outlays expected substantially completed end 2017 5 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted foreign currency denominated sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes company manages operating activities net asset positions local level order mitigate effect exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company may also use forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates recorded income expense net effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax gains 193 million 2016 304 million 2015 294 million 2014 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk may 2016 four interest rate swaps notional amounts 250 million matured swaps effectively converted company’s 10 billion 070 fixedrate notes due 2016 variable rate debt december 31 2016 company party 26 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated foreign currency cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 million 7 million 3 million ineffectiveness hedge 2016 2015 2014 respectively 2 ineffectiveness hedge represents amount excluded hedge effectiveness testing 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2016 company estimates 462 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information investments debt equity securities december 31 follows availableforsale debt securities included shortterm investments totaled 78 billion december 31 2016 remaining debt securities 102 billion mature within five years december 31 2016 2015 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily auto loan credit card student loan receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 increase investments included assets reflects certain assets previously restricted retiree benefits became available fund certain health welfare benefits 2016 see note 13 3 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2016 december 31 2016 cash equivalents 65 billion included 54 billion cash equivalents considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration follows 1 recorded research development expenses materials production costs changes fair value 2016 largely attributable reversal liabilities related programs obtained connection acquisitions ccam oncoethix smartcells see note 7 additions contingent consideration 2016 relate termination spmsd joint venture see note 8 acquisitions iomet afferent see note 3 additions contingent consideration 2015 relate acquisitions cubist ccam see note 3 payments contingent consideration 2016 relate first commercial sale zerbaxa european union 2015 relate first commercial sale zerbaxa united states fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2016 257 billion compared carrying value 248 billion december 31 2015 270 billion compared carrying value 264 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic conditions ongoing sovereign debt issues certain european countries december 31 2016 company’s total net accounts receivable outstanding one year approximately 140 million company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations company’s customers largest accounts receivable balances mckesson corporation amerisourcebergen corporation cardinal health inc zuellig pharma ltd asia pacific aah pharmaceuticals ltd uk represented aggregate approximately 40 total accounts receivable december 31 2016 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2016 2015 company received cash collateral 529 million 862 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2016 2015 6 inventories december 31 consisted inventories valued lifo method comprised approximately 23 billion 24 billion inventories december 31 2016 2015 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2016 2015 amounts included 10 billion 15 billion respectively inventories expected sold within one year addition amounts included 80 million 63 million december 31 2016 2015 respectively inventories produced preparation product launches 7 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2016 2015 187 million 140 million respectively 2016 additions goodwill pharmaceutical segment resulted primarily acquisitions afferent iomet see note 3 well termination spmsd joint venture treated stepacquisition accounting purposes see note 8 addition goodwill within nonreportable segments 2016 relates acquisition staywell part healthcare services segment see note 3 2015 additions goodwill pharmaceutical segment resulted primarily acquisition cubist reductions resulted divestiture company’s remaining ophthalmics business international markets see note 3 impairments goodwill within nonreportable segments 2016 2015 relate certain businesses within healthcare services segment intangibles december 31 consisted acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives increase intangible assets products product rights 2016 primarily relates recognition intangible assets connection termination spmsd joint venture see note 8 company’s significant acquired intangibles related marketed products included product rights december 31 2016 include zerbaxa 33 billion zetia 15 billion sivextro 955 million vytorin 938 million implanonnexplanon 587 million dificid 561 million gardasilgardasil 9 468 million nuvaring 319 million nasonex 308 million company recognized intangible asset related adempas result formation collaboration bayer 2014 see note 3 carrying value 872 million december 31 2016 reflected “other” table 2016 2015 2014 company recorded impairment charges related marketed products intangibles 347 million 45 million 11 billion respectively within material production costs 2016 company lowered cash flow projections zontivity product reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease following several business decisions reduced sales expectations zontivity united states europe company utilized market participant assumptions considered several different scenarios determine fair value intangible asset related zontivity compared related carrying value resulted impairment charge 252 million also 2016 company wroteoff 95 million capitalized connection inlicensed products grastek ragwitek allergy immunotherapy tablets business reasons company determined return licensor charges 2015 primarily relate impairment customer relationship tradename intangibles certain businesses within healthcare services segment amount recorded 2014 793 million related pegintron 244 million related victrelis 35 million related rebetol products treatment chronic hcv infection 2014 developments competitive hcv treatment market led market share losses greater company predicted causing changes cash flow projections pegintron victrelis rebetol indicated intangible asset values recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair values intangible assets related pegintron victrelis rebetol compared related carrying values resulted impairment charges noted iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life asset begin amortization 2016 2015 2014 8 million 280 million 654 million respectively iprd reclassified products product rights upon receipt marketing approval major market 2016 company recorded 36 billion iprd impairment charges within research development expenses amount 29 billion relates clinical development program uprifosbuvir nucleotide prodrug clinical development evaluated treatment hcv company determined recent changes product profile well changes merck’s expectations pricing market opportunity taken together constituted triggering event required company evaluate uprifosbuvir intangible asset impairment utilizing market participant assumptions considering different scenarios company concluded best estimate current fair value intangible asset related uprifosbuvir 240 million resulting recognition pretax impairment charge noted iprd impairment charges 2016 also include charges 180 million 143 million related discontinuation programs obtained connection acquisitions ccam oncoethix respectively resulting unfavorable efficacy data additional 72 million relates programs obtained connection smartcells acquisition following decision terminate lead compound due lack efficacy pursue backup compound reduced projected future cash flows iprd impairment charges 2016 also include 112 million related inlicensed program house dust mite allergies business reasons returned licensor remaining iprd impairment charges 2016 primarily relate deprioritized pipeline programs deemed alternative use period including 79 million impairment charge investigational candidate contraception discontinuation delay certain clinical development programs resulted reduction related liabilities contingent consideration see note 3 2015 company recorded 63 million iprd impairment charges 50 million related surotomycin clinical development program 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted 2014 company recorded 49 million iprd impairment charges primarily result changes cash flow assumptions certain compounds obtained connection company’s joint venture supera farma laboratorios sa supera well discontinuation certain animal health programs iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within materials production costs 38 billion 2016 48 billion 2015 42 billion 2014 estimated aggregate amortization expense next five years follows 2017 32 billion 2018 28 billion 2019 14 billion 2020 12 billion 2021 11 billion 8 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates including spmsd termination december 31 2016 certain investment funds well azlp termination company’s relationship azlp june 30 2014 equity income affiliates 86 million 2016 205 million 2015 257 million 2014 included income expense net see note 14 investments affiliates accounted using equity method totaled 715 million december 31 2016 702 million december 31 2015 amounts reported assets amounts due joint ventures included current assets 1 million december 31 2016 34 million december 31 2015 sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture spmsd market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 10 billion 2016 923 million 2015 11 billion 2014 december 31 2016 merck sanofi pasteur sanofi terminated spmsd ended joint vaccines operations europe terms termination merck acquired sanofi’s 50 interest spmsd exchange consideration 657 million comprised cash well future royalties 115 net sales merck products december 31 2024 company determined fair value 416 million date termination company accounted transaction step acquisition required merck remeasure ownership interest previously accounted equity method investment fair value acquisition date merck turn sold sanofi intellectual property rights held spmsd exchange consideration 596 million comprised cash future royalties 115 net sales sanofi products december 31 2024 company determined fair value 302 million date termination excluded arrangement potential future sales vaxelis jointly developed investigational pediatric hexavalent combination vaccine approved european commission february 2016 european marketing rights vaxelis transferred separate equallyowned joint venture sanofi merck mcm net impact termination spmsd joint venture follows 1 goodwill allocated pharmaceutical segment deductible tax purposes 2 recorded income expense net estimated fair values identifiable intangible assets related products product rights determined using income approach fair value estimated based market participant expectations asset’s projected net cash flows projected net cash flows discounted present value utilizing discount rate 115 actual cash flows likely different assumed amount recorded products product rights 468 million relates gardasilgardasil 9 fair value liabilities contingent consideration related merck’s future royalty payments sanofi 416 million reflected consideration payable sanofi net table determined acquisition date using unobservable inputs include estimated amount timing projected cash flows riskadjusted discount rate 8 used present value cash flows changes inputs could result different fair value measurement based existing accounting policy election merck recorded 302 million estimated fair value contingent future royalties received sanofi sale sanofi products rather recognize amounts future periods sales occur royalties earned company incurred 24 million transaction costs related termination spmsd included marketing administrative expenses 2016 pro forma financial information transaction presented results significant compared company’s financial results astrazeneca lp 1982 merck entered agreement astra ab astra develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc ami merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc kbi contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp partnership exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp azlp upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights connection 1998 restructuring ami merck assumed 24 billion par value preferred stock dividend rate 5 per annum carried kbi included noncontrolling interests merck earned revenue based sales kbi products revenue 463 million 2014 primarily relating sales nexium well prilosec addition merck earned certain partnership returns azlp 192 million 2014 recorded equity income affiliates june 30 2014 astrazeneca exercised option purchase merck’s interest kbi 419 million cash amount 327 million reflected estimate fair value merck’s interest nexium prilosec portion exercise price subject trueup 2018 based actual sales closing 2014 june 2018 deferred recognized income 5 million 182 million 140 million 2016 2015 2014 respectively income expense net contingency eliminated sales occurred deferred income amount fully amortized first quarter 2016 company began recognizing income corresponding receivable amounts due merck astrazeneca based sales performance nexium prilosec subject trueup june 2018 company recognized 93 million income 2016 included income expense net remaining exercise price 91 million primarily represents multiple ten times merck’s average 1 annual profit allocation partnership three years prior exercise merck recognized 91 million gain 2014 within income expense net result astrazeneca’s option exercise company’s remaining interest azlp redeemed accordingly company also recognized noncash gain approximately 650 million 2014 within income expense net resulting retirement 24 billion kbi preferred stock elimination company’s 14 billion investment azlp 340 million reduction goodwill transaction resulted net tax benefit 517 million 2014 primarily reflecting reversal deferred taxes azlp investment balance result astrazeneca exercising option july 1 2014 company longer records equity income azlp supply sales azlp terminated summarized financial information azlp follows 1 includes results june 30 2014 termination date 2 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest 9 loans payable longterm debt commitments loans payable december 31 2016 included 300 million notes due 2017 267 million longdated notes subject repayment option holder loans payable december 31 2015 included 23 billion notes due 2016 10 million shortterm foreign borrowings 225 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 040 007 years ended december 31 2016 2015 respectively longterm debt december 31 consisted presented table included 147 million 223 million december 31 2016 2015 respectively borrowings variable rates resulted effective interest rates 089 zero 2016 2015 respectively also included foreign borrowings 43 million december 31 2015 varying rates 475 exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices november 2016 company issued €10 billion principal amount senior unsecured notes consisting €500 million principal amount 050 notes due 2024 €500 million principal amount 1375 notes due 2036 company intends use net proceeds offering 11 billion general corporate purposes including without limitation repayment outstanding commercial paper borrowings indebtedness upcoming maturities october 2014 company issued €25 billion principal amount senior unsecured notes net proceeds offering 31 billion used part repay debt validly tendered connection tender offers launched company certain outstanding notes debentures company paid 25 billion aggregate consideration applicable purchase price together accrued interest redeem 18 billion principal amount debt november 2014 merck redeemed additional 20 billion principal amount senior unsecured notes company recorded pretax loss 628 million 2014 connection transactions effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2016 company compliance covenants aggregate maturities longterm debt next five years follows 2017 301 million 2018 30 billion 2019 13 billion 2020 19 billion 2021 22 billion june 2016 company terminated existing credit facility entered new 60 billion fiveyear credit facility matures june 2021 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 292 million 2016 303 million 2015 350 million 2014 minimum aggregate rental commitments noncancellable leases follows 2017 200 million 2018 141 million 2019 122 million 2020 88 million 2021 63 million thereafter 140 million company significant capital leases 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including environmental matters opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities effective august 1 2004 vioxx litigation product liability lawsuits previously disclosed merck defendant number putative class action lawsuits alleging economic injury result purchase vioxx one settled settlement merck agreed pay 23 million resolve properly documented claims submitted class members approved attorneys’ fees expenses approved settlement notice costs certain administrative expenses claims review process completed company paying approximately 700000 amount attorneys’ fees paid yet determined merck also defendant lawsuit together abovereferenced lawsuits vioxx product liability lawsuits brought attorney general utah lawsuit pending utah state court utah alleges merck misrepresented safety vioxx seeks damages penalties utah false claims act trial date set merck recently reached agreements attorneys general alaska montana settle state consumer protection act cases company 1525 million 167 million respectively result alaska’s action dismissed prejudice september 30 2016 montana’s action dismissed prejudice october 6 2016 shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits filed merck certain former employees alleging defendants violated federal securities laws making alleged material misstatements omissions respect cardiovascular safety vioxx securities lawsuits vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler previously disclosed merck reached resolution vioxx securities class action reserve recorded 2015 merck created settlement fund 2016 830 million settlement class fund agreed pay additional amount approved attorneys’ fees expenses 232 million feeexpense fund june 28 2016 court approved settlement awarded attorneys’ fees expenses amount 222 million remaining amount feeexpense fund added settlement class fund company paid total settlement amount escrow april 2016 available funds certain insurance policies merck’s net cash payment settlement fees approximately 680 million settlement covers claims relating vioxx settlement class members purchased merck securities may 21 1999 october 29 2004 settlement admission wrongdoing part settlement agreement defendants continue deny allegations addition merck reached resolution referenced individual securities lawsuits filed foreign domestic institutional investors also consolidated vioxx securities lawsuits insurance result previously disclosed insurance arbitration company’s insurers paid insurance proceeds approximately 380 million connection settlement class action company also directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 145 million company received disputes insurers availability company’s directors officers insurance coverage claims amounts actually recovered directors officers policies discussed paragraph may less stated upper limits international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx brazil europe collectively vioxx international lawsuits litigation jurisdictions generally procedural stages merck expects litigation may continue number years reserves company immaterial reserve respect certain vioxx product liability lawsuits company established liability reserves believes meritorious defenses remaining vioxx product liability lawsuits vioxx international lawsuits defend product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2016 approximately 4230 cases filed pending merck either federal state court approximately 20 actions plaintiffs allege among things suffered osteonecrosis jaw onj generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 4210 actions generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation jpml ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation fosamax onj mdl coordinated pretrial proceedings december 2013 merck reached agreement principle plaintiffs’ steering committee psc fosamax onj mdl resolve pending onj cases appeal fosamax onj mdl state courts aggregate amount 277 million merck psc subsequently formalized terms agreement master settlement agreement onj master settlement agreement executed april 2014 included 1200 plaintiffs july 2014 merck elected proceed onj master settlement agreement reduced funding level 273 million since participation level approximately 95 merck fully funded onj master settlement agreement escrow agent agreement making settlement payments qualifying plaintiffs onj master settlement agreement effect cases alleging femur fractures discussed discovery currently ongoing approximately 20 remaining onj cases pending various federal state courts company intends defend lawsuits cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey femur fracture mdl bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 515 cases appealing decision us court appeals third circuit third circuit femur fracture mdl court since dismissed without prejudice another approximately 540 cases pending plaintiffs’ appeal preemption ruling third circuit june 30 2016 third circuit heard oral argument plaintiffs’ appeal preemption ruling parties awaiting decision addition june 2014 femur fracture mdl court granted merck summary judgment gaynor v merck case found merck’s updates january 2011 fosamax label regarding atypical femur fractures adequate matter law merck adequately communicated changes plaintiffs gaynor appealed court’s decision third circuit august 2014 merck filed motion requesting court enter order requiring plaintiffs femur fracture mdl claim 2011 fosamax label inadequate proximate cause alleged injuries show cause cases dismissed based court’s preemption decision ruling gaynor case november 2014 court granted merck’s motion entered requested show cause order december 31 2016 seven cases pending femur fracture mdl excluding 515 cases dismissed prejudice preemption grounds pending appeal 540 cases dismissed without prejudice also pending aforementioned appeal december 31 2016 approximately 2860 cases alleging femur fractures filed new jersey state court pending judge jessica mayer middlesex county parties selected initial group 30 cases reviewed fact discovery two additional groups 50 cases reviewed fact discovery selected november 2013 march 2014 respectively group 25 cases reviewed fact discovery selected merck july 2015 merck continued select additional cases reviewed fact discovery 2016 december 31 2016 approximately 280 cases alleging femur fractures filed pending california state court petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge thierry colaw currently presiding coordinated proceedings march 2014 court directed group 10 discovery pool cases reviewed fact discovery subsequently scheduled galper v merck case plaintiffs selected first trial galper trial began february 2015 jury returned verdict merck’s favor april 2015 plaintiff appealed verdict california appellate court oral argument plaintiff’s appeal galper held november 17 2016 parties awaiting decision next femur fracture trial california scheduled begin april 2016 stayed plaintiffs’ request new trial date set additionally five femur fracture cases pending state courts discovery ongoing femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2016 approximately 1195 product user claims served merck alleging generally use januvia andor janumet caused development pancreatic cancer injuries complaints filed several different state federal courts claims filed consolidated multidistrict litigation proceeding us district court southern district california called “in incretinbased therapies products liability litigation” mdl includes federal lawsuits alleging pancreatic cancer due use following medicines januvia janumet byetta victoza latter two products manufactured pharmaceutical companies majority claims filed mdl filed superior court california county los angeles california state court december 31 2016 eight product users claims pending merck state courts california state court november 2015 mdl california state court separate opinions granted summary judgment defendants grounds preemption approximately 1195 served product user claims rulings resulted dismissal approximately 1100 product user claims plaintiffs appealing mdl california state court preemption rulings addition claims noted company agreed december 31 2016 toll statute limitations approximately 50 additional claims company intends continue defending lawsuits propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2016 approximately 1330 lawsuits filed plaintiffs allege experienced persistent sexual side effects following cessation treatment propecia andor proscar approximately 50 plaintiffs also allege propecia proscar caused cause prostate cancer testicular cancer male breast cancer lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge brian cogan eastern district new york matters pending state court new jersey consolidated judge jessica mayer middlesex county addition one matter pending state court california one matter pending state court new york one matter pending state court ohio company intends defend lawsuits governmental proceedings previously disclosed company received civil investigative demand us attorney’s office southern district new york requests information relating company’s contracts services payments pharmacy benefit managers respect maxalt levitra january 1 2006 present company cooperating investigation previously disclosed company received subpoena office inspector general us department health human services behalf us attorney’s office district maryland civil division us department justice doj requests information relating company’s marketing singulair dulera inhalation aerosol certain marketing activities january 1 2006 present company cooperating investigation previously disclosed company received civil investigative demand us attorney’s office eastern district pennsylvania requested information relating company’s contracting pricing dulera inhalation aerosol certain pharmacy benefit managers medicare part plans company cooperated investigation august 2016 company learned underlying qui tam complaint unsealed voluntarily dismissed prejudice relator without prejudice government doj informed company matter inactive current investigation previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperated agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries previously disclosed company advised doj based information received closed inquiry matter relates company also recently advised sec closed inquiry matter relates company previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate time company receives inquiries subject preliminary investigation activities competition authorities various markets outside united states certain inquiries activities may lead commencement formal proceedings determined adversely company monetary fines andor remedial undertakings may required commercial litigation kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough corporation scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle respectively relating generic versions scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications andas following commencement administrative proceeding us federal trade commission 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case february 2016 district court denied company’s motion summary judgment relating direct purchasers’ claims concerning settlement upshersmith granted company’s motion summary judgment relating direct purchasers’ claims concerning settlement lederle anticipation trial parties filed motions exclude certain expert opinions evidence defendants filed motion summary judgment february 2017 merck upshersmith reached settlement principle class direct purchasers optouts class merck contribute approximately 80 million aggregate towards overall settlement formal settlement agreements class optouts yet executed settlement class subject approval district court sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company us district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws plaintiffs sought granted leave file amended complaint january 2014 plaintiffs filed amended complaint adding four additional named plaintiffs october 2014 court denied company’s motion dismiss strike class claims premature september 2015 plaintiffs filed additional motions including motion conditional certification equal pay act motion amend pleadings seeking add erisa constructive discharge claims company subsidiary named defendant motion equitable relief merck filed papers opposition motions april 27 2016 court granted plaintiff’s motion conditional certification denied plaintiffs’ motions extend liability period equal pay act claims back june 2009 result liability period date back april 2012 earliest april 29 2016 magistrate judge granted plaintiffs’ request amend complaint add following company subsidiary corporate defendant ii erisa claim iii individual constructive discharge claim one named plaintiffs approximately 700 individuals optedin action optin period closed qui tam litigation previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition previously disclosed two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery company intends defend lawsuits merck kgaa litigation january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france united kingdom uk germany switzerland mexico india alleging breach parties’ coexistence agreement unfair competition andor trademark infringement december 2015 paris court first instance issued judgment finding certain activities company directed towards france constitute trademark infringement unfair competition activities found infringe company kgaa appealed decision appeal scheduled heard may 2017 january 2016 uk high court issued judgment finding company breached coexistence agreement infringed kgaa’s trademark rights result certain activities directed towards uk based use word merck promotional information activity noted uk decision finding based company’s use sign merck connection sale products material pharmaceutical business transacted uk company kgaa appealed decision appeal scheduled heard june 2017 patent litigation time generic manufacturers pharmaceutical products file andas us food drug administration fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company products marketed via agreements companies currently involved patent infringement litigation united states include cancidas invanz nasonex noxafil nuvaring similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges cancidas february 2014 patent infringement lawsuit filed united states xellia pharmaceuticals aps xellia respect xellia’s application fda seeking prepatent expiry approval market generic version cancidas june 2015 district court found xellia infringed company’s patent ordered xellia’s application approved patent expires september 2017 including pediatric exclusivity xellia appealed decision appeal heard march 2016 may 2016 parties reached settlement whereby xellia launch generic version august 2017 earlier certain conditions august 2014 patent infringement lawsuit filed united states fresenius kabi usa llc fresenius respect fresenius’s application fda seeking prepatent expiry approval market generic version cancidas december 2016 parties reached settlement whereby fresenius launch generic version august 2017 earlier certain conditions invanz july 2014 patent infringement lawsuit filed united states hospira respect hospira’s application fda seeking prepatent expiry approval market generic version invanz trial matter held april 2016 october 2016 district court ruled patent valid infringed august 2015 patent infringement lawsuit filed united states savior lifetec corporation savior respect savior’s application fda seeking prepatent expiry approval market generic version invanz lawsuit automatically stays fda approval savior’s application november 2017 adverse court decision whichever may occur earlier nasonex july 2014 patent infringement lawsuit filed united states teva pharmaceuticals usa inc teva pharma respect teva pharma’s application fda seeking prepatent expiry approval market generic version nasonex trial matter held june 2016 november 2016 district court ruled patent valid infringed company appealed decision march 2015 patent infringement lawsuit filed united states amneal pharmaceuticals llc amneal respect amneal’s application fda seeking prepatent expiry approval market generic version nasonex trial matter held june 2016 january 2017 district court ruled patent valid infringed company appealed decision previous decision issued june 2013 held merck patent teva pharma amneal lawsuits covering mometasone furoate monohydrate valid infringed apotex corp’s proposed product april 2015 patent infringement lawsuit filed apotex inc apotex corp apotex respect apotex’s nowlaunched product company believes differs generic version previous lawsuit noxafil august 2015 company filed lawsuit actavis laboratories fl inc actavis united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil lawsuit automatically stays fda approval actavis’s application december 2017 adverse court decision whichever may occur earlier trial matter currently scheduled begin july 2017 march 2016 company filed lawsuit roxane laboratories inc roxane united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil lawsuit automatically stays fda approval roxane’s application august 2018 adverse court decision whichever may occur earlier february 2016 company filed lawsuit par sterile products llc par pharmaceutical inc par pharmaceutical companies inc par pharmaceutical holdings inc collectively par united states respect company’s application fda seeking pre patent expiry approval sell generic version noxafil october 2016 parties reached settlement whereby par launch generic version january 2023 earlier certain conditions nuvaring december 2013 company filed lawsuit subsidiary allergan plc united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring trial matter held january 2016 august 2016 district court ruled patent invalid company appealed decision september 2015 company filed lawsuit teva pharma united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring based ruling allergan plc matter district court dismissed company’s lawsuit december 2016 company appealed decision company involved ongoing litigation canada apotex concerning company’s patents related lovastatin alendronate norfloxacin litigation either settled concluded consequence conclusion litigation 2016 company recorded net gain 117 million included income expense net see note 14 antipd1 antibody patent oppositions litigation previously disclosed ono pharmaceutical co ono european patent ep 1 537 878 ’878 broadly claims use antipd1 antibody company’s immunotherapy keytruda treatment cancer ono previously licensed commercial rights antipd1 antibody bristolmyers squibb bms certain markets bms ono also european patent ep 2 161 336 ’336 granted broadly claimed antipd1 antibodies could include keytruda previously disclosed company bms ono engaged worldwide litigation including united states validity infringement ‘878 patent ‘336 patent equivalents january 2017 company announced entered settlement license agreement bms ono resolving worldwide patent infringement litigation related use antipd1 antibody treatment cancer keytruda settlement license agreement company made onetime payment 625 million recorded expense company’s 2016 financial results bms pay royalties worldwide sales keytruda nonexclusive license market keytruda market approved global net sales keytruda company pay royalties follows •65 net sales occurring january 1 2017 including december 31 2023 •25 net sales occurring january 1 2024 including december 31 2026 parties also agreed dismiss claims worldwide relevant legal proceedings october 2015 pdl biopharma pdl filed lawsuit united states company alleging manufacture keytruda infringed us patent 5693761 ’761 patent expired december 2014 patent claims platform technology used creation manufacture recombinant antibodies pdl seeking damages preexpiry infringement ’761 patent july 2016 company filed declaratory judgment action united states genentech city hope seeking ruling us patent 7923221 cabilly iii patent claims platform technology used creation manufacture recombinant antibodies invalid keytruda bezlotoxumab infringe cabilly iii patent july 2016 company also filed petition uspto inter partes review ipr certain claims us patent 6331415 cabilly ii patent claims platform technology used creation manufacture recombinant antibodies also owned genentech city hope invalid december 2016 uspto denied petition allowed company join ipr filed previously another party gilead patent litigation opposition august 2013 gilead sciences inc gilead filed lawsuit us district court northern district california seeking declaration two company patents invalid infringed sale two sofosbuvir containing products solvadi harvoni company filed counterclaim sale products infringe two patents sought reasonable royalty past present future sales products march 2016 conclusion jury trial patents found invalid infringed jury awarded company 200 million royalty sales products december 2015 conclusion jury trial court held bench trial equitable defenses raised gilead june 2016 court found gilead determined merck could collect jury award patents unenforceable respect gilead company appealed court’s decision gilead also asked court overturn jury’s decision validity court held hearing gilead’s motion august 2016 court subsequently rejected gilead’s request company pay 20 net legal fees damages royalties receives ionis pharmaceuticals inc company idenix pharmaceuticals inc subsidiary pending litigation gilead united states uk norway canada germany france australia based different patent estates would also infringed gilead’s sales two products gilead opposed european patent epo trial united states held december 2016 jury returned verdict company awarding damages 254 billion company currently briefing posttrial motions including issues enhanced damages future royalties gilead briefing posttrial motions judgment matter law uk australia canada company initially unsuccessful cases currently appeal norway patent held invalid appeal filed epo opposition division revoked european patent company appealed decision cases france germany stayed pending final decision epo litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2016 december 31 2015 approximately 185 million 245 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters previously disclosed merck’s facilities oss netherlands inspected province brabant province pursuant dutch hazards major accidents decree sites’ environmental permits province issued penalties alleged violations regulations governing preventing managing accidents hazardous substances government also issued fine alleged environmental violations one oss facilities together totaled 235 thousand company subsequently advised criminal investigation initiated based upon certain issues formed basis administrative enforcement action province company intends defend enforcement action may result investigation may 2015 environmental protection agency conducted air compliance evaluation company’s pharmaceutical manufacturing facility elkton virginia result investigation company recently issued notice noncompliance show cause notification relating certain federally enforceable requirements applicable elkton facility company attempting resolve alleged violations way settlement defend settlement cannot reached company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 83 million 109 million december 31 2016 2015 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 64 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees company also issues rsus employees certain company’s equity method investees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2016 125 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus psus dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2016 2015 2014 300 million 299 million 278 million respectively related income tax benefits 92 million 93 million 86 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2016 2015 2014 5463 5973 5814 per option respectively weighted average fair value options granted 2016 2015 2014 589 646 679 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2016 443 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components changes net periodic benefit credit cost year pension plans largely attributable changes discount rate affecting net amortization decrease net periodic benefit cost postretirement benefit plans 2016 compared 2015 largely attributable changes retiree medical benefits approved company december 2015 connection restructuring actions see note 4 termination charges recorded 2016 2015 2014 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded pension postretirement benefit plans settlements recorded certain us international pension plans reflected table obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows 1 result certain allowable administrative actions occurred june 2016 992 million plan assets previously restricted payment postretirement benefits became available fund certain health welfare benefits 2 actuarial losses 2016 actuarial gains 2015 primarily reflect changes discount rates 3 decline postretirement benefit obligations 2015 resulting plan amendments primarily reflects changes merck’s retiree medical benefits approved company december 2015 changes provide beginning 2017 merck provide access retiree health insurance coverage supplements governmentsponsored medicare private insurance marketplace december 31 2016 2015 accumulated benefit obligation 184 billion 167 billion respectively pension plans 105 billion 94 billion respectively related us pension plans information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2016 2015 435 million 423 million respectively approximately 2 3 respectively company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2016 2015 2 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 3 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2016 2015 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 40 60 us equities 20 40 international equities 15 25 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2017 approximately 50 million us pension plans approximately 160 million international pension plans approximately 25 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net periodic benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net periodic benefit cost 2017 270 million 64 million respectively pension plans 178 million 53 million respectively relates us pension plans 1 million 99 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis developing expected rate return within plan longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2017 expected rate return company’s us pension postretirement benefit plans range 800 875 compared range 730 875 2016 health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2016 2015 2014 126 million 125 million 124 million respectively 14 income expense net income expense net consisted higher exchange losses 2015 compared 2016 2014 related primarily venezuelan bolívar second quarter 2015 upon evaluation evolving economic conditions venezuela volatility country combined decline transactions settled official cencoex rate 630 vef bolívar fuertes per us dollar company determined unlikely outstanding net monetary assets would settled cencoex rate accordingly second quarter 2015 company recorded charge 715 million devalue net monetary assets venezuela amount represented company’s estimate us dollar amount would ultimately collected third quarter 2015 company recorded additional exchange losses 138 million aggregate reflecting ongoing effect translating transactions net monetary assets consistent second quarter fourth quarter 2015 result deterioration economic conditions venezuela continued declines transactions settled official rate company began using simadi rate report venezuelan operations company also revalued remaining net monetary assets simadi rate subsequently replaced dicom rate resulted additional charge fourth quarter 2015 161 million since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations decline equity income affiliates 2016 compared 2015 driven primarily lower equity income certain research investment funds net presented table 2016 includes charge 625 million settle worldwide patent litigation related keytruda see note 10 gain 117 million related settlement patent litigation see note 10 gains 100 million resulting receipt milestone payments outlicensed migraine clinical development programs see note 3 98 million income related astrazeneca’s option exercise see note 8 net 2015 includes 680 million net charge related settlement vioxx shareholder class action litigation see note 10 expense 78 million contribution investments equity securities merck foundation partially offset 250 million gain sale certain migraine clinical development programs see note 3 147 million gain divestiture merck’s remaining ophthalmics business international markets see note 3 recognition 182 million deferred income related astrazeneca’s option exercise net 2014 includes 112 billion gain divestiture mcc see note 3 gain 741 million related astrazeneca’s option exercise 480 million gain divestiture certain ophthalmic products several international markets see note 3 gain 204 million related sale sirna see note 3 recognition 140 million deferred income related astrazeneca’s option exercise partially offset 628 million loss extinguishment debt see note 9 93 million goodwill impairment charge related company’s joint venture supera interest paid 686 million 2016 653 million 2015 852 million 2014 15 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits miscellaneous items foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 350 us statutory rate foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 350 us statutory rate company’s 2015 effective tax rate reflects impact protecting americans tax hikes act signed law december 18 2015 extending research credit permanently controlled foreign corporation lookthrough provisions five years company’s 2014 effective tax rate reflects impact tax increase prevention act signed law december 19 2014 extending research credit controlled foreign corporation lookthrough provisions one year income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss nol carryforwards several jurisdictions december 31 2016 243 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant valuation allowances 268 million established foreign nol carryforwards foreign deferred tax assets addition company 194 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2016 2015 2014 18 billion 18 billion 79 billion respectively income taxes paid 2014 reflects approximately 50 billion taxes paid divestiture mcc tax benefits relating stock option exercises 147 million 2016 109 million 2015 202 million 2014 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs discussed company recognize unrecognized tax benefits 35 billion december 31 2016 income tax provision would reflect favorable net impact 33 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2016 could decrease 17 billion next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures however one item currently discussion internal revenue service irs relating 2006 2008 examination company concluded position sustained upon audit however item result unfavorable outcome settlement could material adverse impact company’s financial position liquidity results operations expenses interest penalties associated uncertain tax positions amounted 134 million 2016 102 million 2015 9 million 2014 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 886 million 766 million december 31 2016 2015 respectively irs currently conducting examinations company’s tax returns years 2006 2008 well 2010 2011 although irs’s examination company’s 20022005 federal tax returns concluded prior 2015 one issue relating refund claim remained open 2015 issue resolved company received refund approximately 715 million exceeded receivable previously recorded company resulting tax benefit 410 million addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2003 2016 december 31 2016 foreign earnings 631 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2022 16 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2016 2015 2014 13 million 9 million 4 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 39 billion 33 billion december 31 2016 2015 respectively postretirement benefit plan net loss 115 million 86 million december 31 2016 2015 respectively well pension plan prior service credit 361 million 414 million december 31 2016 2015 respectively postretirement benefit plan prior service credit 466 million 547 million december 31 2016 2015 respectively 18 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health healthcare services alliances animal health healthcare services alliances segments material separate reporting pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccine sales made us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles sales vaccines major european markets marketed company’s spmsd joint venture termination december 31 2016 see note 8 company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers 2016 company made changes composition animal health segment resulted inclusion certain revenues costs previously included nonsegment revenues profits prior periods recast reflect changes comparable basis company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients merck’s alliances segment primarily includes results company’s relationship azlp termination relationship june 30 2014 see note 8 october 1 2014 company divested consumer care segment developed manufactured marketed overthecounter foot care sun care products see note 3 sales company’s products follows 1 sales cubicin 2015 represent sales subsequent cubist acquisition date sales cubicin 2014 reflect sales japan pursuant previously existing licensing agreement 2 amounts reflect sales vaccines sold major european markets company’s joint venture spmsd results reflected equity income affiliates included income expense net amounts however reflect supply sales spmsd december 31 2016 merck sanofi terminated spmsd joint venture see note 8 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health healthcare services alliances well consumer care divestiture october 1 2014 see note 3 alliances segment includes revenue company’s relationship azlp termination june 30 2014 see note 8 5 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2016 2014 also includes approximately 170 million 232 million respectively connection sale marketing rights certain products consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill intangible asset impairment charges gains losses sales businesses expense income related changes estimated fair value contingent consideration miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2016 december 31 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 28 2017 b supplementary data selected quarterly financial data 2016 2015 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2016 include charge settle worldwide patent litigation related keytruda see note 10 amounts 2015 reflect net charge related settlement vioxx shareholder class action litigation see note 10 foreign exchange losses related venezuela see note 14 gain sale company’s remaining ophthalmics business international markets see note 3 2 amounts 2015 include gain sale certain migraine clinical development programs see note 3 amounts 2015 include foreign exchange losses related devaluation company’s net monetary assets venezuela see note 14 4 amounts 2016 2015 reflect acquisition divestiturerelated costs see note 7 impact restructuring actions see note 4 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2017 2016 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2017 notes consolidated financial statements report dated february 27 2018 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities december 31 2016 merck sanofi pasteur sa sanofi terminated equallyowned joint venture sanofi pasteur msd spmsd developed marketed vaccines europe beginning 2017 merck recording vaccine sales incurring costs result operating vaccines business european markets previously part spmsd joint venture accounted equity method affiliate company also animal health segment discovers develops manufactures markets animal health products including vaccines company sells veterinarians distributors animal producers company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized title risk loss passes customer typically upon delivery recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 198 million 24 billion respectively december 31 2017 196 million 27 billion respectively december 31 2016 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile interpretation allows companies recognize revenue sales vaccines us government stockpiles even though sales might meet criteria revenue recognition accounting guidance depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 15 billion 2017 16 billion 2016 16 billion 2015 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 22 billion 21 billion 21 billion 2017 2016 2015 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 449 million 452 million net accumulated amortization december 31 2017 2016 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed acquired intangibles acquired intangibles include products product rights tradenames patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 2 20 years see note 8 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development acquired inprocess research development iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings research development research development expensed incurred nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges periods addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners cost reimbursements collaborative partners recognized incurred included materials production costs marketing administrative expenses research development expenses based underlying nature related activities subject reimbursement merck principal sales transactions third parties company recognizes sales materials production costs marketing administrative expenses gross basis company records profit sharing amounts received collaborative partners alliance revenue within sales profit sharing amounts pays collaborative partners within materials production costs terms collaboration agreements may require company make payments based upon achievement certain developmental regulatory approval commercial milestones upfront milestone payments payable merck collaborative partners prior regulatory approval expensed incurred included research development expenses payments due collaborative partners upon subsequent regulatory approval capitalized amortized estimated useful life corresponding intangible asset materials production costs provided future cash flows support amounts capitalized salesbased milestones payable merck collaborative partners accrued probable achieved capitalized subject cumulative amortization catchup amortization catchup calculated either time first regulatory approval indications unapproved time collaboration formed time formation collaboration approved products related intangible asset recognized amortized materials production costs remaining useful life subject impairment testing sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently issued accounting standards may 2014 financial accounting standards board fasb issued amended accounting guidance revenue recognition applied contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements new standard permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect adopting guidance recognized date initial application modified retrospective method new standard effective january 1 2018 adopted using modified retrospective method company anticipates recording cumulativeeffect adjustment upon adoption increasing retained earnings 5 million 2018 adoption new guidance also result additional disclosures january 2016 fasb issued revised guidance accounting reporting financial instruments new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income new guidance also simplifies impairment testing equity investments without readily determinable fair values changes certain disclosure requirements new standard effective january 1 2018 adopted using modified retrospective approach company anticipates recording cumulativeeffect adjustment upon adoption increasing retained earnings 8 million 2018 august 2016 fasb issued guidance classification certain cash receipts payments statement cash flows intended reduce diversity practice new standard effective january 1 2018 adopted using retrospective application company anticipate changes presentation consolidated statement cash flows result adopting new standard october 2016 fasb issued guidance accounting income tax consequences intraentity transfers assets inventory existing guidance recognition current deferred income taxes intraentity asset transfer prohibited asset sold third party new guidance require recognition income tax consequences intraentity transfer asset exception inventory intraentity transfer occurs new standard effective january 1 2018 adopted using modified retrospective approach company anticipates recording cumulativeeffect adjustment upon adoption increasing retained earnings approximately 60 million 2018 corresponding increase deferred tax assets subject finalization november 2016 fasb issued guidance requiring amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows new standard effective january 1 2018 adopted using retrospective application adoption new guidance material effect company’s consolidated statement cash flows march 2017 fasb amended guidance related net periodic benefit cost defined benefit plans requires entities 1 disaggregate current service cost component components net benefit cost present employee compensation costs income statement within operations subtotal presented 2 present components net benefit cost separately income statement outside income operations 3 capitalize service cost component applicable entities must use retrospective transition method adopt requirement separate presentation income statement service costs components prospective transition method adopt requirement limit capitalization benefit costs service cost component company utilize practical expedient permits use amounts disclosed pension postretirement benefit plan note prior comparative periods estimation basis applying retrospective presentation requirements new standard effective january 1 2018 net periodic benefit cost credit service cost approximately 510 million 530 million years ended december 31 2017 2016 respectively see note 14 upon adoption amounts reclassified income expense net current classification within materials production costs marketing administrative expenses research development costs may 2017 fasb issued guidance clarifying account change terms conditions sharebased payment award modification new guidance modification accounting required fair value vesting conditions classification award equity liability changes result change terms conditions new standard effective january 1 2018 applied future sharebased payment award modifications occur february 2016 fasb issued new accounting guidance accounting reporting leases new guidance requires lessees recognize rightofuse asset lease liability recorded balance sheet leases meet definition shortterm lease leases classified either operating finance operating leases result straightline expense income statement similar current operating leases finance leases result expense recognized earlier years lease term similar current capital leases new guidance effective interim annual periods beginning 2019 adopted using modified retrospective approach require application new guidance beginning earliest comparative period presented early adoption permitted company currently evaluating impact adoption consolidated financial statements august 2017 fasb issued new guidance hedge accounting intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs new guidance makes financial nonfinancial hedging strategies eligible hedge accounting amends presentation disclosure requirements changes companies assess effectiveness new guidance effective interim annual periods beginning 2019 modified retrospective basis early application permitted interim period company intends early adopt guidance january 1 2018 modified retrospective basis company anticipates recording cumulativeeffect adjustment upon adoption decreasing retained earnings 11 million 2018the adoption new guidance result additional disclosures february 2018 fasb issued new guidance address narrowscope financial reporting issue arose consequence tcja existing guidance requires deferred tax liabilities assets adjusted change tax laws rates effect included income continuing operations reporting period includes enactment date guidance applicable even situations related income tax effects items accumulated comprehensive income originally recognized comprehensive income rather net income amounts related benefit plans hedging activity result tax effects items within accumulated comprehensive income reflect appropriate tax rate difference referred stranded tax effects new guidance allows reclassification amounts retained earnings thereby eliminating stranded tax effects new guidance effective interim annual periods 2019 company currently evaluating impact adoption consolidated financial statements june 2016 fasb issued amended guidance accounting credit losses financial instruments guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries new guidance effective interim annual periods beginning 2020 earlier application permitted 2019 new guidance applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption company currently evaluating impact adoption consolidated financial statements january 2017 fasb issued guidance provides elimination step 2 goodwill impairment test new guidance impairment charges recognized extent carrying amount reporting unit exceeds fair value certain limitations new guidance effective interim annual periods 2020 early adoption permitted company anticipate adoption new guidance material effect consolidated financial statements 3 acquisitions divestitures research collaborations license agreements company continues pursue acquisition businesses establishment external alliances research collaborations licensing agreements complement internal research capabilities arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share arrangements contingent upon occurrence certain future events linked success asset development company also reviews marketed products pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain assets pro forma financial information acquired businesses presented historical financial results acquired entity significant compared company’s financial results recently announced transaction february 2018 merck viralytics limited viralytics announced definitive agreement pursuant merck acquire viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 175 per share proposed acquisition values total issued shares viralytics approximately aud 502 million 394 million upon completion transaction merck gain full rights cavatax cva21 viralytics’s investigational oncolytic immunotherapy transaction remains subject viralytics’s shareholder vote customary regulatory approvals merck anticipates transaction close second quarter 2018 2017 transactions october 2017 merck acquired rigontec gmbh rigontec leader accessing retinoic acidinducible gene pathway part innate immune system novel distinct approach cancer immunotherapy induce immediate longterm antitumor immunity rigontec’s lead candidate rgt100 currently phase development evaluating treatment patients various tumors terms agreement merck made upfront cash payment €119 million 140 million may make additional contingent payments €349 million €184 million related achievement research milestones regulatory approvals €165 million related achievement commercial targets transaction accounted acquisition asset upfront payment reflected within research development expenses 2017 july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza olaparib multiple cancer types see note 4 march 2017 merck acquired controlling interest vallée sa vallée leading privately held producer animal health products brazil vallée extensive portfolio products spanning parasiticides antiinfectives vaccines include products livestock horses companion animals terms agreement merck acquired 935 shares vallée 358 million total purchase price 176 million placed escrow pending resolution certain contingent items transaction accounted acquisition business merck recognized intangible assets 291 million related currently marketed products net deferred tax liabilities 93 million net assets 14 million noncontrolling interest 25 million addition company recorded liabilities 37 million contingencies identified acquisition date corresponding indemnification assets 37 million representing amounts reimbursed merck contingent liabilities paid excess consideration transferred fair value net assets acquired 171 million recorded goodwill allocated animal health segment deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach probabilityadjusted future net cash flows product discounted present value utilizing discount rate 155 actual cash flows likely different assumed intangible assets related currently marketed products amortized estimated useful lives 15 years fourth quarter 2017 merck acquired additional 45 interest vallée 18 million reduced noncontrolling interest related vallée 2016 transactions july 2016 merck acquired afferent pharmaceuticals afferent privately held pharmaceutical company focused development therapeutic candidates targeting p2x3 receptor treatment common poorlymanaged neurogenic conditions afferent’s lead investigational candidate mk7264 formerly af219 selective nonnarcotic orallyadministered p2x3 antagonist evaluated treatment refractory chronic cough total consideration transferred 510 million included cash paid outstanding afferent shares 487 million well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf afferent addition former afferent shareholders eligible receive total additional 750 million contingent upon attainment certain clinical development commercial milestones multiple indications candidates including mk7264 transaction accounted acquisition business company determined fair value contingent consideration 223 million acquisition date utilizing probabilityweighted estimated cash flow stream using appropriate discount rate dependent nature timing milestone payment merck recognized intangible asset iprd 832 million net deferred tax liabilities 258 million net assets 29 million primarily consisting cash acquired excess consideration transferred fair value net assets acquired 130 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 115 actual cash flows likely different assumed also july 2016 merck wholly owned subsidiary healthcare services solutions llc acquired majority ownership interest staywell company llc staywell portfolio company vestar capital partners vestar staywell health engagement company helps clients engage educate people improve health business results terms transaction merck paid 150 million majority ownership interest additionally merck provided staywell 150 million intercompany loan pay preexisting thirdparty debt merck option buy vestar option require merck buy vestar’s remaining ownership interest fair value beginning three years acquisition date transaction accounted acquisition business merck recognized intangible assets 238 million deferred tax liabilities 84 million net liabilities 5 million noncontrolling interest 124 million excess consideration transferred fair value net assets acquired 275 million recorded goodwill largely attributable anticipated synergies expected arise acquisition goodwill allocated healthcare services segment deductible tax purposes intangible assets recognized primarily relate customer relationships amortized 10year useful life medical information solutions content amortized fiveyear useful life june 2016 merck moderna therapeutics moderna entered strategic collaboration license agreement develop commercialize novel messenger rna mrnabased personalized cancer vaccines development program entail multiple studies several types cancer include evaluation mrnabased personalized cancer vaccines combination merck’s keytruda pursuant terms agreement merck made upfront cash payment moderna 200 million recorded research development expenses following human proof concept studies merck right elect make additional payment moderna merck exercises right two companies equally share costs profits worldwide collaboration development personalized cancer vaccines moderna right elect copromote personalized cancer vaccines united states agreement entails exclusivity around combinations keytruda moderna merck ability combine mrnabased personalized cancer vaccines nonpd1 agents january 2016 merck acquired iomet pharma ltd iomet privately held ukbased drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism acquisition provides merck iomet’s preclinical pipeline ido indoleamine23dioxygenase 1 tdo tryptophan23dioxygenase dualacting idotdo inhibitors transaction accounted acquisition business total purchase consideration transaction included cash payment 150 million future additional milestone payments 250 million contingent upon certain clinical regulatory milestones achieved company determined fair value contingent consideration 94 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment utilizing discount rate 105 merck recognized intangible assets iprd 155 million net deferred tax assets 32 million excess consideration transferred fair value net assets acquired 57 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach assets’ probabilityadjusted future net cash flows discounted present value also using discount rate 105 actual cash flows likely different assumed july 2017 merck made 100 million payment result achievement clinical development milestone accrued estimated fair value time acquisition noted 2015 transactions december 2015 company divested remaining ophthalmics portfolio international markets mundipharma ophthalmology products limited merck received consideration approximately 170 million recognized gain 147 million recorded income expense net 2015 july 2015 merck acquired ccam biotherapeutics ltd ccam privately held biopharmaceutical company focused discovery development novel cancer immunotherapies total purchase consideration transaction included upfront payment 96 million cash potential future additional payments associated attainment certain clinical development regulatory commercial milestones transaction accounted acquisition business merck recognized intangible asset iprd 180 million related cm24 monoclonal antibody well liability contingent consideration 105 million goodwill 14 million net assets 7 million 2016 result unfavorable efficacy data company determined would discontinue development pipeline program accordingly company recorded iprd impairment charge 180 million related cm24 reversed related liability contingent consideration fair value 116 million time program discontinuation iprd impairment charge income related reduction liability contingent consideration recorded research development expenses 2016 also july 2015 merck allergan plc allergan entered agreement pursuant allergan acquired exclusive worldwide rights mk1602 mk8031 merck’s investigational small molecule oral calcitonin generelated peptide cgrp receptor antagonists developed treatment prevention migraine terms agreement allergan acquired rights upfront payments 250 million 125 million paid august 2015 upon closing transaction remaining 125 million paid april 2016 company recorded gain 250 million within income expense net 2015 related transaction allergan fully responsible development cgrp programs well manufacturing commercialization upon approval launch products agreement merck entitled receive potential development commercial milestone payments royalties tiered doubledigit rates based commercialization programs 2016 merck recognized gains 100 million within income expense net resulting payments allergan achievement research development milestones february 2015 merck ngm biopharmaceuticals inc ngm privately held biotechnology company entered multiyear collaboration research discover develop commercialize novel biologic therapies across wide range therapeutic areas terms agreement merck made upfront payment ngm 94 million included research development expenses purchased 15 equity stake ngm 106 million merck committed 250 million fund ngm’s efforts initial fiveyear term collaboration potential additional funding certain conditions met prior merck initiating phase 3 study licensed program ngm may elect either receive milestone royalty payments certain cases cofund development participate global cost revenue share arrangement 50 agreement also provides ngm option participate copromotion cofunded program united states merck option extend research agreement two additional twoyear terms january 2015 merck acquired cubist pharmaceuticals inc cubist leader development therapies treat serious infections caused broad range bacteria total consideration transferred 83 billion included cash paid outstanding cubist shares 78 billion well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf cubist sharebased compensation payments settle nonvested equity awards attributable postcombination service recognized transaction expense 2015 addition company assumed outstanding convertible debt cubist fair value approximately 19 billion acquisition date merck redeemed debt february 2015 transaction accounted acquisition business estimated fair value assets acquired liabilities assumed cubist follows 1 included current liabilities noncurrent liabilities contingent consideration 73 million 50 million respectively 2 goodwill recognized largely attributable anticipated synergies expected arise acquisition allocated pharmaceutical segment goodwill deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach company’s estimates projected net cash flows considered historical projected pricing margins expense levels performance competing products applicable relevant industry therapeutic area growth drivers factors current expected trends technology product life cycles extent timing potential new product introductions company’s competitors life asset’s underlying patent net cash flows probabilityadjusted appropriate consider uncertainties associated underlying assumptions well risk profile net cash flows utilized valuation probabilityadjusted future net cash flows product discounted present value utilizing discount rate 8 actual cash flows likely different assumed company recorded fair value incomplete research project surotomycin mk4261 time acquisition reached technological feasibility alternative future use second quarter 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge see note 8 connection cubist acquisition liabilities recorded potential future consideration contingent upon achievement future salesbased milestones fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate 8 used present value probabilityweighted cash flows changes inputs could result different fair value measurement transaction closed january 21 2015 accordingly results operations acquired business included company’s results operations beginning date 2015 company incurred 324 million transaction costs directly related acquisition cubist including sharebased compensation costs severance costs legal advisory fees reflected marketing administrative expenses following unaudited supplemental pro forma data presents consolidated information acquisition cubist completed january 1 2014 unaudited supplemental pro forma data reflects historical information merck cubist adjusted include additional amortization expense based fair value assets acquired additional interest expense would incurred borrowings used fund acquisition transaction costs associated acquisition related tax effects adjustments pro forma data considered indicative results would occurred acquisition consummated january 1 2014 indicative future results remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey remicade lost market exclusivity major european markets february 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj 4 collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners parties arrangements active participants exposed significant risks rewards dependent commercial success activities collaboration merck’s significant collaborative arrangements discussed astrazeneca july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza olaparib multiple cancer types lynparza oral poly adpribose polymerase parp inhibitor currently approved certain types ovarian breast cancer companies jointly developing commercializing lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines keytruda pembrolizumab imfinzi durvalumab companies also jointly develop commercialize astrazeneca’s selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple indications including thyroid cancer terms agreement astrazeneca merck share development commercialization costs lynparza selumetinib monotherapy nonpdl1pd1 combination therapy opportunities gross profits lynparza selumetinib product sales generated monotherapies combination therapies shared equally merck fund development commercialization costs keytruda combination lynparza selumetinib astrazeneca fund development commercialization costs imfinzi combination lynparza selumetinib astrazenca currently principal lynparza sales transactions merck recording share product sales lynparza net costs sales commercialization costs alliance revenue within pharmaceutical segment share development costs associated collaboration part research development expenses reimbursements received astrazeneca research development expenses recognized reductions research development costs part agreement merck made upfront payment astrazeneca 16 billion making payments 750 million multiyear period certain license options 250 million paid december 2017 400 million paid 2018 100 million paid 2019 company recorded aggregate charge 235 billion research development expenses 2017 related upfront payment future license options payments addition merck pay astrazeneca additional 615 billion contingent upon successful achievement future regulatory milestones 205 billion salesbased milestones 41 billion total aggregate consideration 85 billion fourth quarter 2017 based performance lynparza since formation collaboration merck determined probable annual sales lynparza future would exceed 250 million would trigger 100 million salesbased milestone payment merck astrazeneca upon achievement sales milestone accordingly fourth quarter 2017 merck recorded 100 million liability corresponding intangible asset also recognized 4 million cumulative amortization expense within materials production costs remaining intangible asset amortized remaining estimated useful life 11 years subject impairment testing remaining 40 billion potential future salesbased milestone payments yet accrued deemed company probable time also january 2018 lynparza received approval united states treatment certain patients metastatic breast cancer triggering 70 million milestone payment merck astrazeneca milestone payment capitalized amortized remaining useful life lynparza summarized information related collaboration follows expenses include amounts attributed activities related collaboration rather amounts relating payments partners amounts materials production costs include amortization related intangible assets bayer ag 2014 company entered worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including bayer’s adempas riociguat approved treat pulmonary arterial hypertension chronic thromboembolic pulmonary hypertension two companies equally share costs profits collaboration implemented joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat phase 3 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn made available earlystage sgc compounds similar terms agreement bayer leads commercialization adempas americas merck leads commercialization rest world vericiguat potential optin products bayer lead commercialization rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead 2016 merck began promoting distributing adempas europe transition bayer merck territories including japan continued 2017 2016 company determined probable annual sales adempas would exceed 500 million triggering 350 million payment merck bayer accordingly 2016 company recorded 350 million liability corresponding intangible asset also recognized 50 million cumulative amortization expense within materials production costs remaining intangible asset amortized remaining estimated useful life subject impairment testing 2017 annual sales adempas exceeded 500 million triggering 350 million milestone payment merck bayer paid first quarter 2018 775 million additional potential future salesbased milestone payments yet accrued deemed company probable time summarized information related collaboration follows expenses include amounts attributed activities related collaboration rather amounts relating payments partners amounts materials production costs include amortization related intangible assets 5 restructuring company incurs substantial costs restructuring program activities related merck’s productivity cost reduction initiatives well connection integration certain acquired businesses 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network company recorded total pretax costs 927 million 2017 11 billion 2016 11 billion 2015 related restructuring program activities since inception programs december 31 2017 merck recorded total pretax accumulated costs approximately 135 billion eliminated approximately 43350 positions comprised employee separations well elimination contractors vacant positions company estimates approximately twothirds cumulative pretax costs cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company substantially completed actions programs approximately 500 million additional pretax costs expected incurred 2018 relating anticipated employee separations remaining assetrelated costs segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated positions eliminated restructuring program activities approximately 2450 2017 2625 2016 3770 2015 accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck recording accelerated depreciation revised useful life site assets anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2017 2016 2015 includes 267 million 409 million 550 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 14 sharebased compensation activity also reflects net pretax losses resulting sales facilities related assets 6 million 2017 151 million 2016 117 million 2015 following table summarizes charges spending relating restructuring program activities 1 remaining cash outlays expected substantially completed end 2020 6 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company may also use forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates recorded income expense net effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax losses 520 million 2017 pretax gains 193 million 2016 304 million 2015 eurodenominated notes interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2017 company party 26 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense offset fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated foreign currency cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 5 million 1 million 7 million ineffectiveness hedge 2017 2016 2015 respectively 2 ineffectiveness hedge represents amount excluded hedge effectiveness testing 3 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2017 company estimates 184 million pretax net unrealized losses derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information investments debt equity securities december 31 follows availableforsale debt securities included shortterm investments totaled 24 billion december 31 2017 remaining debt securities 111 billion mature within five years december 31 2017 2016 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily auto loan credit card student loan receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 investments included assets restricted use primarily payment benefits employee benefit plans 3 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2017 december 31 2017 cash equivalents 61 billion include 52 billion cash equivalents would considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration follows 1 recorded research development expenses materials production costs income expense net includes cumulative translation adjustments 2 includes 315 million recorded current liability amounts expected paid within next 12 months changes estimated fair value contingent consideration 2017 primarily relate changes liabilities recorded connection termination spmsd joint venture clinical progression program related afferent acquisition changes estimated fair value contingent consideration 2016 largely attributable reversal liabilities related programs obtained connection acquisitions ccam oncoethix smartcells see note 8 additions contingent consideration reflected table 2016 relate termination spmsd joint venture see note 9 acquisitions iomet afferent see note 3 payments contingent consideration 2017 relate achievement clinical milestone connection acquisition iomet see note 3 2016 relate first commercial sale zerbaxa european union fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2017 256 billion compared carrying value 244 billion december 31 2016 257 billion compared carrying value 248 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor global economic conditions including volatility associated international sovereign economies associated impacts financial markets business december 31 2017 company’s total net accounts receivable outstanding one year approximately 130 million company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations company’s customers largest accounts receivable balances mckesson corporation amerisourcebergen corporation cardinal health inc zuellig pharma ltd asia pacific represented aggregate approximately 40 total accounts receivable december 31 2017 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2017 2016 company received cash collateral 3 million 529 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2017 2016 7 inventories december 31 consisted inventories valued lifo method comprised approximately 22 billion 23 billion inventories december 31 2017 2016 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2017 2016 amounts included 11 billion 10 billion respectively inventories expected sold within one year addition amounts included 80 million december 31 2017 2016 inventories produced preparation product launches 8 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2017 2016 225 million 187 million respectively 2016 additions goodwill pharmaceutical segment resulted primarily acquisitions afferent iomet see note 3 additions goodwill within nonreportable segments 2017 primarily relate acquisition vallée part animal health segment see note 3 2016 relate acquisition staywell part healthcare services segment see note 3 impairments goodwill within nonreportable segments 2017 2016 relate certain businesses within healthcare services segment intangibles december 31 consisted acquired intangibles include products product rights tradenames patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles related marketed products included product rights december 31 2017 include zerbaxa 30 billion sivextro 879 million zetia 756 million implanonnexplanon 529 million dificid 478 million gardasilgardasil 9 468 million vytorin 375 million bridion 320 million simponi 226 million company recognized intangible asset related adempas result collaboration bayer see note 4 carrying value 894 million december 31 2017 reflected “other” table 2017 2016 2015 company recorded impairment charges related marketed products intangibles 58 million 347 million 45 million respectively within material production costs 2017 company recorded intangible asset impairment charge 47 million related intron treatment certain types cancers sales intron adversely affected availability new therapeutic options 2017 sales intron united states eroded rapidly previously anticipated company led changes cash flow assumptions intron revisions cash flows indicated intron intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related intron compared related carrying value resulted impairment charge noted intangible asset value intron december 31 2017 13 million remaining charges 2017 relate impairment customer relationship tradename developed technology intangibles certain businesses healthcare services segment 2016 company lowered cash flow projections zontivity product reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease following several business decisions reduced sales expectations zontivity united states europe company utilized market participant assumptions considered several different scenarios determine fair value intangible asset related zontivity compared related carrying value resulted impairment charge 252 million also 2016 company wroteoff 95 million capitalized connection inlicensed products grastek ragwitek allergy immunotherapy tablets business reasons company returned licensor charges 2015 primarily relate impairment customer relationship tradename intangibles certain businesses within healthcare services segment iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life asset begin amortization 2017 2016 2015 14 million 8 million 280 million respectively iprd reclassified products product rights upon receipt marketing approval major market 2017 company recorded 483 million iprd impairment charges within research development expenses amount 240 million resulted strategic decision discontinue development investigational combination regimens mk3682b grazoprevirruzasviruprifosbuvir mk3682c ruzasviruprifosbuvir treatment chronic hepatitis c virus hcv infection decision made based review available phase 2 efficacy data consideration evolving marketplace growing number treatment options available patients chronic hcv infection including zepatier currently marketed company treatment adult patients chronic hcv infection result decision company recorded iprd impairment charge writeoff remaining intangible asset related uprifosbuvir company previously recorded impairment charge uprifosbuvir 2016 described iprd impairment charges 2017 also include charge 226 million writeoff intangible asset related verubecestat investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 resulting decision february 2018 stop phase 3 study evaluating verubecestat people prodromal alzheimer’s disease decision stop study followed recommendation external data monitoring committee edmc assessed overall benefitrisk interim safety analysis edmc concluded unlikely positive benefitrisk could established trial continued 2016 company recorded 36 billion iprd impairment charges amount 29 billion relates clinical development program uprifosbuvir nucleotide prodrug evaluated treatment hcv company determined changes product profile well changes merck’s expectations pricing market opportunity taken together constituted triggering event required company evaluate uprifosbuvir intangible asset impairment utilizing market participant assumptions considering different scenarios company concluded best estimate fair value intangible asset related uprifosbuvir 240 million resulting recognition pretax impairment charge noted iprd impairment charges 2016 also include charges 180 million 143 million related discontinuation programs obtained connection acquisitions ccam oncoethix respectively resulting unfavorable efficacy data additional 72 million relates programs obtained connection smartcells acquisition following decision terminate lead compound due lack efficacy pursue backup compound reduced projected future cash flows iprd impairment charges 2016 also include 112 million related inlicensed program house dust mite allergies business reasons returned licensor remaining iprd impairment charges 2016 primarily relate deprioritized pipeline programs deemed alternative use period including 79 million impairment charge investigational candidate contraception discontinuation delay certain clinical development programs resulted reduction related liabilities contingent consideration see note 6 2015 company recorded 63 million iprd impairment charges 50 million related surotomycin clinical development program 2015 company received unfavorable efficacy data clinical trial surotomycin evaluation data combined assessment commercial opportunity surotomycin resulted discontinuation program iprd impairment charge noted iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within materials production costs 32 billion 2017 38 billion 2016 48 billion 2015 estimated aggregate amortization expense next five years follows 2018 28 billion 2019 15 billion 2020 12 billion 2021 11 billion 2022 11 billion 9 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates including spmsd termination december 31 2016 certain investment funds equity income affiliates 42 million 2017 86 million 2016 205 million 2015 included income expense net see note 15 investments affiliates accounted using equity method totaled 767 million december 31 2017 715 million december 31 2016 sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture spmsd market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 10 billion 2016 923 million 2015 december 31 2016 merck sanofi pasteur sanofi terminated spmsd ended joint vaccines operations europe terms termination merck acquired sanofi’s 50 interest spmsd exchange consideration 657 million comprised cash well future royalties 115 net sales merck products previously sold joint venture december 31 2024 company determined fair value 416 million date termination company accounted transaction step acquisition required merck remeasure ownership interest previously accounted equity method investment fair value acquisition date merck turn sold sanofi intellectual property rights held spmsd exchange consideration 596 million comprised cash future royalties 115 net sales sanofi products previously sold joint venture december 31 2024 company determined fair value 302 million date termination excluded arrangement potential future sales vaxelis jointly developed investigational pediatric hexavalent combination vaccine approved european commission february 2016 european marketing rights vaxelis transferred separate equallyowned joint venture sanofi merck net impact termination spmsd joint venture follows 1 recorded income expense net estimated fair values identifiable intangible assets related products product rights determined using income approach fair value estimated based market participant expectations asset’s projected net cash flows projected net cash flows discounted present value utilizing discount rate 115 actual cash flows likely different assumed amount recorded products product rights 468 million related gardasilgardasil 9 fair value liabilities contingent consideration related merck’s future royalty payments sanofi 416 million reflected consideration payable sanofi net table determined acquisition date using unobservable inputs include estimated amount timing projected cash flows riskadjusted discount rate 8 used present value cash flows changes inputs could result different fair value measurement based existing accounting policy election merck record 302 million estimated fair value contingent future royalties received sanofi sale sanofi products rather recognizing amounts sales occur royalties earned company incurred 24 million transaction costs related termination spmsd included marketing administrative expenses 2016 pro forma financial information transaction presented results significant compared company’s financial results astrazeneca lp 1982 merck entered agreement astra ab astra develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc ami merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc kbi contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp partnership exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp azlp upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products earned certain partnership returns azlp june 30 2014 astrazeneca exercised option purchase merck’s interest kbi redeem merck’s remaining interest azlp portion exercise price subject trueup 2018 based actual sales nexium prilosec closing 2014 june 2018 deferred recognized income contingency eliminated sales occurred deferred income amount fully recognized 2016 company began recognizing income corresponding receivable amounts due merck astrazeneca based sales performance nexium prilosec subject trueup june 2018 company recognized income 232 million 98 million 182 million 2017 2016 2015 respectively income expense net related amounts receivable astrazeneca 325 million december 31 2017 10 loans payable longterm debt commitments loans payable december 31 2017 included 30 billion notes due 2018 73 million longdated notes subject repayment option holder loans payable december 31 2016 included 300 million notes due 2017 267 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 085 040 years ended december 31 2017 2016 respectively longterm debt december 31 consisted presented table includes 300 million 147 million december 31 2017 2016 respectively borrowings variable rates resulted effective interest rates 142 089 2017 2016 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices november 2017 company launched tender offers certain outstanding notes debentures company paid 810 million aggregate consideration applicable purchase price together accrued interest redeem 585 million principal amount debt validly tendered connection tender offers recognized loss extinguishment debt 191 million 2017 effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2017 company compliance covenants aggregate maturities longterm debt next five years follows 2018 30 billion 2019 13 billion 2020 19 billion 2021 23 billion 2022 22 billion company 60 billion fiveyear credit facility matures june 2022 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 327 million 2017 292 million 2016 303 million 2015 minimum aggregate rental commitments noncancellable leases follows 2018 255 million 2019 175 million 2020 126 million 2021 90 million 2022 68 million thereafter 138 million company significant capital leases 11 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities effective august 1 2004 product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2017 approximately 4085 cases filed pending merck either federal state court approximately 15 actions plaintiffs allege among things suffered osteonecrosis jaw onj generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 4070 actions generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation jpml ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation fosamax onj mdl coordinated pretrial proceedings december 2013 merck reached agreement principle plaintiffs’ steering committee psc fosamax onj mdl resolve pending onj cases appeal fosamax onj mdl state courts aggregate amount 277 million merck psc subsequently formalized terms agreement master settlement agreement onj master settlement agreement executed april 2014 included 1200 plaintiffs july 2014 merck elected proceed onj master settlement agreement reduced funding level 273 million since participation level approximately 95 merck fully funded onj master settlement agreement escrow agent agreement making settlement payments qualifying plaintiffs onj master settlement agreement effect cases alleging femur fractures discussed discovery currently ongoing approximately 15 remaining onj cases pending various federal state courts company intends defend lawsuits cases alleging femur fractures march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey femur fracture mdl bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law glynn decision appealed plaintiff august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 515 cases appealed decision us court appeals third circuit third circuit femur fracture mdl court also dismissed without prejudice another approximately 510 cases pending plaintiffs’ appeal preemption ruling third circuit march 22 2017 third circuit issued decision reversing femur fracture mdl court’s preemption ruling remanding appealed cases back femur fracture mdl court april 5 2017 merck filed petition seeking rehearing third circuit’s march 22 2017 decision denied april 24 2017 merck filed petition writ certiorari us supreme court august 22 2017 seeking review third circuit’s decision december 4 2017 supreme court invited solicitor general file brief case expressing views united states addition june 2014 femur fracture mdl court granted merck summary judgment gaynor v merck case found merck’s updates january 2011 fosamax label regarding atypical femur fractures adequate matter law merck adequately communicated changes plaintiffs gaynor appeal femur fracture mdl court’s findings respect adequacy 2011 label change appeal dismissal case based preemption grounds third circuit subsequently reversed dismissal march 22 2017 decision august 2014 merck filed motion requesting femur fracture mdl court enter order requiring plaintiffs femur fracture mdl claim 2011 fosamax label inadequate proximate cause alleged injuries show cause cases dismissed based court’s preemption decision ruling gaynor case november 2014 court granted merck’s motion entered requested show cause order plaintiffs responded appealed november 2014 show cause order december 31 2017 approximately 530 cases pending femur fracture mdl following reinstatement cases appeal third circuit 510 cases dismissed without prejudice also pending final resolution aforementioned appeal yet reinstated december 31 2017 approximately 2750 cases alleging femur fractures filed new jersey state court pending judge james hyland middlesex county parties selected initial group 30 cases reviewed fact discovery two additional groups 50 cases reviewed fact discovery selected november 2013 march 2014 respectively group 25 cases reviewed fact discovery selected merck july 2015 merck continued select additional cases reviewed fact discovery 2016 2017 december 31 2017 approximately 280 cases alleging femur fractures filed pending california state court femur fracture cases filed california state court coordinated single judge orange county california march 2014 court directed group 10 discovery pool cases reviewed fact discovery subsequently scheduled galper v merck case plaintiffs selected first trial galper trial began february 2015 jury returned verdict merck’s favor april 2015 plaintiff appealed verdict california appellate court oral argument plaintiff’s appeal galper held november 2016 april 24 2017 california appellate court issued decision affirming lower court’s judgment favor merck next femur fracture trial california scheduled begin april 2016 stayed plaintiffs’ request new trial date set additionally five femur fracture cases pending state courts discovery ongoing femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2017 merck aware approximately 1235 product user claims alleging generally use januvia andor janumet caused development pancreatic cancer injuries complaints filed several different state federal courts claims filed consolidated multidistrict litigation proceeding us district court southern district california called “in incretinbased therapies products liability litigation” mdl includes federal lawsuits alleging pancreatic cancer due use following medicines januvia janumet byetta victoza latter two products manufactured pharmaceutical companies majority claims filed mdl filed superior court california county los angeles california state court november 2015 mdl california state court separate opinions granted summary judgment defendants grounds preemption approximately 1235 product user claims rulings resulted dismissal approximately 1100 product user claims plaintiffs appealed mdl california state court preemption rulings november 28 2017 us court appeals ninth circuit ninth circuit reversed trial court’s ruling mdl remanded proceedings ninth circuit address substance defendants’ preemption argument instead ruled district court made various errors discovery jurisdiction returned us district court southern district california january 2 2018 preemption appeal california state court litigation fully briefed court yet scheduled oral argument december 31 2017 seven product users claims pending merck state courts california state court including four active product user claims pending illinois state court june 30 2017 illinois trial court denied merck’s motion summary judgment grounds preemption merck sought permission appeal order interlocutory basis granted stay proceedings trial court september 19 2017 intermediate appellate court illinois denied merck’s petition interlocutory review october 20 2017 merck filed petition illinois supreme court seeking leave appeal appellate court’s denial illinois supreme court denied merck’s petition certiorari review instead directed appellate court answer certified question result proceedings trial court remain stayed trials certain product users illinois delayed addition claims noted company agreed toll statute limitations approximately 50 additional claims company intends continue defending lawsuits propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2017 approximately 775 lawsuits filed plaintiffs allege experienced persistent sexual side effects following cessation treatment propecia andor proscar approximately 20 plaintiffs also allege propecia proscar caused cause prostate cancer testicular cancer male breast cancer lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge brian cogan eastern district new york matters pending state court new jersey consolidated judge hyland middlesex county addition one matter pending state court california one matter pending state court ohio one matter appeal massachusetts supreme judicial court company intends defend lawsuits governmental proceedings previously disclosed company learned prosecution office milan italy investigating interactions company’s italian subsidiary certain employees subsidiary certain italian health care providers company understands part larger investigation involving engagements various health care companies health care providers company cooperating investigation previously disclosed united kingdom uk competition markets authority cma issued statement objections company msd sharp dohme limited msd uk may 23 2017 statement objections cma alleges msd uk abused dominant position discount program remicade period march 2015 february 2016 company msd uk contesting cma’s allegations previously disclosed company received investigative subpoena california insurance commissioner’s fraud bureau seeking information january 1 2007 present related pricing promotion cubicin bureau investigating whether cubist pharmaceuticals inc company acquired 2015 unlawfully induced presentation false claims cubicin private insurers california insurance code false claims act company cooperating investigation previously disclosed company received civil investigative demand us attorney’s office southern district new york requests information relating company’s contracts services payments pharmacy benefit managers respect maxalt levitra january 1 2006 present company cooperating investigation previously disclosed company received subpoena office inspector general us department health human services behalf us attorney’s office district maryland civil division us department justice requests information relating company’s marketing singulair dulera inhalation aerosol certain marketing activities january 1 2006 present company cooperating investigation previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate previously disclosed time company receives inquiries subject preliminary investigation activities competition governmental authorities markets outside united states authorities may include regulators administrative authorities law enforcement similar officials preliminary investigation activities may include site visits formal informal requests demands documents materials inquiries interviews similar matters certain preliminary inquiries activities may lead commencement formal proceedings determined adversely company monetary fines andor remedial undertakings may required commercial litigation kdur antitrust litigation june 1997 january 1998 scheringplough corporation scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle respectively relating generic versions scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drugapplications nda putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey february 2016 court denied company’s motion summary judgment relating direct purchasers’ claims concerning settlement upshersmith granted company’s motion summary judgment relating direct purchasers’ claims concerning settlement lederle previously disclosed february 2017 merck upshersmith reached settlement principle class direct purchasers optouts class merck contribute approximately 80 million aggregate towards overall settlement april 5 2017 claims optouts dismissed prejudice pursuant written settlement agreement parties may 15 2017 merck class executed settlement agreement received preliminary approval court may 23 2017 october 5 2017 court entered final judgment order dismissal approving settlement agreement direct purchaser class dismissing claims class prejudice zetia antitrust litigation may 2010 schering corporation schering msp singapore company llc msp settled patent litigation glenmark pharmaceuticals inc usa glenmark pharmaceuticals ltd together glenmark relating generic version zetia pharmaceutical product containing ezetimibe used patients high cholesterol glenmark filed abbreviated nda january february 2018 putative class action suits filed behalf direct indirect purchasers zetia merck msd scheringplough schering msp glenmark us district courts eastern district virginia eastern district new york suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company us district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws plaintiffs sought granted leave file amended complaint january 2014 plaintiffs filed amended complaint adding four additional named plaintiffs october 2014 court denied company’s motion dismiss strike class claims premature september 2015 plaintiffs filed additional motions including motion conditional certification equal pay act motion amend pleadings seeking add erisa constructive discharge claims company subsidiary named defendant motion equitable relief merck filed papers opposition motions april 27 2016 court granted plaintiff’s motion conditional certification denied plaintiffs’ motions extend liability period equal pay act claims back june 2009 result liability period date back april 2012 earliest april 29 2016 magistrate judge granted plaintiffs’ request amend complaint add following company subsidiary corporate defendant ii erisa claim iii individual constructive discharge claim one named plaintiffs approximately 700 individuals optedin action optin period closed august 1 2017 plaintiffs filed motion class certification motion seeks certify title vii pay discrimination class also seeks final collective action certification plaintiffs’ equal pay act claim parties currently engaged motion practice court qui tam litigation previously disclosed june 21 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition previously disclosed two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery company intends defend lawsuits merck kgaa litigation january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france uk germany switzerland mexico india alleging breach parties’ coexistence agreement unfair competition andor trademark infringement december 2015 paris court first instance issued judgment finding certain activities company directed towards france constitute trademark infringement unfair competition activities found infringe company kgaa appealed decision appeal heard may 2017 june 2017 french appeals court held certain activities company directed france constituted unfair competition trademark infringement appeal pursued january 2016 uk high court issued judgment finding company breached coexistence agreement infringed kgaa’s trademark rights result certain activities directed towards uk based use word merck promotional information activity noted uk decision finding based company’s use sign merck connection sale products material pharmaceutical business transacted uk company kgaa appealed decision appeal heard june 2017 november 2017 uk court appeals affirmed decision coexistence agreement remitted rehearing issues trade mark infringement validity relief kgaa would entitled patent litigation time generic manufacturers pharmaceutical products file abbreviated ndas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company currently involved patent infringement litigation united states include noxafil nuvaring similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges noxafil august 2015 company filed lawsuit actavis laboratories fl inc actavis united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil october 2017 district court held patent valid infringed actavis appealed decision march 2016 company filed lawsuit roxane laboratories inc roxane united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil october 2017 parties reached settlement whereby roxane launch generic version upon expiry patent earlier certain conditions february 2016 company filed lawsuit par sterile products llc par pharmaceutical inc par pharmaceutical companies inc par pharmaceutical holdings inc collectively par united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil injection october 2016 parties reached settlement whereby par launch generic version january 2023 earlier certain conditions nasonex lost market exclusivity united states 2016 prior april 2015 company filed patent infringement lawsuit apotex inc apotex corp apotex respect apotex’s marketed product company believed infringing january 2018 company apotex settled matter apotex agreeing pay company 115 million plus certain consideration nuvaring december 2013 company filed lawsuit subsidiary allergan plc united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring trial matter held january 2016 august 2016 district court ruled patent invalid company appealed decision october 2017 appellate court reversed district court decision found patent valid case remanded district court enjoined defendant marketing generic version nuvaring patent expires september 2015 company filed lawsuit teva pharma united states respect company’s application fda seeking prepatent expiry approval sell generic version nuvaring based ruling allergan plc matter district court dismissed company’s lawsuit december 2016 following appellate reversal allergan plc matter defendant agreed enjoined marketing generic version nuvaring patent expires antipd1 antibody patent oppositions litigation previously disclosed ono pharmaceutical co ono european patent ep 1 537 878 ’878 broadly claims use antipd1 antibody company’s immunotherapy keytruda treatment cancer ono previously licensed commercial rights antipd1 antibody bristolmyers squibb bms certain markets bms ono also european patent ep 2 161 336 ’336 granted broadly claimed antipd1 antibodies could include keytruda previously disclosed company bms ono engaged worldwide litigation including united states validity infringement ’878 patent ’336 patent equivalents january 2017 company announced entered settlement license agreement bms ono resolving worldwide patent infringement litigation related use antipd1 antibody treatment cancer keytruda settlement license agreement company made onetime payment 625 million recorded expense company’s 2016 financial results bms pay royalties worldwide sales keytruda nonexclusive license market keytruda market approved global net sales keytruda company pay royalties 65 net sales occurring january 1 2017 including december 31 2023 25 net sales occurring january 1 2024 including december 31 2026 parties also agreed dismiss claims worldwide relevant legal proceedings october 2015 pdl biopharma pdl filed lawsuit united states company alleging manufacture keytruda infringed us patent 5693761 ’761 patent expired december 2014 patent claims platform technology used creation manufacture recombinant antibodies pdl seeking damages preexpiry infringement ’761 patent april 2017 parties reached settlement pursuant exchange lump sum pdl dismissed lawsuit prejudice granted company fully paidup nonexclusive license ’761 patent july 2016 company filed declaratory judgment action united states genentech city hope seeking ruling us patent 7923221 cabilly iii patent claims platform technology used creation manufacture recombinant antibodies invalid keytruda bezlotoxumab infringe cabilly iii patent july 2016 company also filed petition uspto inter partes review ipr certain claims us patent 6331415 cabilly ii patent claims platform technology used creation manufacture recombinant antibodies also owned genentech city hope invalid december 2016 uspto denied petition allowed company join ipr filed previously another party may 2017 parties reached settlement pursuant company dismissed lawsuit prejudice moved terminate ipr genentech city hope granted company fully paidup nonexclusive license cabilly ii cabilly iii patent gilead patent litigation opposition august 2013 gilead sciences inc gilead filed lawsuit us district court northern district california seeking declaration two company patents invalid infringed sale two sofosbuvir containing products solvadi harvoni company filed counterclaim sale products infringe two patents sought reasonable royalty past present future sales products march 2016 conclusion jury trial patents found invalid infringed jury awarded company 200 million royalty sales products december 2015 conclusion jury trial court held bench trial equitable defenses raised gilead june 2016 court found gilead determined merck could collect jury award patents unenforceable respect gilead company appealed court’s decision gilead also asked court overturn jury’s decision validity court held hearing gilead’s motion august 2016 court subsequently rejected gilead’s request gilead appealed hearing combined appeals case held february 4 2018 company pay 20 net legal fees damages royalties receives ionis pharmaceuticals inc company idenix pharmaceuticals inc subsidiary pending litigation gilead united states uk norway canada germany france australia based different patent estates would also infringed gilead’s sales two products gilead opposed european patent european patent office epo trial united states held december 2016 jury returned verdict company awarding damages 254 billion company submitted posttrial motions including issues enhanced damages future royalties gilead submitted posttrial motions judgment matter law hearing motions held september 2017 also september 2017 court denied company’s motion enhanced damages granted motion prejudgment interest deferred motion future royalties february 2018 court granted gilead’s motion judgment matter law found patent invalid lack enablement company appeal decision australia company initially unsuccessful full federal court affirmed lower court decision company sought leave appeal high court australia review canada company initially unsuccessful federal court appeals affirmed lower court decision company sought leave supreme court canada review uk norway patent held invalid appeal filed epo opposition division revoked european patent company appealed decision cases france germany stayed pending final decision epo litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2017 december 31 2016 approximately 160 million 185 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters previously disclosed merck’s facilities oss netherlands inspected province brabant province pursuant dutch hazards major accidents decree sites’ environmental permits province issued penalties alleged violations regulations governing preventing managing accidents hazardous substances government also issued fine alleged environmental violations one oss facilities together totaled 235 thousand company subsequently advised criminal investigation initiated based upon certain issues formed basis administrative enforcement action province company intends defend enforcement action may result investigation may 2015 environmental protection agency epa conducted air compliance evaluation company’s pharmaceutical manufacturing facility elkton virginia result investigation company issued notice noncompliance show cause notification relating certain federally enforceable requirements applicable elkton facility company advised epa enforcement action longer pursued company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 82 million 83 million december 31 2017 2016 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 63 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 12 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 13 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2017 118 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus psus dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period subject terms applicable awards psu awards generally vest three years prior 2018 rsu awards generally vested three years beginning awards granted 2018 rsu awards vest onethird year threeyear period total pretax sharebased compensation cost recorded 2017 2016 2015 312 million 300 million 299 million respectively related income tax benefits 57 million 92 million 93 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2017 2016 2015 6388 5463 5973 per option respectively weighted average fair value options granted 2017 2016 2015 704 589 646 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2017 469 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 14 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost credit pension postretirement benefit plans consisted following components changes net periodic benefit cost credit year pension plans largely attributable changes discount rate affecting net loss amortization increase net periodic benefit credit postretirement benefit plans 2017 2016 compared 2015 largely attributable changes retiree medical benefits approved company december 2015 partially offset lower returns plan assets connection restructuring actions see note 5 termination charges recorded 2017 2016 2015 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded pension postretirement benefit plans settlements recorded certain us international pension plans reflected table obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows 1 result certain allowable administrative actions occurred june 2016 992 million plan assets previously restricted payment postretirement benefits became available fund certain health welfare benefits 2 actuarial losses 2017 2016 primarily reflect changes discount rates december 31 2017 2016 accumulated benefit obligation 205 billion 184 billion respectively pension plans 115 billion 105 billion respectively related us pension plans information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2017 2016 488 million 435 million respectively approximately 2 company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2017 2016 2 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 3 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2017 2016 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 35 55 us equities 20 35 international equities 20 35 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2018 approximately 60 million us pension plans approximately 150 million international pension plans approximately 25 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net periodic benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net periodic benefit cost 2018 314 million 64 million respectively pension plans 230 million 51 million respectively relates us pension plans 1 million 84 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis expected rate return within plan developed considering longterm historical returns data current market conditions actual returns plan assets using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2018 expected rate return company’s us pension postretirement benefit plans range 770 830 compared range 800 875 2017 decrease primarily due modest shift asset allocation increase weightedaverage expected return us pension postretirement benefit plan assets 2015 2017 due relative weighting referenced plans’ assets health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2017 2016 2015 131 million 126 million 125 million respectively 15 income expense net income expense net consisted exchange losses 2015 related primarily venezuelan bolívar 2015 upon evaluation evolving economic conditions venezuela volatility country combined decline transactions settled official cencoex rate company determined unlikely outstanding net monetary assets would settled cencoex rate accordingly 2015 company recorded charges 876 million devalue net monetary assets venezuela amounts represented company’s estimate us dollar amount would ultimately collected recorded additional exchange losses 138 million aggregate 2015 reflecting ongoing effect translating transactions net monetary assets consistent rates since january 2010 venezuela designated hyperinflationary result local foreign operations remeasured us dollars impact recorded results operations decline equity income affiliates 2017 compared 2016 driven primarily termination spmsd joint venture december 31 2016 partially offset higher equity income certain research investment funds decline equity income affiliates 2016 compared 2015 driven primarily lower equity income certain research investment funds net presented table 2017 includes gains 291 million sale equity investments income 232 million related astrazeneca’s option exercise see note 9 191 million loss extinguishment debt see note 10 net 2016 includes charge 625 million settle worldwide patent litigation related keytruda see note 11 gain 117 million related settlement patent litigation gains 100 million resulting receipt milestone payments outlicensed migraine clinical development programs see note 3 98 million income related astrazeneca’s option exercise net 2015 includes 680 million net charge related settlement vioxx shareholder class action litigation paid 2016 expense 78 million contribution investments equity securities merck foundation partially offset 250 million gain sale certain migraine clinical development programs see note 3 147 million gain divestiture merck’s remaining ophthalmics business international markets see note 3 recognition 182 million income related astrazeneca’s option exercise interest paid 723 million 2017 686 million 2016 653 million 2015 16 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits losses foreign subsidiaries miscellaneous items company’s 2017 effective tax rate reflects provisional impact 403 tax cuts jobs act tcja enacted december 22 2017 among provisions tcja reduces us federal corporate statutory tax rate 35 21 effective january 1 2018 requires companies pay onetime transition tax undistributed earnings certain foreign subsidiaries creates new taxes certain foreign sourced earnings company reflected impact tcja financial statements described however application certain provisions tcja remains subject interpretation instances company made reasonable estimate effects tcja onetime transition tax based company’s post1986 undistributed earnings profits ep substantial portion undistributed ep company previously provided deferred taxes earnings deemed merck retained indefinitely subsidiary companies reinvestment company recorded provisional amount onetime transition tax liability 53 billion merck yet finalized calculation total post1986 undistributed ep foreign subsidiaries transition tax based part amount undistributed ep held cash specified assets therefore amount may change company finalizes calculation post1986 undistributed foreign ep finalizes amounts held cash specified assets provisional amount reduced reversal 20 billion deferred taxes previously recorded connection merger scheringplough corporation 2009 certain undistributed foreign ep company anticipates able utilize certain foreign tax credits partially reduce transition tax payment resulting net transition tax payment 51 billion permitted tcja company elected pay onetime transition tax period eight years current portion transition tax liability 545 million included reduction prepaid income taxes included current assets remainder 45 billion included noncurrent liabilities result tcja company made determination longer indefinitely reinvested respect undistributed earnings foreign subsidiaries provided deferred tax liability withholding tax would apply company remeasured deferred tax assets liabilities new federal statutory tax rate 21 resulted provisional deferred tax benefit 779 million deferred tax benefit calculation remains subject certain clarifications particularly related executive compensation benefits beginning 2018 tcja includes tax “global intangible lowtaxed income” gilti defined tcja company allowed make accounting policy election account tax effects gilti tax either income tax provision future periods tax arises component deferred taxes related investments foreign subsidiaries company currently evaluating gilti provisions tcja implications tax provision finalized accounting policy election therefore company recorded deferred taxes gilti december 31 2017 foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants begin expire 2022 earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared 35 us statutory rate foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared 35 us statutory rate company’s 2015 effective tax rate reflects impact protecting americans tax hikes act signed law december 18 2015 extending research credit permanently controlled foreign corporation lookthrough provisions five years income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss nol carryforwards several jurisdictions december 31 2017 630 million deferred taxes nol carryforwards relate foreign jurisdictions valuation allowances 900 million established foreign nol carryforwards foreign deferred tax assets addition company 24 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2017 2016 2015 49 billion 18 billion 18 billion respectively tax benefits relating stock option exercises 73 million 2017 147 million 2016 109 million 2015 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs discussed company recognize unrecognized tax benefits 17 billion december 31 2017 income tax provision would reflect favorable net impact 16 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2017 could decrease approximately 165 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures expenses interest penalties associated uncertain tax positions amounted 183 million 2017 134 million 2016 102 million 2015 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 341 million 886 million december 31 2017 2016 respectively 2017 internal revenue service irs concluded examinations merck’s 20062011 us federal income tax returns result company required make payment approximately 28 billion company’s reserves unrecognized tax benefits years examination exceeded adjustments relating examination period therefore company recorded net 234 million tax benefit 2017 net benefit reflects reductions reserves unrecognized tax benefits tax positions relating years examination partially offset additional reserves tax positions previously reserved well adjustments reserves unrecognized tax benefits relating years remain open examination affected settlement although irs’s examination company’s 20022005 federal tax returns concluded prior 2015 one issue relating refund claim remained open 2015 issue resolved company received refund approximately 715 million exceeded receivable previously recorded company resulting tax benefit 410 million irs currently conducting examinations company’s tax returns years 2012 2014 addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2003 2017 17 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2017 2016 2015 5 million 13 million 9 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 18 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 14 4 includes pension plan net loss 35 billion 39 billion december 31 2017 2016 respectively postretirement benefit plan net gain loss 16 million 115 million december 31 2017 2016 respectively well pension plan prior service credit 326 million 361 million december 31 2017 2016 respectively postretirement benefit plan prior service credit 383 million 466 million december 31 2017 2016 respectively 19 segment reporting company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical segment reportable segment pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccine sales made us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles sales vaccines major european markets marketed company’s spmsd joint venture termination december 31 2016 see note 9 company also animal health segment discovers develops manufactures markets animal health products including vaccines company sells veterinarians distributors animal producers company’s healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients sales company’s products follows us plus international may equal total due rounding 1 sales cubicin 2015 represent sales subsequent cubist acquisition date 2 december 31 2016 merck sanofi terminated equallyowned joint venture spmsd marketed vaccines major european markets see note 9 accordingly vaccine sales 2017 include sales european markets previously part spmsd amounts 2016 2015 include sales vaccines sold spmsd results reflected equity income affiliates included income expense net amounts 2016 2015 however include supply sales spmsd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents nonreportable segments animal health healthcare services alliances 5 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2017 2016 also includes 85 million 170 million respectively related sale marketing rights certain products consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows segment profits comprised segment sales less standard costs certain operating expenses directly incurred segments internal management reporting presented chief operating decision maker merck allocate materials production costs standard costs majority research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill intangible asset impairment charges gains losses sales businesses expense income related changes estimated fair value contingent consideration miscellaneous income expense items equity income affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets merck co inc subsidiaries december 31 2017 2016 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2017 including related notes collectively referred “consolidated financial statements” also audited company’s internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states “pcaob” required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 27 2018 served company’s auditor since 2002 b supplementary data selected quarterly financial data 2017 2016 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2017 include provisional net tax charge related enactment us tax legislation see note 16 amounts 2016 include charge settle worldwide patent litigation related keytruda see note 11 2 amounts 2017 include aggregate charge related formation collaboration astrazeneca see note 4 3 amounts 2017 2016 reflect acquisition divestiturerelated costs see note 8 impact restructuring actions see note 5 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2018 2017 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2018 notes consolidated financial statements report dated february 27 2019 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities december 31 2016 merck sanofi pasteur sa sanofi terminated equallyowned joint venture sanofi pasteur msd spmsd developed marketed vaccines europe 2017 merck began recording vaccine sales incurring costs result operating vaccines business european markets previously part spmsd joint venture accounted equity method affiliate animal health segment discovers develops manufactures markets animal health products including pharmaceutical vaccine products prevention treatment control disease major livestock companion animal species company sells veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 see note 9 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired inprocess research development iprd alternative future use charged expense contingent consideration recognized acquisition date foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost net realizable value cost substantial majority us pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt securities classified availableforsale reported fair value fair values company’s investments marketable debt securities determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt securities included income expense net investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net revenue recognition january 1 2018 company adopted asu 201409 revenue contracts customers subsequent amendments asc 606 new guidance using modified retrospective method merck applied new guidance contracts customers within scope standard effect january 1 2018 recognized cumulative effect initially applying new guidance adjustment opening balance retained earnings see “recently adopted accounting standards” comparative information prior periods restated continues reported accounting standards effect periods new guidance requires entity recognize revenue depict transfer goods services customers amount reflects consideration expects entitled exchange goods services new guidance introduces 5step model recognize revenue control transferred identify contract customer identify performance obligations contract determine transaction price allocate transaction price performance obligations contract recognize revenue performance obligations satisfied changes company’s revenue recognition policy result adopting asc 606 described see note 19 disaggregated revenue disclosures recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment certain merck entities including us entities contract terms control goods passes customer upon shipment however either pursuant terms contract business practice merck retains responsibility goods lost damaged transit prior adoption new standard merck would recognize revenue entities upon delivery goods new guidance company recognizing revenue time shipment entities company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile interpretation allows companies recognize revenue sales vaccines us government stockpiles even though sales might meet criteria revenue recognition accounting guidance businesses within company’s healthcare services segment certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covering chargebacks rebates 107 billion 2018 107 billion 2017 97 billion 2016 chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 245 million 24 billion respectively december 31 2018 198 million 24 billion respectively december 31 2017 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically net 36 days receipt invoice us animal health customers typically net 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms following table provides effects adopting asc 606 consolidated statement income following table provides effects adopting asc 606 consolidated balance sheet depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 14 billion 2018 15 billion 2017 16 billion 2016 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 21 billion 22 billion 21 billion 2018 2017 2016 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 439 million 449 million net accumulated amortization december 31 2018 2017 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangibles acquired intangibles include products product rights tradenames patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 2 20 years see note 8 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development acquired iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination thenuseful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value iprd intangible asset less carrying amount company concludes likely fair value less carrying amount quantitative test compares fair value iprd intangible asset carrying value performed fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s business acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingent consideration liability remeasured current fair value changes either expense income recorded earnings research development research development expensed incurred nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration research development expenses also include upfront milestone payments related asset acquisitions licensing transactions involving clinical development programs yet received regulatory approval collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners merck principal sales transactions third parties company recognizes sales cost sales selling general administrative expenses gross basis profit sharing amounts pays collaborative partners recorded within cost sales collaborative partner principal sales transactions third parties company records profit sharing amounts received collaborative partners alliance revenue within sales alliance revenue recorded net cost sales includes adjustment share commercialization costs partners accordance collaboration agreement adjustment determined comparing commercialization costs merck incurred directly reported within selling general administrative expenses costs collaborative partner incurred research development costs merck incurs related collaborations recorded within research development expenses cost reimbursements collaborative partner payments received collaborative partner share costs pursuant terms collaboration agreements recorded increases decreases research development expenses addition terms collaboration agreements may require company make payments based upon achievement certain developmental regulatory approval commercial milestones upfront milestone payments payable merck collaborative partners prior regulatory approval expensed incurred included research development expenses payments due collaborative partners upon subsequent regulatory approval capitalized amortized estimated useful life corresponding intangible asset cost sales provided future cash flows support amounts capitalized salesbased milestones payable merck collaborative partners accrued probable achieved capitalized subject cumulative amortization catchup amortization catchup calculated either time first regulatory approval indications unapproved time collaboration formed time formation collaboration approved products related intangible asset recognized amortized cost sales remaining useful life subject impairment testing sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards may 2014 financial accounting standards board fasb issued amended accounting guidance revenue recognition asu 201409 applies contracts customers objective new guidance improve comparability revenue recognition practices across entities provide useful information users financial statements improved disclosure requirements new standard permits two methods adoption retrospectively prior reporting period presented full retrospective method retrospectively cumulative effect adopting guidance recognized date initial application modified retrospective method new standard effective january 1 2018 adopted using modified retrospective method company recorded cumulativeeffect adjustment upon adoption increasing retained earnings 5 million january 2016 fasb issued revised guidance accounting reporting financial instruments asu 201601 2018 issued related technical corrections asu 201803 new guidance requires equity investments readily determinable fair values currently classified available sale measured fair value changes fair value recognized net income company elected measure equity investments without readily determinable fair values cost adjusted subsequent observable price changes less impairments recognized net income new guidance also changed certain disclosure requirements asu 201601 effective january 1 2018 adopted using modified retrospective approach company recorded cumulativeeffect adjustment upon adoption increasing retained earnings 8 million asu 201803 also adopted january 1 2018 prospective basis result additional impacts upon adoption october 2016 fasb issued guidance accounting income tax consequences intraentity transfers assets inventory asu 201616 new guidance requires recognition income tax consequences intraentity transfer asset exception inventory intraentity transfer occurs replacing prohibition current exception defer recognition tax impact transfer inventory within consolidated entity sold third party remains unaffected new standard effective january 1 2018 adopted using modified retrospective approach company recorded cumulativeeffect adjustment upon adoption increasing retained earnings 54 million corresponding decrease deferred income taxes august 2017 fasb issued new guidance hedge accounting asu 201712 intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs new guidance makes financial nonfinancial hedging strategies eligible hedge accounting amends presentation disclosure requirements changes companies assess effectiveness company elected early adopt guidance january 1 2018 modified retrospective basis new guidance applied existing hedges adoption date fair value hedges interest rate risk outstanding date adoption company recorded cumulativeeffect adjustment upon adoption basis adjustment hedged item resulting applying benchmark component coupon guidance adjustment decreased retained earnings 11 million also accordance transition provisions asu 201712 company required eliminate separate measurement ineffectiveness cash flow hedging instruments existing adoption date cumulativeeffect adjustment retained earnings however amounts de minimis february 2018 fasb issued new guidance address narrowscope financial reporting issue arose consequence tax cuts jobs act 2017 tcja asu 201802 existing guidance requires deferred tax liabilities assets adjusted change tax laws rates effect included income continuing operations reporting period includes enactment date guidance applicable even situations related income tax effects items accumulated comprehensive income originally recognized comprehensive income rather net income amounts related benefit plans hedging activity result tax effects items within accumulated comprehensive income reflect appropriate tax rate difference referred stranded tax effects new guidance allows reclassification stranded tax effects resulting tcja accumulated comprehensive income retained earnings thereby eliminating stranded tax effects company elected early adopt new guidance first quarter 2018 reclassified stranded income tax effects tcja increasing accumulated comprehensive loss amount 266 million corresponding increase retained earnings see note 18 company’s policy releasing disproportionate income tax effects accumulated comprehensive loss utilize itembyitem approach impact adopting standards follows march 2017 fasb issued amended guidance retirement benefits asu 201707 related net periodic benefit cost defined benefit plans requires entities 1 disaggregate current service cost component components net benefit cost present employee compensation costs income statement within operations subtotal presented 2 present components net benefit cost separately income statement outside income operations 3 capitalize service cost component applicable company adopted new standard january 1 2018 using retrospective transition method requirement separate presentation income statement service costs components prospective transition method requirement limit capitalization benefit costs service cost component company utilized practical expedient permits use amounts disclosed pension postretirement benefit plan note prior comparative periods estimation basis applying retrospective presentation requirements upon adoption net periodic benefit cost credit service cost 512 million 531 million years ended december 31 2017 2016 respectively reclassified income expense net previous classification within cost sales selling general administrative expenses research development expenses see note 15 august 2016 fasb issued guidance classification certain cash receipts payments statement cash flows intended reduce diversity practice company adopted new standard effective january 1 2018 using retrospective application changes presentation consolidated statement cash flows previous years presented result adopting new standard november 2016 fasb issued guidance requiring amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows new standard effective january 1 2018 adopted using retrospective application adoption new guidance material effect company’s consolidated statement cash flows may 2017 fasb issued guidance clarifying account change terms conditions sharebased payment award modification new guidance modification accounting required fair value vesting conditions classification award equity liability changes result change terms conditions company adopted new standard effective january 1 2018 apply new guidance future sharebased payment award modifications occur january 2017 fasb issued guidance provides elimination step 2 goodwill impairment test new guidance impairment charges recognized extent carrying amount reporting unit exceeds fair value certain limitations company adopted new standard fourth quarter 2018 applied new guidance purposes fourth quarter goodwill impairment assessment adoption new guidance immaterial effect consolidated financial statements recently issued accounting standards yet adopted february 2016 fasb issued new accounting guidance accounting reporting leases subsequently issued several updates new guidance new guidance requires lessees recognize rightofuse asset lease liability recorded balance sheet leases meet definition shortterm lease leases classified either operating finance operating leases result straightline expense income statement similar current operating leases finance leases result expense recognized earlier years lease term similar current capital leases new standard effective january 1 2019 adopted using modified retrospective approach merck elect transition method allows application standard adoption date rather beginning earliest comparative period presented financial statements company intends elect available practical expedients merck implemented lease accounting software application completed data validation company’s portfolio leases including assessment potential embedded leases upon adoption company anticipates recognize approximately 1 billion additional assets corresponding liabilities consolidated balance sheet subject finalization june 2016 fasb issued amended guidance accounting credit losses financial instruments guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries new guidance effective interim annual periods beginning 2020 earlier application permitted 2019 new guidance applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption company currently evaluating impact adoption consolidated financial statements april 2018 fasb issued new guidance accounting costs incurred implement cloud computing arrangement considered service arrangement new guidance requires capitalization costs aligning accounting costs associated developing obtaining internaluse software new guidance effective interim annual periods beginning 2020 early adoption permitted including adoption interim period prospective adoption eligible costs incurred date adoption retrospective adoption permitted company currently evaluating impact adoption consolidated financial statements may elect early adopt guidance november 2018 fasb issued new guidance collaborative arrangements intended reduce diversity practice clarifying whether certain transactions collaborative arrangement participants accounted recently issued guidance revenue recognition asc 606 new guidance effective interim annual periods beginning 2020 early adoption permitted including adoption interim period new guidance applied modified retrospective basis cumulativeeffect adjustment directly retained earnings company currently evaluating impact adoption consolidated financial statements 3 acquisitions divestitures research collaborations license agreements company continues pursue acquisition businesses establishment external alliances research collaborations licensing agreements complement internal research capabilities arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share arrangements contingent upon occurrence certain future events linked success asset development company also reviews marketed products pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain assets pro forma financial information acquired businesses presented historical financial results acquired entity significant compared company’s financial results recently announced transaction december 2018 merck privately held antelliq group antelliq signed definitive agreement merck acquire antelliq funds advised bc partners antelliq leader digital animal identification traceability monitoring solutions help veterinarians farmers pet owners gather critical data improve management health wellbeing livestock pets merck make cash payment approximately €21 billion approximately 24 billion based exchange rates time announcement acquire outstanding shares antelliq assume antelliq’s debt €11 billion approximately 13 billion intends repay shortly closing acquisition transaction subject clearance antitrust competition law authorities customary closing conditions expected close second quarter 2019 2018 transactions 2018 company recorded aggregate charge 423 million within cost sales conjunction termination collaboration agreement entered 2014 samsung bioepis co ltd samsung insulin glargine charge reflects termination payment 155 million represents reimbursement fees previously paid samsung merck agreement plus interest well release merck’s ongoing obligations agreement charge also included fixed asset abandonment charges 137 million inventory writeoffs 122 million well related costs 9 million termination agreement impact company’s collaboration samsung june 2018 merck acquired viralytics limited viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 502 million 378 million transaction provided merck full rights cavatak v937 formerly cva21 viralytics’s investigational oncolytic immunotherapy cavatak based viralytics’s proprietary formulation oncolytic virus coxsackievirus type a21 shown preferentially infect kill cancer cells cavatak currently evaluated multiple phase 1 phase 2 clinical trials intratumoral intravenous agent including combination keytruda previous agreement merck viralytics study investigating use keytruda cavatak combination melanoma prostate lung bladder cancers transaction accounted acquisition asset merck recorded net assets 34 million primarily cash acquisition date research development expenses 344 million 2018 related transaction future contingent payments associated acquisition march 2018 merck eisai co ltd eisai entered strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai see note 4 2017 transactions october 2017 merck acquired rigontec gmbh rigontec leader accessing retinoic acidinducible gene pathway part innate immune system novel distinct approach cancer immunotherapy induce immediate longterm antitumor immunity rigontec’s lead candidate mk4621 formerly rgt100 currently phase development evaluating treatment patients various tumors terms agreement merck made upfront cash payment €119 million 140 million may make additional contingent payments €349 million €184 million related achievement research milestones regulatory approvals €165 million related achievement commercial targets transaction accounted acquisition asset upfront payment reflected within research development expenses 2017 july 2017 merck astrazeneca plc astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types see note 4 march 2017 merck acquired controlling interest vallée sa vallée leading privately held producer animal health products brazil vallée extensive portfolio products spanning parasiticides antiinfectives vaccines include products livestock horses companion animals terms agreement merck acquired 935 shares vallée 358 million total purchase price 176 million placed escrow pending resolution certain contingent items transaction accounted acquisition business merck recognized intangible assets 297 million related currently marketed products net deferred tax liabilities 102 million net assets 32 million noncontrolling interest 25 million addition company recorded liabilities 37 million contingencies identified acquisition date corresponding indemnification assets 37 million representing amounts reimbursed merck contingent liabilities paid excess consideration transferred fair value net assets acquired 156 million recorded goodwill allocated animal health segment deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach probabilityadjusted future net cash flows product discounted present value utilizing discount rate 155 actual cash flows likely different assumed intangible assets related currently marketed products amortized estimated useful lives 15 years fourth quarter 2017 merck acquired additional 45 interest vallée 18 million reduced noncontrolling interest related vallée 2016 transactions july 2016 merck acquired afferent pharmaceuticals afferent privately held pharmaceutical company focused development therapeutic candidates targeting p2x3 receptor treatment common poorlymanaged neurogenic conditions afferent’s lead investigational candidate mk7264 formerly af219 gefapixant selective nonnarcotic orallyadministered p2x3 antagonist evaluated treatment refractory chronic cough treatment endometriosisrelated pain total consideration transferred 510 million included cash paid outstanding afferent shares 487 million well sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf afferent addition former afferent shareholders eligible receive total additional 750 million contingent upon attainment certain clinical development commercial milestones multiple indications candidates including mk7264 transaction accounted acquisition business company determined fair value contingent consideration 223 million acquisition date utilizing probabilityweighted estimated cash flow stream using appropriate discount rate dependent nature timing milestone payment merck recognized intangible asset iprd 832 million net deferred tax liabilities 258 million net assets 29 million primarily consisting cash acquired excess consideration transferred fair value net assets acquired 130 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair value identifiable intangible asset related iprd determined using income approach asset’s probabilityadjusted future net cash flows discounted present value using discount rate 115 actual cash flows likely different assumed 2018 result achievement clinical development milestone merck made 175 million payment accrued estimated fair value time acquisition noted contingent consideration liability remeasured current fair value subsequent reporting period payment made see note 6 june 2016 merck moderna therapeutics moderna entered strategic collaboration license agreement develop commercialize novel messenger rna mrnabased personalized cancer vaccines development program entail multiple studies several types cancer include evaluation mrnabased personalized cancer vaccines combination merck’s keytruda pursuant terms agreement merck made upfront cash payment moderna 200 million recorded research development expenses following human proof concept studies merck right elect make additional payment moderna merck exercises right two companies equally share costs profits worldwide collaboration development personalized cancer vaccines moderna right elect copromote personalized cancer vaccines united states agreement entails exclusivity around combinations keytruda moderna merck ability combine mrnabased personalized cancer vaccines nonpd1 agents january 2016 merck acquired iomet pharma ltd iomet privately held ukbased drug discovery company focused development innovative medicines treatment cancer particular emphasis fields cancer immunotherapy cancer metabolism acquisition provided merck iomet’s preclinical pipeline ido indoleamine23dioxygenase 1 tdo tryptophan23dioxygenase dualacting idotdo inhibitors transaction accounted acquisition business total purchase consideration transaction included cash payment 150 million future additional milestone payments 250 million contingent upon certain clinical regulatory milestones achieved company determined fair value contingent consideration 94 million acquisition date utilizing probabilityweighted estimated cash flow stream adjusted expected timing payment utilizing discount rate 105 merck recognized intangible assets iprd 155 million net deferred tax assets 32 million excess consideration transferred fair value net assets acquired 57 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach assets’ probabilityadjusted future net cash flows discounted present value also using discount rate 105 actual cash flows likely different assumed 2017 result achievement clinical development milestone merck made 100 million payment accrued estimated fair value time acquisition noted contingent consideration liability remeasured current fair value subsequent reporting period payment made see note 6 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey remicade lost market exclusivity major european markets 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj 4 collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners parties arrangements active participants exposed significant risks rewards dependent commercial success activities collaboration merck’s significant collaborative arrangements discussed astrazeneca july 2017 merck astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types lynparza oral poly adpribose polymerase parp inhibitor currently approved certain types ovarian breast cancer companies jointly developing commercializing lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines keytruda imfinzi companies also jointly develop commercialize astrazeneca’s selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple indications terms agreement astrazeneca merck share development commercialization costs lynparza selumetinib monotherapy nonpdl1pd1 combination therapy opportunities gross profits lynparza selumetinib product sales generated monotherapies combination therapies shared equally merck fund development commercialization costs keytruda combination lynparza selumetinib astrazeneca fund development commercialization costs imfinzi combination lynparza selumetinib astrazeneca currently principal lynparza sales transactions merck records share lynparza product sales net cost sales commercialization costs alliance revenue within pharmaceutical segment share development costs associated collaboration part research development expenses reimbursements received astrazeneca research development expenses recognized reductions research development costs part agreement merck made upfront payment astrazeneca 16 billion make payments 750 million multiyear period certain license options 250 million paid december 2017 400 million paid december 2018 100 million expected paid 2019 company recorded aggregate charge 235 billion research development expenses 2017 related upfront payment future license option payments addition agreement provides additional contingent payments merck astrazeneca related successful achievement regulatory salesbased milestones 2018 merck determined probable annual sales lynparza future would trigger three salesbased milestone payments merck astrazeneca aggregating 600 million accordingly 2018 merck recorded 600 million liabilities corresponding increase intangible asset related lynparza recognized 58 million cumulative amortization expense within cost sales 2018 one salesbased milestones triggered resulting 150 million payment astrazeneca 2018 merck made additional 100 million salesbased milestone payment accrued 2017 company deemed payment probable remaining 34 billion potential future salesbased milestone payments yet accrued deemed company probable time 2018 lynparza received approval united states treatment certain patients metastatic breast cancer use firstline maintenance setting advanced ovarian cancer triggering capitalized milestone payments 140 million aggregate merck astrazeneca potential future regulatory milestone payments 176 billion remain agreement asset balance related lynparza includes capitalized salesbased regulatory milestone payments 743 million december 31 2018 included assets consolidated balance sheet amount amortized estimated useful life 2028 supported projected future cash flows subject impairment testing summarized information related collaboration follows 1 represents amortization capitalized milestone payments 2 amount 2017 includes 235 billion related upfront payment future license option payments 3 includes accrued milestone license option payments eisai march 2018 merck eisai announced strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai agreement merck eisai develop commercialize lenvima jointly monotherapy combination merck’s antipd1 therapy keytruda eisai records lenvima product sales globally eisai principal lenvima sales transactions merck eisai share gross profits equally merck records share lenvima product sales net cost sales commercialization costs alliance revenue expenses incurred codevelopment including studies evaluating lenvima monotherapy shared equally two companies reflected research development expenses agreement merck made upfront payment eisai 750 million make payments 650 million certain option rights 2021 325 million paid march 2019 200 million expected paid 2020 125 million expected paid 2021 company recorded aggregate charge 14 billion research development expenses 2018 related upfront payment future option payments addition agreement provides eisai receive 385 million associated achievement certain clinical regulatory milestones 397 billion achievement milestones associated sales lenvima 2018 merck determined probable annual sales lenvima future would trigger three salesbased milestone payments merck eisai aggregating 268 million accordingly 2018 merck recorded 268 million liabilities corresponding increase intangible asset related lenvima recognized 24 million cumulative amortization expense within cost sales remaining 371 billion potential future salesbased milestone payments yet accrued deemed company probable time 2018 lenvima approved treatment patients unresectable hepatocellular carcinoma united states european union japan china triggering capitalized milestone payments eisai 250 million aggregate potential future regulatory milestone payments 135 million remain agreement asset balance related lenvima includes capitalized salesbased regulatory milestone payments 479 million december 31 2018 included assets consolidated balance sheet amount amortized estimated useful life 2026 supported projected future cash flows subject impairment testing summarized information related collaboration follows 1 represents amortization capitalized milestone payments 2 includes 14 billion related upfront payment future option payments 3 includes accrued milestone option payments bayer ag 2014 company entered worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including bayer’s adempas approved treat pulmonary arterial hypertension chronic thromboembolic pulmonary hypertension two companies implemented joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat phase 3 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn made available earlystage sgc compounds similar terms agreement bayer leads commercialization adempas americas merck leads commercialization rest world vericiguat potential optin products bayer lead commercialization rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead 2016 merck began promoting distributing adempas europe transition bayer merck territories including japan continued 2017 revenue adempas includes sales merck’s marketing territories well merck’s share profits sale adempas bayer’s marketing territories 2018 merck determined probable annual worldwide sales adempas future would trigger 375 million salesbased milestone payment merck bayer accordingly merck recorded 375 million noncurrent liability corresponding increase intangible asset related adempas recognized 106 million cumulative amortization expense within cost sales 2018 company made 350 million milestone payment bayer accrued 2016 merck deemed payment probable additional 400 million potential future salesbased milestone payment yet accrued deemed company probable time intangible asset balance related adempas includes remaining acquired intangible asset balance well capitalized salesbased milestone payments 10 billion december 31 2018 included intangibles net consolidated balance sheet amount amortized estimated useful life 2027 supported projected future cash flows subject impairment testing summarized information related collaboration follows 1 includes amortization intangible assets 2 includes accrued milestone payments aggregate amortization expense related capitalized license costs recorded within cost sales 186 million 2018 39 million 2017 30 million 2016 estimated aggregate amortization expense next five years follows 2019 196 million 2020 193 million 2021 191 million 2022 187 million 2023 181 million 5 restructuring 2010 2013 company commenced actions global restructuring programs designed streamline cost structure actions programs include elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company also continues reduce global real estate footprint improve efficiency manufacturing supply network company recorded total pretax costs 658 million 2018 927 million 2017 11 billion 2016 related restructuring program activities since inception programs december 31 2018 merck recorded total pretax accumulated costs approximately 141 billion eliminated approximately 45510 positions comprised employee separations well elimination contractors vacant positions company estimates approximately twothirds cumulative pretax costs cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company substantially completed actions programs segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated positions eliminated restructuring program activities approximately 2160 2018 2450 2017 2625 2016 accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck recording accelerated depreciation revised useful life site assets anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2018 2017 2016 includes 141 million 267 million 409 million respectively asset abandonment shutdown related costs additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 14 sharebased compensation activity also reflects net pretax losses resulting sales facilities related assets 151 million 2016 following table summarizes charges spending relating restructuring program activities 1 remaining cash outlays expected substantially completed end 2020 6 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations unrealized gains losses contracts recorded foreign currency translation adjustment within oci remain aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded component changes fair value excluded components recognized oci accordance new guidance adopted january 1 2018 see note 2 company elected recognize earnings initial value excluded component straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci effects company’s net investment hedges oci consolidated statement income shown 1 amounts reclassified aoci income related sale subsidiary interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk may 2018 four interest rate swaps notional amounts aggregating 10 billion matured swaps effectively converted company’s 10 billion 130 fixedrate notes due 2018 variable rate debt december 2018 connection early repayment debt company settled three interest rate swaps notional amounts aggregating 550 million swaps effectively converted portion company’s 125 billion 500 notes due 2019 variable rate debt december 31 2018 company party 19 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows table presents location amounts recorded consolidated balance sheet related cumulative basis adjustments fair value hedges december 31 1 amounts include hedging adjustment gains related discontinued hedging relationships 11 million december 31 2017 presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information regarding location amount pretax gains losses derivatives designated fair value cash flow hedging relationships 1 interest expense component income expense net table provides information regarding income statement effects derivatives designated hedging instruments 1 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates 2 derivative contracts serve economic hedges forecasted transactions december 31 2018 company estimates 186 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information investments debt equity securities december 31 follows 1 pursuant adoption asu 201601 see note 2 beginning january 1 2018 changes fair value publicly traded equity securities recognized net income unrealized net losses 35 million recognized income expense net 2018 equity securities still held december 31 2018 december 31 2018 company also 568 million equity investments without readily determinable fair values included assets 2018 company recognized unrealized gains 167 million income expense net certain equity investments based favorable observable price changes transactions involving similar investments investee addition 2018 company recognized unrealized losses 26 million income expense net related certain investments based unfavorable observable price changes availableforsale debt securities included shortterm investments totaled 894 million december 31 2018 remaining debt securities 58 billion mature within five years december 31 2018 2017 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily auto loan credit card student loan receivables weightedaverage lives primarily 5 years less 2 investments included assets restricted use primarily payment benefits employee benefit plans 3 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2018 december 31 2018 cash equivalents 80 billion include 72 billion cash equivalents would considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration follows 1 recorded research development expenses cost sales income expense net includes cumulative translation adjustments 2 balance december 31 2018 includes 89 million recorded current liability amounts expected paid within next 12 months changes estimated fair value liabilities contingent consideration 2018 largely attributable increases liabilities recorded connection termination spmsd joint venture 2016 see note 9 partially offset reversal liability related discontinuation program obtained connection acquisition smartcells see note 8 changes estimated fair value liabilities contingent consideration 2017 primarily relate increases liabilities recorded connection termination spmsd joint venture clinical progression program related afferent acquisition payments contingent consideration 2018 include 175 million related achievement clinical milestone connection acquisition afferent see note 3 remaining payments 2018 relate liabilities recorded connection termination spmsd joint venture payments contingent consideration 2017 relate achievement clinical milestone connection acquisition iomet see note 3 fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2018 256 billion compared carrying value 251 billion december 31 2017 256 billion compared carrying value 244 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor global economic conditions including volatility associated international sovereign economies associated impacts financial markets business company’s customers largest accounts receivable balances mckesson corporation amerisourcebergen corporation cardinal health inc represented aggregate approximately 40 total accounts receivable december 31 2018 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty cash collateral received company various counterparties 107 million 3 million december 31 2018 2017 respectively obligation return collateral recorded accrued current liabilities cash collateral advanced company counterparties december 31 2018 2017 7 inventories december 31 consisted inventories valued lifo method comprised approximately 25 billion 22 billion december 31 2018 2017 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2018 2017 amounts included 14 billion 11 billion respectively inventories expected sold within one year addition amounts included 7 million 80 million december 31 2018 2017 respectively inventories produced preparation product launches 8 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2018 2017 369 million 225 million respectively additions goodwill within animal health segment 2017 primarily relate acquisition vallée see note 3 impairments goodwill within nonreportable segments 2018 2017 relate certain businesses within healthcare services segment intangibles december 31 consisted acquired intangibles include products product rights tradenames patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles related marketed products included products product rights december 31 2018 include zerbaxa 27 billion sivextro 833 million implanonnexplanon 470 million dificid 395 million gardasilgardasil 9 384 million bridion 275 million simponi 194 million company intangible asset related adempas result collaboration bayer see note 4 carrying value 10 billion december 31 2018 reflected “other” table 2017 2016 company recorded impairment charges related marketed products intangibles 58 million 347 million respectively within cost sales 2017 company recorded intangible asset impairment charge 47 million related intron treatment certain types cancers sales intron adversely affected availability new therapeutic options 2017 sales intron united states eroded rapidly previously anticipated company led changes cash flow assumptions intron revisions cash flows indicated intron intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related intron compared related carrying value resulted impairment charge noted remaining charges 2017 relate impairment customer relationship tradename developed technology intangibles certain businesses healthcare services segment 2016 company lowered cash flow projections zontivity product reduction thrombotic cardiovascular events patients history myocardial infarction peripheral arterial disease following several business decisions reduced sales expectations zontivity united states europe company utilized market participant assumptions considered several different scenarios determine fair value intangible asset related zontivity compared related carrying value resulted impairment charge 252 million also 2016 company wroteoff 95 million capitalized connection inlicensed products grastek ragwitek allergy immunotherapy tablets business reasons company returned licensor iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life asset begin amortization 2018 company recorded 152 million iprd impairment charges within research development expenses amount 139 million relates writeoff remaining intangible asset balance program obtained connection smartcells acquisition following decision terminate program due product development issues company previously recorded impairment charge 2016 programs obtained connection acquisition smartcells described discontinuation clinical development program resulted reversal related liability contingent consideration 60 million see note 6 2017 company recorded 483 million iprd impairment charges amount 240 million resulted strategic decision discontinue development investigational combination regimens mk3682b grazoprevirruzasviruprifosbuvir mk3682c ruzasviruprifosbuvir treatment chronic hepatitis c virus hcv infection decision made based review available phase 2 efficacy data consideration evolving marketplace growing number treatment options available patients chronic hcv infection including zepatier marketed company treatment adult patients chronic hcv infection result decision company recorded iprd impairment charge writeoff remaining intangible asset related uprifosbuvir company previously recorded impairment charge uprifosbuvir 2016 described iprd impairment charges 2017 also include charge 226 million writeoff intangible asset related verubecestat investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 resulting decision february 2018 stop phase 3 study evaluating verubecestat people prodromal alzheimer’s disease decision stop study followed recommendation external data monitoring committee edmc assessed overall benefitrisk interim safety analysis edmc concluded unlikely positive benefitrisk could established trial continued 2016 company recorded 36 billion iprd impairment charges amount 29 billion related clinical development program uprifosbuvir nucleotide prodrug evaluated treatment hcv company determined changes product profile well changes merck’s expectations pricing market opportunity taken together constituted triggering event required company evaluate uprifosbuvir intangible asset impairment utilizing market participant assumptions considering different scenarios company concluded best estimate fair value intangible asset related uprifosbuvir 240 million resulting recognition impairment charge noted iprd impairment charges 2016 also included charges 180 million 143 million related discontinuation programs obtained connection acquisitions ccam biotherapeutics ltd oncoethix respectively resulting unfavorable efficacy data additional 72 million related programs obtained connection smartcells acquisition following decision terminate lead compound due lack efficacy pursue backup compound reduced projected future cash flows iprd impairment charges 2016 also included 112 million related inlicensed program house dust mite allergies business reasons returned licensor remaining iprd impairment charges 2016 primarily related deprioritized pipeline programs deemed alternative use period including 79 million impairment charge investigational candidate contraception discontinuation delay certain clinical development programs resulted reduction related liabilities contingent consideration iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within cost sales 29 billion 2018 32 billion 2017 38 billion 2016 estimated aggregate amortization expense next five years follows 2019 15 billion 2020 12 billion 2021 11 billion 2022 11 billion 2023 11 billion 9 joint ventures equity method affiliates sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture spmsd market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 10 billion 2016 december 31 2016 merck sanofi pasteur sanofi terminated spmsd ended joint vaccines operations europe terms termination merck acquired sanofi’s 50 interest spmsd exchange consideration 657 million comprised cash well future royalties 115 net sales merck products previously sold joint venture december 31 2024 company determined fair value 416 million date termination company accounted transaction step acquisition required merck remeasure ownership interest previously accounted equity method investment fair value acquisition date merck turn sold sanofi intellectual property rights held spmsd exchange consideration 596 million comprised cash future royalties 115 net sales sanofi products previously sold joint venture december 31 2024 company determined fair value 302 million date termination excluded arrangement sales vaxelis jointly developed pediatric hexavalent combination vaccine approved european commission 2016 us food drug administration 2018 european marketing rights vaxelis transferred separate equallyowned joint venture sanofi merck net impact termination spmsd joint venture follows 1 recorded income expense net estimated fair values identifiable intangible assets related products product rights determined using income approach fair value estimated based market participant expectations asset’s projected net cash flows projected net cash flows discounted present value utilizing discount rate 115 actual cash flows likely different assumed amount recorded products product rights 468 million related gardasilgardasil 9 fair value liabilities contingent consideration related merck’s future royalty payments sanofi 416 million reflected consideration payable sanofi net table determined acquisition date using unobservable inputs include estimated amount timing projected cash flows riskadjusted discount rate 8 used present value cash flows changes inputs could result different fair value measurement based existing accounting policy election merck record 302 million estimated fair value contingent future royalties received sanofi sale sanofi products rather recognizing amounts sales occur royalties earned company incurred 24 million transaction costs related termination spmsd included selling general administrative expenses 2016 pro forma financial information transaction presented results significant compared company’s financial results astrazeneca lp 1982 merck entered agreement astra ab astra develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc ami merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc kbi contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp partnership exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp azlp upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights merck earned revenue based sales kbi products earned certain partnership returns azlp june 30 2014 astrazeneca exercised option purchase merck’s interest kbi redeem merck’s remaining interest azlp portion exercise price remained subject trueup 2018 based actual sales nexium prilosec closing 2014 june 2018 deferred recognized income contingency eliminated sales occurred deferred income amount fully recognized 2016 company began recognizing income corresponding receivable amounts would due merck astrazeneca based sales performance nexium prilosec subject trueup june 2018 company recognized income 99 million 2018 232 million 2017 98 million 2016 including 5 million remaining deferred income expense net related amounts january 2019 company received 424 million astrazeneca settlement amounts concludes transactions related 2014 termination company’s relationship azlp 10 loans payable longterm debt commitments loans payable december 31 2018 included 51 billion commercial paper 149 million longdated notes subject repayment option holders loans payable december 31 2017 included 30 billion notes due 2018 73 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 209 085 years ended december 31 2018 2017 respectively longterm debt december 31 consisted presented table includes 223 million 300 million december 31 2018 2017 respectively borrowings variable rates resulted effective interest rates 227 142 2018 2017 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices december 2018 company exercised makewhole provision 125 billion 500 notes due 2019 repaid debt november 2017 company launched tender offers certain outstanding notes debentures company paid 810 million aggregate consideration applicable purchase price together accrued interest redeem 585 million principal amount debt validly tendered connection tender offers recognized loss extinguishment debt 191 million 2017 effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply covenants december 31 2018 company compliance covenants aggregate maturities longterm debt next five years follows 2019 maturities 2020 19 billion 2021 23 billion 2022 22 billion 2023 17 billion company 60 billion credit facility matures june 2023 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility rental expense operating leases net sublease income 322 million 2018 327 million 2017 292 million 2016 minimum aggregate rental commitments noncancellable leases follows 2019 188 million 2020 198 million 2021 150 million 2022 134 million 2023 84 million thereafter 243 million company significant capital leases 11 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters opinion company unlikely resolution matters material company’s financial position results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities effective august 1 2004 product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2018 approximately 3900 cases filed either pending conditionally dismissed noted merck either federal state court plaintiffs vast majority cases generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax march 2011 merck submitted motion transfer judicial panel multidistrict litigation jpml seeking federal cases alleging femur fractures consolidated one multidistrict litigation coordinated pretrial proceedings federal cases involving allegations femur fracture transferred multidistrict litigation district new jersey femur fracture mdl bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 515 cases appealed decision us court appeals third circuit third circuit march 2017 third circuit issued decision reversing femur fracture mdl court’s preemption ruling remanding appealed cases back femur fracture mdl court merck filed petition writ certiorari us supreme court august 2017 seeking review third circuit’s decision december 2017 supreme court invited solicitor general file brief case expressing views united states may 2018 solicitor general submitted brief stating third circuit’s decision wrongly decided recommended supreme court grant merck’s cert petition supreme court granted merck’s petition june 2018 oral argument supreme court held january 7 2019 final decision femur fracture mdl court’s preemption ruling pending supreme court accordingly december 31 2018 nine cases actively pending femur fracture mdl approximately 1055 cases either dismissed without prejudice administratively closed pending final resolution supreme court appeal femur fracture mdl court’s preemption order december 31 2018 approximately 2555 cases alleging femur fractures filed new jersey state court pending judge james hyland middlesex county parties selected initial group 30 cases reviewed fact discovery two additional groups 50 cases reviewed fact discovery selected november 2013 march 2014 respectively group 25 cases reviewed fact discovery selected merck july 2015 merck continued select additional cases reviewed fact discovery 2016 present december 31 2018 approximately 275 cases alleging femur fractures filed pending california state court femur fracture cases filed california state court coordinated single judge orange county california march 2014 court directed group 10 discovery pool cases reviewed fact discovery subsequently scheduled galper v merck case plaintiffs selected first trial galper trial began february 2015 jury returned verdict merck’s favor april 2015 plaintiff appealed verdict california appellate court april 2017 california appellate court issued decision affirming lower court’s judgment favor merck next femur fracture trial california scheduled begin april 2016 stayed plaintiffs’ request new trial date set additionally four femur fracture cases pending state courts discovery ongoing femur fracture mdl state courts femur fracture cases pending company intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2018 merck aware approximately 1290 product users alleging januvia andor janumet caused development pancreatic cancer injuries claims filed multidistrict litigation us district court southern district california mdl outside mdl majority claims filed coordinated proceedings superior court california county los angeles california state court november 2015 mdl california state courtin separate opinionsgranted summary judgment defendants grounds federal preemption plaintiffs appealed forums november 2017 us court appeals ninth circuit vacated judgment remanded discovery ongoing november 2018 california state appellate court reversed remanded similar grounds december 31 2018 eight product users claims pending merck state courts california including illinois june 2017 illinois trial court denied merck’s motion summary judgment based federal preemption merck appealed illinois appellate court affirmed december 2018 merck intends appeal ruling addition claims noted company agreed toll statute limitations approximately 50 additional claims company intends continue defending lawsuits vioxx previously disclosed merck defendant lawsuit brought attorney general utah alleging merck misrepresented safety vioxx lawsuit pending utah state court utah seeks damages penalties utah false claims act bench trial matter currently scheduled july 2019 propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar lawsuits filed various federal courts state court new jersey federal lawsuits consolidated pretrial purposes federal multidistrict litigation judge brian cogan eastern district new york matters pending state court new jersey consolidated judge hyland middlesex county nj coordinated proceedings previously disclosed april 9 2018 merck plaintiffs’ executive committee propecia mdl plaintiffs’ liaison counsel nj coordinated proceedings entered agreement resolve mentioned propeciaproscar lawsuits aggregate amount 43 million settlement subject certain contingencies including 95 plaintiff participation per plaintiff clawback participation rate less 100 contingencies satisfied settlement agreement finalized settlement fewer 25 cases remain pending united states company intends defend remaining unsettled lawsuits governmental proceedings previously disclosed company learned prosecution office milan italy investigating interactions company’s italian subsidiary certain employees subsidiary certain italian health care providers company understands part larger investigation involving engagements various health care companies health care providers company cooperating investigation previously disclosed united kingdom uk competition markets authority cma issued statement objections company msd sharp dohme limited msd uk may 2017 statement objections cma alleges msd uk abused dominant position discount program remicade period march 2015 february 2016 company msd uk contesting cma’s allegations previously disclosed company received investigative subpoena california insurance commissioner’s fraud bureau seeking information january 1 2007 present related pricing promotion cubicin bureau investigating whether cubist pharmaceuticals inc company acquired 2015 unlawfully induced presentation false claims cubicin private insurers california insurance code false claims act company cooperating investigation previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate previously disclosed time company receives inquiries subject preliminary investigation activities competition governmental authorities markets outside united states authorities may include regulators administrative authorities law enforcement similar officials preliminary investigation activities may include site visits formal informal requests demands documents materials inquiries interviews similar matters certain preliminary inquiries activities may lead commencement formal proceedings determined adversely company monetary fines andor remedial undertakings may required commercial litigation zetia antitrust litigation previously disclosed merck msd schering corporation msp singapore company llc collectively merck defendants putative class action optout lawsuits filed 2018 behalf direct indirect purchasers zetia alleging violations federal state antitrust laws well state statutory common law causes action cases consolidated pretrial purposes federal multidistrict litigation judge rebecca beach smith eastern district virginia december 6 2018 court denied merck defendants’ motions dismiss stay direct purchaser putative class actions pending bilateral arbitration february 6 2019 magistrate judge issued report recommendation recommending district judge grant part deny part defendants’ motions dismiss nonarbitration issues february 20 2019 defendants retailer optout plaintiffs filed objections report recommendation responses filed parties await decision district judge rotavirus vaccines antitrust litigation previously disclosed msd defendant putative class action lawsuits filed 2018 behalf direct purchasers rotateq alleging violations federal antitrust laws cases consolidated eastern district pennsylvania january 23 2019 court denied msd’s motions compel arbitration dismiss consolidated complaint february 19 2019 msd appealed court’s order arbitration third circuit february 22 2019 court granted msd’s motion vacate existing deadlines district court light appeal sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company us district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws january 2014 plaintiffs filed amended complaint adding four additional named plaintiffs october 2014 court denied company’s motion dismiss strike class claims premature september 2015 plaintiffs filed additional motions including motion conditional certification equal pay act motion amend pleadings seeking add erisa constructive discharge claims company subsidiary named defendant motion equitable relief merck filed papers opposition motions april 2016 court granted plaintiff’s motion conditional certification denied plaintiffs’ motions extend liability period equal pay act claims back june 2009 april 2016 magistrate judge granted plaintiffs’ request amend complaint add following company subsidiary corporate defendant ii erisa claim iii individual constructive discharge claim one named plaintiffs approximately 700 individuals optedin action optin period closed august 2017 plaintiffs filed motion class certification motion sought certify title vii pay discrimination class also sought final collective action certification plaintiffs’ equal pay act claim october 1 2018 parties entered agreement fully resolve smith sales force litigation part settlement exchange full general release individual class claims company agreed pay 85 million settlement agreement contains “optout” clause allowing merck pull agreement 30 individuals opt subject court approval december 18 2018 plaintiffs filed motion court seeking preliminary approval settlement qui tam litigation previously disclosed june 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition previously disclosed two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery ongoing company continues defend lawsuits merck kgaa litigation previously disclosed january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa historically operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france uk germany switzerland mexico india australia singapore hong kong china alleging among things unfair competition trademark infringement andor corporate name infringement uk australia singapore hong kong india kgaa also alleges breach parties’ coexistence agreement december 2015 paris court first instance issued judgment finding certain activities company directed towards france constitute trademark infringement unfair competition activities found infringe constitute unfair competition company kgaa appealed decision appeal heard may 2017 june 2017 french appeals court held certain activities company directed france constituted unfair competition trademark infringement december 2017 company decided pursue appeal january 2016 uk high court issued judgment finding company breached coexistence agreement infringed kgaa’s trademark rights result certain activities directed towards uk based use word merck promotional information activity noted uk decision finding based company’s use sign merck connection sale products material pharmaceutical business transacted uk company kgaa appealed decision appeal heard june 2017 november 2017 uk court appeals affirmed decision coexistence agreement remitted rehearing issues trademark infringement scope kgaa’s uk trademarks pharmaceutical products relief kgaa would entitled rehearing held decision handed november 2018 district court hamburg germany dismissed kgaa’s claims concerning kgaa’s eu trademark respect territory eu accordance judgment court justice eu delivered october 2017 district court hamburg held jurisdiction claim kgaa insofar claim related territory uk kgaa appealed decision decisions district court hamburg germany connection claims concerning kgaa’s eu trademark german trademark trade name rights well unfair competition law respect territory germany expected february 28 2019 january 2019 mexican trademark office issued decision kgaa’s action court found trademark infringement company dismissed kgaa’s claims trademark infringement court ruled company kgaa’s unfair competition claim kgaa company appealed decision patent litigation time generic manufacturers pharmaceutical products file abbreviated ndas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges inegy patents protecting inegy europe expired supplemental protection certificates spcs granted company many european countries expire april 2019 multiple challenges spcs related inegy throughout europe generic products launched austria france italy ireland spain portugal germany netherlands company filed preliminary injunctions many countries still pending decision preliminary injunctions presently force austria czech republic greece norway portugal slovakia preliminary injunctions denied revoked germany ireland netherlands spain company appealing decisions france belgium preliminary injunctions granted companies denied others appeals pending spc held valid merits proceedings portugal france company filed continue file actions patent infringement seeking damages companies launch generic products april 2019 noxafil august 2015 company filed lawsuit actavis laboratories fl inc actavis united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil october 2017 district court held patent valid infringed actavis appealed decision appeal pending parties reached settlement subject certain terms agreement met whereby actavis launch generic version prior expiry patent pediatric exclusivity certain conditions march 2016 company filed lawsuit roxane laboratories inc roxane united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil november 2017 parties reached settlement whereby roxane launch generic version prior expiry patent certain conditions february 2016 company filed lawsuit par sterile products llc par pharmaceutical inc par pharmaceutical companies inc par pharmaceutical holdings inc collectively par united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil injection october 2016 parties reached settlement whereby par launch generic version january 2023 earlier certain conditions february 2018 company filed lawsuit fresenius kabi usa llc fresenius united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil november 2018 company reached settlement fresenius whereby fresenius launch generic version intravenous product prior expiry patent certain conditions march 2018 company filed lawsuit mylan laboratories limited united states respect company’s application fda seeking prepatent expiry approval sell generic version noxafil nasonex lost market exclusivity united states 2016 prior april 2015 company filed patent infringement lawsuit apotex inc apotex corp apotex respect apotex’s marketed product company believed infringing january 2018 company apotex settled matter apotex agreeing pay company 115 million plus certain consideration januvia janumet xr february 2019 par pharmaceutical inc par pharmaceutical filed suit company us district court district new jersey seeking declaratory judgment invalidity patent owned company covering certain salt polymorphic forms sitagliptin expires 2026 judgment favor may allow par pharmaceutical bring market generic version janumet xr following expiration key patent protection 2022 prior expiration latergranted patent challenging response company filed patent infringement lawsuit us district court district delaware par pharmaceutical additional companies also indicated intent market generic versions januvia janumet xr following expiration key patent protection 2022 prior expiration latergranted patent owned company covering certain salt polymorphic forms sitagliptin expires 2026 later granted patent owned company covering janumet formulation expires 2028 schedule cases set court gilead patent litigation opposition company idenix pharmaceuticals inc subsidiary pending litigation gilead united states germany france based different patent estates would infringed gilead’s sales two products sovaldi harvoni gilead opposed european patent european patent office epo trial united states held december 2016 jury returned verdict company awarding damages 254 billion company submitted posttrial motions including issues enhanced damages future royalties gilead submitted posttrial motions judgment matter law hearing motions held september 2017 also september 2017 court denied company’s motion enhanced damages granted motion prejudgment interest deferred motion future royalties february 2018 court granted gilead’s motion judgment matter law found patent invalid lack enablement company appealed decision appellate briefing completed company waiting oral argument scheduled epo opposition division revoked european patent company appealed decision cases france germany stayed pending final decision epo litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2018 2017 approximately 245 million 160 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters previously disclosed merck’s facilities oss netherlands inspected 2012 province brabant province pursuant dutch hazards major accidents decree sites’ environmental permits province issued penalties alleged violations regulations governing preventing managing accidents hazardous substances government also issued fine alleged environmental violations one oss facilities together totaled 235 thousand company subsequently advised criminal investigation initiated based upon certain issues formed basis administrative enforcement action province previously disclosed matter settled without admission liability aggregate payment €400 thousand company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 71 million 82 million december 31 2018 2017 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 60 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 12 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans october 25 2018 company entered accelerated share repurchase asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers october 29 2018 funded existing cash investments well shortterm borrowings payments dealers recorded reductions shareholders’ equity consisting 4 billion increase treasury stock reflects value initial 567 million shares received october 29 2018 1 billion decrease otherpaidin capital reflects value stock held back dealers pending final settlement number shares merck’s common stock merck may receive may required remit upon final settlement asr agreements based upon average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount final settlement transaction asr agreements expected occur first half 2019 may occur earlier option dealers later certain circumstances merck obligated make adjustment payments dealers asr agreements merck may elect satisfy obligations cash shares merck’s common stock 13 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2018 111 million shares collectively authorized future grants company’s sharebased compensation plans awards settled primarily treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus psus dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period subject terms applicable awards psu awards generally vest three years prior 2018 rsu awards generally vested three years beginning awards granted 2018 rsu awards generally vest onethird year threeyear period total pretax sharebased compensation cost recorded 2018 2017 2016 348 million 312 million 300 million respectively related income tax benefits 55 million 57 million 92 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2018 2017 2016 5815 6388 5463 per option respectively weighted average fair value options granted 2018 2017 2016 826 704 589 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2018 560 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 14 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost credit pension postretirement benefit plans consisted following components changes net periodic benefit cost credit year pension plans largely attributable changes discount rate affecting net loss amortization connection restructuring actions see note 5 termination charges recorded 2018 2017 2016 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded pension postretirement benefit plans settlements recorded certain us international pension plans reflected table components net periodic benefit cost credit service cost component included income expense net see note 15 exception certain amounts termination benefits curtailments settlements recorded restructuring costs event giving rise termination benefits curtailment settlement related restructuring actions noted obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows 1 actuarial gains losses 2018 2017 primarily reflect changes discount rates december 31 2018 2017 accumulated benefit obligation 190 billion 205 billion respectively pension plans 104 billion 115 billion respectively related us pension plans information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2018 2017 826 million 488 million respectively approximately 5 2 respectively company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2018 2017 2 plans’ level 3 investments real estate funds generally valued market appraisals underlying investments funds 3 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2018 2017 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 50 us equities 15 30 international equities 30 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 11 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2019 approximately 50 million us pension plans approximately 150 million international pension plans approximately 15 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net periodic benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net periodic benefit cost 2019 204 million 62 million respectively pension plans 141 million 50 million respectively relates us pension plans 7 million 78 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis expected rate return within plan developed considering longterm historical returns data current market conditions actual returns plan assets using reference information longterm return expectations asset category weighted average expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2019 expected rate return company’s us pension postretirement benefit plans range 770 810 compared range 770 830 2018 decrease primarily due modest shift asset allocation change weightedaverage expected return us pension postretirement benefit plan assets 2016 2018 due relative weighting referenced plans’ assets health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2018 2017 2016 136 million 131 million 126 million respectively 15 income expense net income expense net consisted 1 includes net realized unrealized gains losses investments equity securities either owned directly ownership interests investment funds income investments equity securities net 2018 reflects recognition unrealized net gains pursuant prospective adoption asu 201601 january 1 2018 see note 2 increase income investments equity securities net 2017 driven primarily higher realized gains sales net presented table 2018 includes gain 115 million related settlement certain patent litigation see note 11 income 99 million related astrazeneca’s option exercise see note 9 gain 85 million resulting receipt milestone payment outlicensed migraine clinical development program net 2018 also includes 144 million goodwill impairment charges related certain businesses healthcare services segment see note 8 well 41 million charges related writedown assets held sale fair value anticipation dissolution company’s joint venture supera farma laboratorios sa brazil net 2017 includes income 232 million related astrazeneca’s option exercise 191 million loss extinguishment debt see note 10 net 2016 includes charge 625 million related previously disclosed settlement worldwide patent litigation related keytruda gain 117 million related settlement patent litigation gains 100 million resulting receipt milestone payments outlicensed migraine clinical development programs 98 million income related astrazeneca’s option exercise interest paid 777 million 2018 723 million 2017 686 million 2016 16 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effects losses foreign subsidiaries miscellaneous items company’s 2017 effective tax rate reflected provisional impact 403 tax cuts jobs act tcja enacted december 22 2017 among provisions tcja reduced us federal corporate statutory tax rate 35 21 effective january 1 2018 requires companies pay onetime transition tax undistributed earnings certain foreign subsidiaries creates new taxes certain foreign sourced earnings company reflected impact tcja 2017 financial statements however since application certain provisions tcja remained subject interpretation certain instances company made reasonable estimates effects tcja 2018 amounts finalized described onetime transition tax based company’s post1986 undistributed earnings profits ep substantial portion undistributed ep company previously provided deferred taxes earnings deemed merck retained indefinitely subsidiary companies reinvestment company recorded provisional amount 2017 onetime transition tax liability 53 billion provisional amount reduced reversal 20 billion deferred taxes previously recorded connection merger scheringplough corporation 2009 certain undistributed foreign ep basis revised calculations post1986 undistributed foreign ep finalization amounts held cash specified assets company recognized measurementperiod adjustment 124 million 2018 related transition tax obligation corresponding adjustment income tax expense period resulting revised transition tax obligation 55 billion company anticipates able utilize certain foreign tax credits partially reduce transition tax payment permitted tcja company elected pay onetime transition tax period eight years payment amount due 2018 remaining transition tax liability december 31 2018 49 billion 275 million included income taxes payable remainder 46 billion included noncurrent liabilities result tcja company made determination longer indefinitely reinvested respect undistributed earnings foreign subsidiaries provided deferred tax liability withholding tax would apply 2017 company remeasured deferred tax assets liabilities new federal statutory tax rate 21 resulted provisional deferred tax benefit 779 million basis clarifications deferred tax benefit calculation company recorded measurementperiod adjustments 2018 32 million related deferred income taxes beginning 2018 tcja includes tax “global intangible lowtaxed income” gilti defined tcja company made accounting policy election account tax effects gilti tax income tax provision future periods tax arises foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants begin expire 2022 earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared us statutory rate 35 2017 2016 21 2018 foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared us statutory rate 35 2017 2016 21 2018 income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss nol carryforwards several jurisdictions december 31 2018 715 million deferred taxes nol carryforwards relate foreign jurisdictions valuation allowances 13 billion established foreign nol carryforwards foreign deferred tax assets company nol carryforwards relating us jurisdictions income taxes paid 2018 2017 2016 15 billion 49 billion 18 billion respectively tax benefits relating stock option exercises 77 million 2018 73 million 2017 147 million 2016 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs discussed company recognize unrecognized tax benefits 19 billion december 31 2018 income tax provision would reflect favorable net impact 18 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2018 could decrease approximately 750 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures expenses interest penalties associated uncertain tax positions amounted 51 million 2018 183 million 2017 134 million 2016 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 372 million 341 million december 31 2018 2017 respectively 2017 internal revenue service irs concluded examinations merck’s 20062011 us federal income tax returns result company required make payment approximately 28 billion company’s reserves unrecognized tax benefits years examination exceeded adjustments relating examination period therefore company recorded net 234 million tax benefit 2017 net benefit reflects reductions reserves unrecognized tax benefits tax positions relating years examination partially offset additional reserves tax positions previously reserved well adjustments reserves unrecognized tax benefits relating years remain open examination affected settlement irs currently conducting examinations company’s tax returns years 2012 2014 addition various state foreign tax examinations progress jurisdictions company’s income tax returns open examination period 2003 2018 17 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2018 2017 2016 6 million 5 million 13 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 18 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 2017 2016 amounts included investments debt equity securities however result adoption asu 201601 see note 2 2018 amounts relate investments availableforsale debt securities 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 14 4 includes pension plan net loss 44 billion 35 billion december 31 2018 2017 respectively postretirement benefit plan net gain loss 170 million 16 million december 31 2018 2017 respectively well pension plan prior service credit 314 million 326 million december 31 2018 2017 respectively postretirement benefit plan prior service credit 375 million 383 million december 31 2018 2017 respectively 19 segment reporting company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments animal health segment met criteria separate reporting became reportable segment 2018 pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccine sales made us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles sales vaccines major european markets marketed company’s spmsd joint venture termination december 31 2016 see note 9 animal health segment discovers develops manufactures markets animal health products including pharmaceutical vaccine products prevention treatment control disease major livestock companion animal species company sells veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 see note 9 sales company’s products follows us plus international may equal total due rounding 1 december 31 2016 merck sanofi terminated equallyowned joint venture spmsd marketed vaccines major european markets see note 9 accordingly vaccine sales 2018 2017 include sales european markets previously part spmsd amounts 2016 include sales vaccines sold spmsd results reflected equity income affiliates included income expense net amounts 2016 however include supply sales spmsd 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments healthcare services alliances 4 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2018 2017 2016 also includes approximately 95 million 85 million 170 million respectively related sale marketing rights certain products consolidated revenues geographic area derived follows reconciliation segment profits income taxes follows pharmaceutical segment profits comprised segment sales less standard costs well selling general administrative expenses research development costs directly incurred segment animal health segment profits comprised segment sales less cost sales well selling general administrative expenses research development costs directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred merck research laboratories company’s research development division focuses human healthrelated activities general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill intangible asset impairment charges gains losses sales businesses expense income related changes estimated fair value liabilities contingent consideration miscellaneous income expense items 2018 company adopted new accounting standard related classification certain defined benefit plan costs see note 2 resulted change measurement segment profits net periodic benefit cost credit service cost longer included component segment profits prior period amounts recast conform new presentation equity income loss affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors stockholders merck co inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets merck co inc subsidiaries “company” december 31 2018 2017 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2018 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts retirement benefits 2018 basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 27 2019 served company’s auditor since 2002 b supplementary data selected quarterly financial data 2018 2017 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2017 include provisional net tax charge related enactment us tax legislation see note 16 2 amounts 2017 include charge related formation collaboration astrazeneca see note 4 3 amounts 2018 include charge related formation collaboration eisai see note 4 amounts 2018 2017 reflect acquisition divestiturerelated costs see note 8 impact restructuring actions see note 5 amounts recast result adoption january 1 2018 new accounting standard related classification certain defined benefit plan costs impact net income result adopting new accounting standard see note 2 item 9item 8financial statements supplementary data afinancial statements consolidated balance sheet merck co inc subsidiaries december 31 2020 2019 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2020 notes consolidated financial statements report dated february 25 2021 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include two operating segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers company previously healthcare services segment provided services solutions focused engagement health analytics clinical services improve value care delivered patients company divested remaining businesses segment first quarter 2020 company previously alliances segment primarily included activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 planned spinoff women’s health biosimilars established brands new company february 2020 merck announced intention spinoff products women’s health biosimilars established brands businesses new independent publicly traded company named organon co organon distribution organon’s publicly traded stock company shareholders distribution expected qualify taxfree company shareholders us federal income tax purposes established brands included transaction consist dermatology nonopioid pain management respiratory select cardiovascular products including zetia vytorin well rest merck’s diversified brands franchise merck’s existing research pipeline programs continue owned developed within merck planned organon development capabilities initially focused latestage development lifecycle management expected time develop research capabilities selected therapeutic areas spinoff expected completed late second quarter 2021 subject market certain conditions subsequent spinoff historical results women’s health biosimilars established brands businesses reflected discontinued operations company’s consolidated financial statements 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired inprocess research development iprd alternative future use charged expense contingent consideration recognized acquisition date foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost net realizable value cost substantial majority us pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt securities classified availableforsale reported fair value fair values company’s investments marketable debt securities determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt securities included income expense net investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net revenue recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile interpretation allows companies recognize revenue sales vaccines us government stockpiles even though sales might meet criteria revenue recognition accounting guidance certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covering chargebacks rebates 131 billion 2020 118 billion 2019 107 billion 2018 chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 249 million 29 billion respectively december 31 2020 233 million 22 billion respectively december 31 2019 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically 36 days receipt invoice us animal health customers typically 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms see note 18 disaggregated revenue disclosures depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 17 billion 2020 17 billion 2019 14 billion 2018 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 20 billion 2020 21 billion 2019 21 billion 2018 software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development costs included property plant equipment addition company capitalizes certain costs incurred implement cloud computing arrangement considered service agreement included assets capitalized software costs amortized periods ranging 3 10 years longer lives generally associated enterprisewide projects implemented multiple years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangibles acquired intangibles include products product rights licenses trade names patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 2 24 years see note 8 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development iprd company acquires conjunction acquisition business represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination thenuseful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company evaluates iprd impairment least annually frequently impairment indicators exist performing quantitative test compares fair value iprd intangible asset carrying value fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales transaction accounted acquisition business fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingency resolved contingent consideration liability remeasured current fair value changes either expense income recorded earnings significant events increase decrease probability achieving development regulatory milestones increase decrease projected cash flows result corresponding increases decreases fair values related contingent consideration obligations transaction accounted acquisition asset rather business contingent consideration recognized acquisition date instances product development milestones recognized upon achievement salesbased milestones recognized milestone deemed probable company achieved research development research development expensed incurred nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration research development expenses also include upfront milestone payments related asset acquisitions licensing transactions involving clinical development programs yet received regulatory approval collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners merck principal sales transactions third parties company recognizes sales cost sales selling general administrative expenses gross basis profit sharing amounts pays collaborative partners recorded within cost sales collaborative partner principal sales transactions third parties company records profit sharing amounts received collaborative partners alliance revenue within sales alliance revenue recorded net cost sales includes adjustment share commercialization costs partners accordance collaboration agreement adjustment determined comparing commercialization costs merck incurred directly reported within selling general administrative expenses costs collaborative partner incurred research development costs merck incurs related collaborations recorded within research development expenses cost reimbursements collaborative partner payments received collaborative partner share costs pursuant terms collaboration agreements recorded increases decreases research development expenses addition terms collaboration agreements may require company make payments based upon achievement certain developmental regulatory approval commercial milestones upfront milestone payments payable merck collaborative partners prior regulatory approval expensed incurred included research development expenses payments due collaborative partners upon subsequent regulatory approval capitalized amortized estimated useful life corresponding intangible asset cost sales provided future cash flows support amounts capitalized salesbased milestones payable merck collaborative partners accrued capitalized subject cumulative amortization catchup probable achieved amortization catchup calculated either time first regulatory approval indications unapproved time collaboration formed time formation collaboration approved products related intangible asset recognized amortized cost sales remaining useful life subject impairment testing sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income company accounts tax effects tax global intangible lowtaxed income gilti certain foreign subsidiaries income tax provision period tax arises use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards june 2016 financial accounting standards board fasb issued new guidance accounting credit losses financial instruments new guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries company adopted new guidance effective january 1 2020 impact company’s consolidated financial statements upon adoption november 2018 fasb issued new guidance collaborative arrangements intended reduce diversity practice clarifying whether certain transactions collaborative arrangement participants accounted revenue recognition guidance asc 606 company retrospectively adopted new guidance effective january 1 2020 resulted minor changes presentation information related company’s collaborative arrangements see note 4 note 18 december 2019 fasb issued amended guidance accounting reporting income taxes guidance intended simplify accounting income taxes removing exceptions related certain intraperiod tax allocations deferred tax liabilities clarifying guidance primarily related evaluating stepup tax basis goodwill business combination reflecting enacted changes tax laws rates annual effective tax rate company adopted new guidance effective january 1 2021 impact company’s consolidated financial statements upon adoption january 2020 fasb issued new guidance intended clarify certain interactions accounting standards related equity securities equity method investments certain derivatives guidance addresses accounting transition equity method accounting measuring certain purchased options forward contracts acquire investments company adopted new guidance effective january 1 2021 impact company’s consolidated financial statements upon adoption recently issued accounting standard yet adopted march 2020 fasb issued optional guidance ease potential burden accounting recognizing effects reference rate reform financial reporting subsequently issued clarifying amendments guidance provides optional expedients exceptions applying gaap contracts hedging relationships transactions reference london interbank offered rate libor another reference rate expected discontinued reference rate reform optional guidance effective upon issuance applied prospective basis time january 1 2020 december 31 2022 company currently evaluating impact adoption consolidated financial statements 3 acquisitions divestitures research collaborations license agreements company continues pursue acquisitions establishment external alliances research collaborations licensing agreements complement internal research capabilities arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share arrangements contingent upon occurrence certain future events linked success asset development company also reviews marketed products pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain assets pro forma financial information acquired businesses presented historical financial results acquired entity significant compared company’s financial results 2020 transactions december 2020 merck acquired oncoimmune privately held clinicalstage biopharmaceutical company upfront payment 423 million addition oncoimmune shareholders eligible receive 255 million future contingent regulatory approval milestone payments tiered royalties ranging 10 20 oncoimmune’s lead therapeutic candidate mk7110 also known cd24fc evaluated treatment patients hospitalized coronavirus disease 2019 covid19 transaction accounted acquisition asset agreement prior completion acquisition oncoimmune spunout certain rights assets unrelated mk7110 program new entity owned existing shareholders oncoimmune connection closing acquisition merck invested 50 million 20 ownership interest new entity valued 33 million resulting 17 million premium merck also recognized net liabilities 22 million company recorded research development expenses 462 million 2020 related transaction also december 2020 merck acquired velosbio inc velosbio privately held clinicalstage biopharmaceutical company 28 billion velosbio’s lead investigational candidate mk2140 formerly known vls101 antibodydrug conjugate targeting receptor tyrosine kinaselike orphan receptor 1 ror1 currently evaluated treatment patients hematologic malignancies solid tumors transaction accounted acquisition asset merck recorded net assets 180 million primarily cash research development expenses 27 billion 2020 related transaction september 2020 merck seagen inc seagen formerly known seattle genetics inc announced oncology collaboration globally develop commercialize seagen’s ladiratuzumab vedotin mk6440 investigational antibodydrug conjugate targeting liv1 currently phase 2 clinical trials breast cancer solid tumors collaboration pursue broad joint development program evaluating ladiratuzumab vedotin monotherapy combination keytruda pembrolizumab triplenegative breast cancer hormone receptorpositive breast cancer liv1expressing solid tumors companies equally share profits worldwide terms agreement merck made upfront payment 600 million 10 billion equity investment 5 million shares seagen common stock price 200 per share merck recorded 616 million research development expenses 2020 related transaction reflecting upfront payment well 16 million premium relating equity shares based price seagen common stock closing date seagen also eligible receive future contingent milestone payments 26 billion including 850 million development milestones 175 billion salesbased milestones concurrent transaction seagen granted merck exclusive license commercialize tukysa tucatinib small molecule tyrosine kinase inhibitor treatment her2positive cancers asia middle east latin america regions outside united states canada europe merck responsible marketing applications seeking approval territories supported positive results her2climb clinical trial merck also cofund portion tukysa global development plan encompasses several ongoing planned trials across her2positive cancers including breast colorectal gastric cancers set forth global product development plan merck solely fund conduct countryspecific clinical trials necessary support anticipated regulatory applications territories terms agreement merck made upfront payments aggregating 210 million recorded research development expenses 2020 seagen also eligible receive future contingent regulatory approval milestones 65 million receive tiered royalties ranging 20 33 based annual sales levels tukysa merck’s territories additionally september 2020 merck acquired biologics manufacturing facility located dunboyne ireland takeda pharmaceutical company limited €256 million 302 million transaction accounted acquisition asset merck recorded property plant equipment 289 million net assets 13 million future contingent payments associated acquisition july 2020 merck acquired us rights sentinel flavor tabs sentinel spectrum chews virbac corporation 410 million sentinel products provide protection common parasites dogs transaction accounted acquisition asset merck recognized intangible assets 401 million related currently marketed products inventory 9 million acquisition date estimated fair values identifiable intangible assets related currently marketed products determined using income approach actual cash flows likely different assumed intangible assets related currently marketed products amortized estimated useful lives 15 years future contingent payments associated acquisition also july 2020 merck ridgeback biotherapeutics lp ridgeback bio closely held biotechnology company closed collaboration agreement develop molnupiravir mk4482 also known eidd2801 orally available antiviral candidate clinical development treatment patients covid19 merck gained exclusive worldwide rights develop commercialize molnupiravir related molecules terms agreement ridgeback bio received upfront payment also eligible receive future contingent payments dependent upon achievement certain developmental regulatory approval milestones well share net profits molnupiravir related molecules approved merck ridgeback committed ensure medicines developed sarscov2 causative agent covid19 accessible affordable globally june 2020 merck acquired privately held themis bioscience gmbh themis company focused vaccines including covid19 vaccine candidate v591 immunemodulation therapies infectious diseases cancer 366 million acquisition originally provided merck make additional contingent payments 740 million transaction accounted acquisition business company determined fair value contingent consideration 97 million acquisition date utilizing probabilityweighted estimated cash flow stream using appropriate discount rate dependent nature timing milestone payments merck recognized intangible assets iprd 136 million cash 59 million deferred tax assets 70 million net liabilities 32 million excess consideration transferred fair value net assets acquired 230 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach actual cash flows likely different assumed january 2021 company announced discontinuing development v591 discussed result 2020 company recorded iprd impairment charge 90 million within research development expenses company also recorded reduction research development expenses resulting decrease related liability contingent consideration 45 million since future contingent milestone payments reduced 450 million aggregate including 60 million development milestones 196 million regulatory approval milestones 194 million commercial milestones may 2020 merck international aids vaccine initiative inc iavi nonprofit scientific research organization dedicated addressing urgent unmet global health challenges announced collaboration develop v590 investigational vaccine sarscov2 studied prevention covid19 agreement provided upfront payment merck 65 million also provided future contingent payments based sales merck also signed agreement biomedical advanced research development authority barda part office assistant secretary preparedness response within agency united states department health human services provide initial funding support merck effort january 2021 company announced discontinuing development v590 discussed january 2021 company announced discontinuation development programs covid19 vaccine candidates v590 v591 following merck’s review findings phase 1 clinical studies vaccines studies v590 v591 generally well tolerated immune responses inferior seen following natural infection reported sarscov2covid19 vaccines due discontinuation company recorded charge 305 million 2020 260 million reflected cost sales related fixedasset materials writeoffs well recognition liabilities purchase commitments remaining 45 million costs reflected research development expenses represent amounts related themis acquisition noted iprd impairment charge partially offset reduction related liability contingent consideration january 2020 merck acquired arqule inc arqule publicly traded biopharmaceutical company focused kinase inhibitor discovery development treatment patients cancer diseases total consideration paid 27 billion included 138 million sharebased compensation payments settle equity awards attributable precombination service cash paid transaction costs behalf arqule company incurred 95 million transaction costs directly related acquisition arqule consisting almost entirely sharebased compensation payments settle nonvested equity awards attributable postcombination service costs included selling general administrative expenses 2020 arqule’s lead investigational candidate mk1026 formerly known arq 531 novel oral bruton’s tyrosine kinase btk inhibitor currently evaluated treatment bcell malignancies transaction accounted acquisition business estimated fair value assets acquired liabilities assumed arqule follows 1 estimated fair value identifiable intangible asset related iprd determined using income approach future net cash flows discounted present value utilizing discount rate 125 actual cash flows likely different assumed 2 goodwill allocated pharmaceutical segment deductible tax purposes 2019 transactions july 2019 merck acquired peloton therapeutics inc peloton clinicalstage biopharmaceutical company focused development novel small molecule therapeutic candidates targeting hypoxiainducible factor2α hif2α treatment patients cancer nononcology diseases peloton’s lead candidate mk6482 formerly known pt2977 novel investigational oral hif2α inhibitor latestage development renal cell carcinoma merck made upfront payment 12 billion additionally former peloton shareholders eligible receive 50 million upon us regulatory approval 50 million upon first commercial sale united states 105 billion salesbased milestones transaction accounted acquisition asset merck recorded cash 157 million deferred tax liabilities 52 million net liabilities 4 million acquisition date well research development expenses 993 million 2019 related transaction april 1 2019 merck acquired antelliq corporation antelliq leader digital animal identification traceability monitoring solutions help veterinarians farmers pet owners gather critical data improve management health wellbeing livestock pets merck paid 23 billion acquire outstanding shares antelliq spent 13 billion repay antelliq’s debt transaction accounted acquisition business estimated fair value assets acquired liabilities assumed antelliq follows 1 estimated fair values identifiable intangible assets relate primarily trade names determined using income approach future net cash flows discounted present value utilizing discount rate 115 actual cash flows likely different assumed 2 goodwill recognized largely attributable anticipated synergies expected arise acquisition allocated animal health segment goodwill deductible tax purposes company’s results 2019 include eight months activity antelliq company’s results 2020 include 13 months activity company incurred 47 million transaction costs directly related acquisition antelliq consisting largely advisory fees reflected selling general administrative expenses 2019 also april 2019 merck acquired immune design latestage immunotherapy company employing nextgeneration vivo approaches enable body’s immune system fight disease 301 million cash transaction accounted acquisition business merck recognized intangible assets 156 million cash 83 million net assets 42 million excess consideration transferred fair value net assets acquired 20 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach actual cash flows likely different assumed 2018 transactions 2018 company recorded aggregate charge 423 million within cost sales conjunction termination collaboration agreement entered 2014 samsung bioepis co ltd samsung insulin glargine charge reflects termination payment 155 million represents reimbursement fees previously paid samsung merck agreement plus interest well release merck’s ongoing obligations agreement charge also included fixed asset abandonment charges 137 million inventory writeoffs 122 million well related costs 9 million termination agreement impact company’s collaboration samsung june 2018 merck acquired viralytics limited viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 502 million 378 million transaction provided merck full rights v937 formerly known cva21 investigational oncolytic immunotherapy transaction accounted acquisition asset merck recorded net assets 34 million primarily cash acquisition date research development expenses 344 million 2018 related transaction future contingent payments associated acquisition march 2018 merck eisai co ltd eisai entered strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai see note 4 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey remicade lost market exclusivity major european markets 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj company’s marketing rights respect products revert janssen pharmaceuticals inc second half 2024 4 collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners parties arrangements active participants exposed significant risks rewards dependent commercial success activities collaboration merck’s significant collaborative arrangements discussed astrazeneca july 2017 merck astrazeneca plc astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza olaparib multiple cancer types lynparza oral poly adpribose polymerase parp inhibitor currently approved certain types advanced ovarian breast pancreatic prostate cancers companies jointly developing commercializing lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines keytruda imfinzi companies also jointly developing commercializing astrazeneca’s koselugo selumetinib oral selective inhibitor mek part mitogenactivated protein kinase mapk pathway multiple indications april 2020 koselugo approved us food drug administration fda treatment pediatric patients two years age older neurofibromatosis type 1 symptomatic inoperable plexiform neurofibromas terms agreement astrazeneca merck share development commercialization costs lynparza koselugo monotherapy nonpdl1pd1 combination therapy opportunities profits lynparza koselugo product sales generated monotherapies combination therapies shared equally merck fund development commercialization costs keytruda combination lynparza koselugo astrazeneca fund development commercialization costs imfinzi combination lynparza koselugo astrazeneca principal lynparza koselugo sales transactions merck records share lynparza koselugo product sales net cost sales commercialization costs alliance revenue share development costs associated collaboration part research development expenses reimbursements received astrazeneca research development expenses recognized reductions research development costs part agreement merck made upfront payment astrazeneca 16 billion 2017 made payments 750 million multiyear period certain license options 250 million paid december 2017 400 million paid december 2018 100 million paid december 2019 upfront payment license option payments reflected research development expenses 2017 addition agreement provides additional contingent payments merck astrazeneca related successful achievement salesbased regulatory milestones 2020 merck determined probable sales lynparza future would trigger 400 million salesbased milestone payments merck astrazeneca accordingly merck recorded 400 million liabilities corresponding increases intangible asset related lynparza prior 2020 merck accrued salesbased milestone payments aggregating 10 billion related lynparza 550 million 200 million 250 million paid astrazeneca 2020 2019 2018 respectively potential future salesbased milestone payments 27 billion yet accrued deemed company probable time 2020 2019 2018 lynparza received regulatory approvals triggering capitalized milestone payments 160 million 60 million 140 million respectively aggregate merck astrazeneca potential future regulatory milestone payments 14 billion remain agreement intangible asset balance related lynparza includes capitalized salesbased regulatory milestone payments 13 billion december 31 2020 included intangibles net amount amortized estimated useful life 2028 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 represents amortization capitalized milestone payments 2 includes accrued milestone payments eisai march 2018 merck eisai co ltd eisai announced strategic collaboration worldwide codevelopment cocommercialization lenvima lenvatinib orally available tyrosine kinase inhibitor discovered eisai lenvima currently approved treatment certain types thyroid cancer hepatocellular carcinoma combination everolimus certain patients renal cell carcinoma combination keytruda treatment certain patients endometrial carcinoma agreement merck eisai develop commercialize lenvima jointly monotherapy combination keytruda eisai records lenvima product sales globally eisai principal lenvima sales transactions merck eisai share applicable profits equally merck records share lenvima product sales net cost sales commercialization costs alliance revenue expenses incurred codevelopment shared two companies accordance collaboration agreement reflected research development expenses certain expenses incurred solely merck eisai shareable collaboration agreement including costs incurred excess agreed upon caps costs related certain combination studies keytruda lenvima agreement merck made upfront payment eisai 750 million 2018 agreed make payments 650 million certain option rights 2021 325 million paid march 2019 200 million paid march 2020 125 million expected paid march 2021 company recorded aggregate charge 14 billion research development expenses 2018 related upfront payment future option payments addition agreement provides additional contingent payments merck eisai related successful achievement salesbased regulatory milestones 2020 merck determined probable sales lenvima future would trigger salesbased milestone payments aggregating 400 million merck eisai accordingly merck recorded liabilities 400 million corresponding increases intangible asset related lenvima prior 2020 merck accrued salesbased milestone payments aggregating 950 million related lenvima 500 million 50 million paid eisai 2020 2019 respectively potential future salesbased milestone payments 26 billion yet accrued deemed company probable time 2020 2018 lenvima received regulatory approvals triggering capitalized milestone payments 10 million 250 million respectively merck eisai potential future regulatory milestone payments 125 million remain agreement intangible asset balance related lenvima includes capitalized salesbased regulatory milestone payments 11 billion december 31 2020 included intangibles net amount amortized estimated useful life 2026 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 represents amortization capitalized milestone payments 2 amount 2018 includes 14 billion related upfront payment option payments 3 includes accrued milestone future option payments 4 includes accrued milestone payments bayer ag 2014 company entered worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including bayer’s adempas riociguat approved treat pulmonary arterial hypertension chronic thromboembolic pulmonary hypertension two companies implemented joint development commercialization strategy collaboration also includes clinical development bayer’s verquvo vericiguat approved fda january 2021 reduce risk cardiovascular death heart failure hospitalization following hospitalization heart failure need outpatient intravenous diuretics adults verquvo review regulatory authorities territories including eu japan agreement bayer commercializes adempas americas merck commercializes rest world verquvo merck commercialize united states bayer commercialize rest world companies share development costs profits sales merck records sales adempas record sales verquvo marketing territories well alliance revenue alliance revenue represents merck’s share profits sales bayer’s marketing territories product sales net cost sales commercialization costs addition agreement provides contingent payments merck bayer related successful achievement salesbased milestones prior 2020 merck accrued 725 million salesbased milestone payments collaboration 375 million 350 million paid bayer 2020 2018 respectively following 2021 fda approval verquvo noted merck determined probable sales adempas verquvo future would trigger remaining 400 million salesbased milestone payment accordingly merck record liability 400 million corresponding increase intangible assets related collaboration first quarter 2021 intangible asset balance related collaboration includes acquired intangible asset balance well capitalized salesbased milestone payments 849 million december 31 2020 included intangibles net amount amortized estimated useful life 2027 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 includes amortization intangible assets 2 represents accrued milestone payment 5 restructuring early 2019 merck approved new global restructuring program restructuring program part worldwide initiative focused optimizing company’s manufacturing supply network well reducing global real estate footprint program continuation company’s plant rationalization builds prior restructuring programs include actions associated planned spinoff organon company continues evaluate global footprint overall operating model subsequently identified additional actions restructuring program could identify actions time actions currently contemplated restructuring program expected substantially completed end 2023 cumulative pretax costs incurred company implement program estimated approximately 30 billion company estimates approximately 70 cumulative pretax costs result cash outlays primarily related employee separation expense facility shutdown costs approximately 30 cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company expects record charges approximately 700 million 2021 related restructuring program actions previous global restructuring programs substantially completed company recorded total pretax costs 883 million 2020 927 million 2019 658 million 2018 related restructuring program activities since inception restructuring program december 31 2020 merck recorded total pretax accumulated costs approximately 18 billion segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck recording accelerated depreciation revised useful life site assets anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2020 2019 2018 includes asset abandonment facility shutdown related costs well pretax gains losses resulting sales facilities related assets additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation following table summarizes charges spending relating restructuring program activities 1 remaining cash outlays expected substantially completed end 2023 6 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused changes foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen chinese renminbi achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge portion net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation unrealized gains losses contracts recorded foreign currency translation adjustment within oci remain aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded components changes fair value excluded components recognized oci company recognizes earnings initial value excluded components straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci effects company’s net investment hedges oci consolidated statement income shown 1 amounts reclassified aoci income related sale subsidiary interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk february 2020 five interest rate swaps notional amounts 250 million matured swaps effectively converted company’s 125 billion 185 fixedrate notes due 2020 variable rate debt december 31 2020 company party 14 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table 1 interest rate swaps matured january 2021 interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows table presents location amounts recorded consolidated balance sheet related cumulative basis adjustments fair value hedges december 31 presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information regarding location amount pretax gains losses derivatives designated fair value cash flow hedging relationships 1 interest expense component income expense net table provides information regarding income statement effects derivatives designated hedging instruments 1 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates 2 derivative contracts serve economic hedges forecasted transactions 3 derivatives serve economic hedges rising treasury rates december 31 2020 company estimates 331 million pretax net unrealized losses derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information investments debt equity securities december 31 follows 1 unrealized net gains recognized income expense net equity securities still held december 31 2020 163 million 2020 unrealized net gains recognized income expense net equity securities still held december 31 2019 160 million 2019 december 31 2020 2019 company also 586 million 420 million respectively equity investments without readily determinable fair values included assets 2020 2019 company recognized unrealized gains 62 million 20 million respectively income expense net certain equity investments based favorable observable price changes transactions involving similar investments investee addition 2020 2019 company recognized unrealized losses 3 million 13 million respectively income expense net related certain investments based unfavorable observable price changes cumulative unrealized gains cumulative unrealized losses based observable prices changes investments equity investments without readily determinable fair values 169 million 24 million respectively fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 investments included assets restricted use including payment benefits employee benefit plans 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant december 31 2020 2019 cash equivalents include 68 billion 89 billion respectively cash equivalents would considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration associated business acquisitions follows 1 recorded cost sales research development expenses income expense net includes cumulative translation adjustments 2 balance december 31 2020 includes 148 million recorded current liability amounts expected paid within next 12 months 3 december 31 2020 2019 711 million 625 million respectively liabilities relate termination sanofi pasteur msd joint venture 2016 part termination merck recorded liability contingent future royalty payments 115 net sales merck products previously sold joint venture december 31 2024 fair value liability determined utilizing estimated amount timing projected cash flows riskadjusted discount rate 8 present value cash flows additions contingent consideration 2020 relate acquisition themis changes estimated fair value liabilities contingent consideration 2020 2019 largely attributable increases liabilities recorded connection termination sanofi pasteur msd spmsd joint venture 2016 2020 increase partially offset decline related discontinuation covid19 vaccine program obtained acquisition themis payments contingent consideration years relate spmsd liabilities described fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2020 360 billion compared carrying value 318 billion december 31 2019 288 billion compared carrying value 263 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe china primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor global economic conditions including volatility associated international sovereign economies associated impacts financial markets business company’s customers largest accounts receivable balances mckesson corporation amerisourcebergen corporation cardinal health inc represented aggregate approximately 45 total accounts receivable december 31 2020 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales company accounts receivable factoring agreements financial institutions certain countries sell accounts receivable company factored 23 billion 27 billion accounts receivable fourth quarter 2020 2019 respectively factoring arrangements reduced outstanding accounts receivable cash received financial institutions reported within operating activities consolidated statement cash flows certain factoring arrangements ease administration company collect customer payments related factored receivables remits financial institutions december 31 2020 2019 company collected 102 million 256 million respectively behalf financial institutions reflected restricted cash current assets related obligation remit cash within accrued current liabilities company remitted cash financial institutions january 2021 2020 respectively net cash flows relating collections reported financing activities consolidated statement cash flows cost factoring accounts receivable de minimis derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty cash collateral advanced company counterparties 36 million december 31 2020 cash collateral received company various counterparties 34 million december 31 2019 obligation return collateral recorded accrued current liabilities 7 inventories december 31 consisted inventories valued lifo method comprised approximately 29 billion 26 billion december 31 2020 2019 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2020 2019 amounts included 19 billion 13 billion respectively inventories expected sold within one year addition amounts included 279 million 168 million december 31 2020 2019 respectively inventories produced preparation product launches 8 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses 531 million december 31 2020 2019 additions goodwill pharmaceutical segment 2020 primarily related acquisitions arqule themis see note 3 additions goodwill within animal health segment 2019 primarily relate acquisition antelliq see note 3 impairments goodwill within nonreportable segments 2019 relate certain businesses within healthcare services segment healthcare services segment fully divested first quarter 2020 intangibles december 31 consisted acquired intangibles include products product rights licenses trade names patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles net basis related human health marketed products included products product rights december 31 2020 include zerbaxa 551 million implanonnexplanon 354 million gardasilgardasil 9 276 million dificid 228 million bridion 185 million sivextro 154 million simponi 132 million additionally company 54 billion net acquired intangibles related animal health marketed products december 31 2020 25 billion relate primarily trade names obtained 2019 acquisition antelliq see note 3 company’s significant net intangible assets included licenses december 31 2020 include lynparza 13 billion lenvima 11 billion result collaborations astrazeneca eisai see note 4 december 31 2020 iprd primarily relates mk1026 obtained acquisition arqule 2020 see note 3 mk7264 gefapixant obtained acquisition afferent pharmaceuticals 2016 company intangible asset related collaboration bayer see note 4 carrying value 849 million december 31 2020 reflected “other” table 2020 company recorded impairment charge 16 billion within cost sales related zerbaxa injection combination antibacterial betalactamase inhibitor treatment certain bacterial infections december 2020 company temporarily suspended sales zerbaxa subsequently issued product recall following identification product sterility issues recall constituted triggering event requiring evaluation zerbaxa intangible asset impairment company revised cash flow forecasts zerbaxa utilizing certain assumptions around return market timeline anticipated uptake sales thereafter revised cash flow forecasts indicated zerbaxa intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related zerbaxa compared related carrying value resulted impairment charge noted company also wroteoff inventory 120 million cost sales 2020 related zerbaxa recall remaining intangible asset balance related zerbaxa 551 million december 31 2020 2019 company recorded impairment charges related marketed products intangibles 705 million amount 612 million related sivextro product treatment acute bacterial skin structure infections caused designated susceptible grampositive organisms part reorganization reprioritization internal sales force company made decision cease promotion sivextro us market end 2019 decision resulted reduced cash flow projections sivextro indicated sivextro intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related sivextro compared related carrying value resulted impairment charge noted iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life asset begin amortization 2020 company recorded 90 million iprd impairment charge within research development expenses related decision discontinue development program covid19 vaccine candidate v591 following merck’s review findings phase 1 clinical study vaccine study v591 generally well tolerated immune responses inferior seen following natural infection reported sarscov2covid19 vaccines discontinuation development program also resulted reversal related liability contingent consideration 45 million see note 6 2019 company recorded 172 million iprd impairment charges amount 155 million relates writeoff intangible asset balance programs obtained connection acquisition iomet pharma ltd following review clinical trial results conducted merck along external clinical trial results similar compounds discontinuation clinical development program also resulted reversal related liability contingent consideration 11 million 2018 company recorded 152 million iprd impairment charges amount 139 million relates writeoff remaining intangible asset balance program obtained connection smartcells acquisition following decision terminate program due product development issues discontinuation clinical development program also resulted reversal related liability contingent consideration 60 million iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense primarily recorded within cost sales 19 billion 2020 20 billion 2019 31 billion 2018 estimated aggregate amortization expense next five years follows 2021 15 billion 2022 15 billion 2023 14 billion 2024 13 billion 2025 12 billion 9 loans payable longterm debt leases loans payable loans payable december 31 2020 included 23 billion notes due 2021 40 billion commercial paper 73 million longdated notes subject repayment option holders loans payable december 31 2019 included 19 billion notes due 2020 14 billion commercial paper 226 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 079 223 years ended december 31 2020 2019 respectively longterm debt longterm debt december 31 consisted presented table includes 294 million 147 million december 31 2020 2019 respectively borrowings variable rates resulted effective interest rates 045 254 2020 2019 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices june 2020 company issued 45 billion principal amount senior unsecured notes consisting 10 billion 075 notes due 2026 125 billion 145 notes due 2030 10 billion 235 notes due 2040 125 billion 245 notes due 2050 merck used net proceeds offering general corporate purposes including without limitation repayment outstanding commercial paper borrowings indebtedness upcoming maturities effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply covenants december 31 2020 company compliance covenants aggregate maturities longterm debt next five years follows 2021 23 billion 2022 23 billion 2023 17 billion 2024 14 billion 2025 25 billion company 60 billion credit facility matures june 2024 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility leases company operating leases primarily manufacturing facilities research development facilities corporate offices employee housing vehicles certain equipment company determines arrangement lease inception evaluating contracts embedded leases company exercises judgment determine explicit implicit identified asset contract merck controls use asset embedded leases primarily associated contract manufacturing organizations immaterial lease term includes options extend terminate lease reasonably certain merck exercise option real estate leases facilities average remaining lease term eight years include options extend leases four years applicable vehicle leases generally effect four years company record shortterm leases initial term 12 months less balance sheet however merck currently shortterm leases lease expense operating lease payments recognized straightline basis term lease operating lease assets liabilities recognized based present value lease payments lease term since company’s leases readily determinable implicit discount rate company uses incremental borrowing rate calculate present value lease payments asset class quarterly basis updated incremental borrowing rate determined based average remaining lease term asset class company’s pretax cost debt term updated rates asset class applied prospectively new leases company separate lease components eg payments rent real estate taxes insurance costs nonlease components eg commonarea maintenance costs event agreement contains merck includes lease nonlease components purposes calculating rightofuse asset related lease liability nonlease components fixed vehicle leases employee housing company applies portfolio approach effectively account operating lease assets liabilities certain company’s lease agreements contain variable lease payments adjusted periodically inflation actual operating expense trueups compared estimated amounts however amounts immaterial sublease income activity related sale leaseback transactions immaterial merck’s lease agreements contain material residual value guarantees material restrictive covenants operating lease cost 346 million 2020 339 million 2019 rental expense operating leases net sublease income 322 million 2018 cash paid amounts included measurement operating lease liabilities 340 million 2020 281 million 2019 operating lease assets obtained exchange lease obligations 495 million 2020 129 million 2019 supplemental balance sheet information related operating leases follows 1 includes prepaid leases related lease liability maturities operating leases liabilities follows december 31 2020 company entered additional real estate operating leases yet commenced obligations associated leases total 475 million 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters opinion company unlikely resolution matters material company’s financial condition results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2020 approximately 3520 cases pending merck either federal state court plaintiffs vast majority cases generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax federal cases involving allegations femur fractures transferred multidistrict litigation district new jersey femur fracture mdl bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 515 cases appealed decision us court appeals third circuit third circuit march 2017 third circuit issued decision reversing femur fracture mdl court’s preemption ruling remanding appealed cases back femur fracture mdl court may 2019 us supreme court decided third circuit incorrectly concluded issue preemption resolved jury accordingly vacated judgment third circuit remanded proceedings back third circuit address issue manner consistent supreme court’s opinion november 2019 third circuit remanded cases back district court order allow court determine first instance whether plaintiffs’ state law claims preempted federal law standards described supreme court opinion briefing issue closed parties await decision district court accordingly december 31 2020 approximately 970 cases actively pending femur fracture mdl december 31 2020 approximately 2270 cases alleging femur fractures filed new jersey state court pending judge james hyland middlesex county parties selected initial group cases reviewed fact discovery merck continued select additional cases reviewed december 31 2020 approximately 275 cases alleging femur fractures filed pending california state court femur fracture cases filed california state court coordinated single judge orange county california additionally four femur fracture cases pending state courts discovery presently stayed femur fracture mdl state court california merck intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2020 merck aware approximately 1480 product users alleging januvia andor janumet caused development pancreatic cancer injuries claims filed multidistrict litigation us district court southern district california mdl outside mdl majority claims filed coordinated proceedings superior court california county los angeles california state court november 2015 mdl california state court separate opinions granted summary judgment defendants grounds federal preemption plaintiffs appealed forums november 2017 us court appeals ninth circuit vacated judgment remanded discovery november 2018 california state appellate court reversed remanded similar grounds march 2019 parties mdl california coordinated proceedings agreed coordinate adopt schedule completing discovery general causation preemption issues renewing summary judgment expert motions briefing motions complete hearings mdl california state court judges took place october 20 december 8 2020 respectively december 31 2020 six product users claims pending merck state courts california including illinois june 2017 illinois trial court denied merck’s motion summary judgment based federal preemption merck appealed illinois appellate court affirmed december 2018 merck filed petition leave appeal illinois supreme court february 2019 april 2019 illinois supreme court stayed consideration pending petition appeal us supreme court issued opinion merck sharp dohme corp v albrecht relating fosamax matter discussed merck filed opinion albrecht illinois supreme court june 2019 petition leave appeal decided september 2019 illinois supreme court directed intermediate appellate court reconsider earlier ruling illinois appellate court issued favorable decision concluding consistent albrecht preemption presents legal question resolved court may 2020 illinois appellate court issued mandate state trial court december 31 2020 scheduled case management conference addition claims noted company agreed toll statute limitations approximately 50 additional claims company intends continue defending lawsuits vioxx merck reached settlement attorney general utah fully resolve state’s previously disclosed civil lawsuit alleging merck misrepresented safety vioxx part resolution merck paid state 25 million settlement constitute admission merck liability wrongdoing agreement marks final resolution litigation involving vioxx united states ongoing vioxx litigation certain countries outside united states governmental proceedings previously disclosed fall 2018 company received records subpoena us attorney’s office district vermont vt usao pursuant section 248 health insurance portability accountability act 1996 hipaa relating investigation potential health care offenses subpoena sought information relating actual potential business relationship arrangement merck practice fusion inc pfi cloudbased electronic health records ehr company acquired allscripts january 2018 company cooperated government responded subpoena subsequently may 2019 merck received second records subpoena vt usao broadened government’s information request seeking information relating merck’s relationship ehr company shortly thereafter vt usao served civil investigation demand cid upon merck similarly seeking information company’s relationships ehr vendors cid explains government conducting false claims act investigation concerning whether merck andor pfi submitted claims federal health care programs violate federal antikickback statute merck cooperating government’s investigation previously disclosed april 2019 merck received set investigative interrogatories california attorney general’s office pursuant investigation conduct agreements allegedly affected delayed competition lantus insulin market interrogatories seek information concerning merck’s development insulin glargine product subsequent termination well merck’s patent litigation sanofi sa concerning lantus resolution litigation merck cooperating california attorney general’s investigation previously disclosed june 2020 merck received cid us department justice cid requests answers interrogatories well various documents regarding temperature excursions thirdparty storage facility containing certain merck products merck cooperating government’s investigation intends produce information andor documents necessary response cid previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate previously disclosed time company receives inquiries subject preliminary investigation activities competition governmental authorities markets outside united states authorities may include regulators administrative authorities law enforcement similar officials preliminary investigation activities may include site visits formal informal requests demands documents materials inquiries interviews similar matters certain preliminary inquiries activities may lead commencement formal proceedings determined adversely company monetary fines andor remedial undertakings may required commercial litigation zetia antitrust litigation previously disclosed merck msd schering corporation msp singapore company llc collectively merck defendants putative class action optout lawsuits filed 2018 behalf direct indirect purchasers zetia alleging violations federal state antitrust laws well state statutory common law causes action cases consolidated pretrial purposes federal multidistrict litigation judge rebecca beach smith eastern district virginia december 2018 court denied merck defendants’ motions dismiss stay direct purchaser putative class actions pending bilateral arbitration august 2019 district court adopted full report recommendation magistrate judge respect merck defendants’ motions dismiss nonarbitration issues thereby granting part denying part merck defendants’ motions dismiss addition june 2019 representatives putative direct purchaser class filed amended complaint august 2019 retailer optout plaintiffs filed amended complaint december 2019 district court granted merck defendants’ motion dismiss extent motion sought dismissal claims overcharges paid entities purchased generic ezetimibe par pharmaceutical inc par pharmaceutical dismissed claims overcharges november 2019 direct purchaser plaintiffs indirect purchaser plaintiffs filed motions class certification august 21 2020 district court granted part direct purchasers’ motion class certification certified class 35 direct purchasers november 2 2020 us court appeals fourth circuit granted merck defendants’ motion permission appeal district court’s order also august 14 2020 magistrate judge recommended court grant motion class certification filed putative indirect purchaser class merck defendants objected report recommendation awaiting decision district court august 10 2020 merck defendants filed motion summary judgment motions plaintiffs filed motion partial summary judgment motions fully briefed court likely hold hearing competing motions trial matter adjourned september 4 2020 united healthcare services inc filed lawsuit united states district court district minnesota merck others uhc action uhc action makes similar allegations made zetia class action september 23 2020 united states judicial panel multidistrict litigation transferred case eastern district virginia proceed multidistrict zetia litigation already progress december 11 2020 humana inc filed lawsuit superior court state california county san francisco merck others alleging defendants violated state antitrust laws multiple states also december 11 2020 centene corporation others filed lawsuit superior court state california county san francisco defendants humana lawsuits allege similar anticompetitive acts alleged zetia class action rotavirus vaccines antitrust litigation previously disclosed msd defendant putative class action lawsuits filed 2018 behalf direct purchasers rotateq alleging violations federal antitrust laws cases consolidated eastern district pennsylvania january 2019 court denied msd’s motions compel arbitration dismiss consolidated complaint february 2019 msd appealed court’s order arbitration third circuit october 2019 third circuit vacated district court’s order remanded limited discovery issue arbitrability july 6 2020 msd filed renewed motion compel arbitration plaintiffs filed cross motion summary judgment arbitrability november 20 2020 district court denied msd’s motion granted plaintiffs’ motion december 4 2020 msd filed notice appeal third circuit bravecto litigation previously disclosed january 2020 company served complaint united states district court district new jersey seeking certify nationwide class action purchasers users bravecto fluralaner products united states territories may 1 2014 december 27 2019 complaint contends bravecto causes neurological events alleges violations new jersey consumer fraud act breach warranty product liability related theories similar case filed quebec canada may 2019 qui tam litigation previously disclosed june 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition previously disclosed two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery complete parties filed briefed crossmotions summary judgment currently pending court company continues defend lawsuits merck kgaa litigation previously disclosed january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa historically operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france uk germany switzerland mexico india australia singapore hong kong china alleging among things unfair competition trademark infringement andor corporate name infringement uk australia singapore hong kong india kgaa also alleges breach parties’ coexistence agreement litigation ongoing united states trial date set also ongoing numerous jurisdictions outside united states company defending suits jurisdiction patent litigation time generic manufacturers pharmaceutical products file abbreviated new drug applications ndas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges bridion january november 2020 company received multiple paragraph iv certification letters hatchwaxman act notifying company generic drug companies filed applications fda seeking prepatent expiry approval sell generic versions bridion sugammadex injection march april december 2020 company filed patent infringement lawsuits us district courts district new jersey northern district west virginia generic companies actions district new jersey consolidated lawsuits assert one patents covering sugammadex methods using sugammadex automatically stay fda approval generic applications june 2023 adverse court decisions whichever may occur earlier mylan pharmaceuticals inc mylan api us llc mylan inc mylan filed motions dismiss district new jersey lack venue failure state claim certain defendants northern district west virginia failure state claim certain defendants new jersey motion yet decided west virginia action stayed pending resolution new jersey motion januvia janumet xr fda granted pediatric exclusivity respect januvia janumet xr provides six months exclusivity united states beyond expiration patents listed fda’s orange book including exclusivity key patent protection extends january 2023 company anticipates sales januvia janumet united states decline significantly loss market exclusivity however januvia janumet xr contain sitagliptin phosphate monohydrate company another patent covering certain phosphate salt polymorphic forms sitagliptin determined valid would preclude generic manufacturers making sitagliptin phosphate salt polymorphic forms patent inclusive pediatric exclusivity expires 2027 saltpolymorph patent 2019 par pharmaceutical filed suit company us district court district new jersey seeking declaratory judgment invalidity 2027 saltpolymorph patent response company filed patent infringement lawsuit us district court district delaware par pharmaceutical additional companies also indicated intent market generic versions januvia janumet xr following expiration key patent protection prior expiration 2027 saltpolymorph patent later granted patent owned company covering janumet formulation inclusive pediatric exclusivity expires 2029 company also filed patent infringement lawsuit mylan northern district west virginia judicial panel multidistrict litigation entered order transferring company’s lawsuit mylan us district court district delaware coordinated consolidated pretrial proceedings cases pending district us district court district delaware scheduled lawsuits single threeday trial invalidity issues october 2021 court scheduled separate oneday trials infringement issues november 2021 january 2022 extent trials necessary company’s case mylan us district court northern district west virginia conditionally scheduled threeday trial december 2021 issues company settled nine generic companies providing generic companies bring products market may 2027 earlier certain circumstances additionally 2019 mylan filed petition inter partes review ipr united states patent trademark office uspto seeking invalidity claims 2027 saltpolymorph patent manufacturers joined uspto instituted ipr proceedings may 2020 finding reasonable likelihood challenged claims valid trial held february 2021 final decision expected may 2021 challenges successful unchallenged claims 2027 saltpolymorph patent remain valid subject court proceedings described germany two generic companies sought revocation supplementary protection certificate spc janumet generic companies successful janumet could lose market exclusivity germany early july 2022 challenges janumet spc also occurred portugal finland could occur european countries nexplanon june 2017 microspherix llc microspherix sued company us district court district new jersey asserting manufacturing use sale importation nexplanon infringed several microspherix’s patents claim radioopaque implantable drug delivery devices microspherix claiming damages september 2014 patents expire may 2021 company brought ipr proceedings uspto successfully stayed district court action uspto invalidated claims asserted company appealed decisions finding claims valid court appeals federal circuit affirmed uspto’s decisions matter longer stayed district court company currently litigating invalidity noninfringement remaining asserted claims litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial condition results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2020 2019 approximately 250 million 240 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial condition results operations liquidity company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 67 million december 31 2020 2019 liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed approximately 65 million aggregate management also believe expenditures result material adverse effect company’s financial condition results operations liquidity year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 2018 company entered accelerated share repurchase asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers funded existing cash investments well shortterm borrowings upon settlement asr agreements 2019 merck received additional 77 million shares determined average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount bringing total shares received merck program 644 million 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2020 100 million shares collectively authorized future grants company’s sharebased compensation plans awards settled treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus psus dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period subject terms applicable awards psu awards generally vest three years rsu awards generally vest onethird year threeyear period total pretax sharebased compensation cost recorded 2020 2019 2018 475 million 417 million 348 million respectively related income tax benefits 65 million 57 million 55 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield risk free interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree interest rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2020 2019 2018 7767 8005 5815 per option respectively weighted average fair value options granted 2020 2019 2018 993 1063 826 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2020 678 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost credit pension postretirement benefit plans consisted following components changes net periodic benefit cost year pension plans largely attributable changes discount rate affecting net loss amortization connection restructuring actions see note 5 termination charges recorded 2020 2019 2018 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded pension postretirement benefit plans settlements recorded certain us international pension plans reflected table components net periodic benefit cost credit service cost component included income expense net see note 14 exception certain amounts termination benefits curtailments settlements recorded restructuring costs event giving rise termination benefits curtailment settlement related restructuring actions noted obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows 1 actuarial losses gains primarily reflect changes discount rates december 31 2020 2019 accumulated benefit obligation 264 billion 228 billion respectively pension plans 144 billion 128 billion respectively related us pension plans information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2020 2019 942 million 860 million respectively approximately 4 company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy nav amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2020 2019 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy nav amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2020 2019 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 45 us equities 15 30 international equities 35 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 11 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2021 approximately 300 million us pension plans approximately 170 million international pension plans approximately 35 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net periodic benefit cost average remaining service life employees following amounts reflected components oci actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis expected rate return plan developed considering longterm historical returns data current market conditions actual returns plan assets using reference information longterm return expectations asset category weightedaverage expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2021 expected rate return company’s us pension postretirement benefit plans range 650 670 compared range 700 730 2020 health care cost trend rate assumptions postretirement benefit plans follows savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2020 2019 2018 166 million 149 million 136 million respectively 14 income expense net income expense net consisted 1 includes net realized unrealized gains losses investments equity securities either owned directly ownership interests investment funds unrealized gains losses investments directly owned determined end reporting period ownership interests investment funds accounted one quarter lag net presented table 2019 includes 162 million goodwill impairment charges related certain businesses healthcare services segment see note 8 net 2018 includes gain 115 million related settlement certain patent litigation income 99 million related astrazeneca’s option exercise 2014 connection termination company’s relationship astrazeneca lp azlp gain 85 million resulting receipt milestone payment outlicensed migraine clinical development program net 2018 also includes 144 million goodwill impairment charges related certain businesses healthcare services segment see note 8 well 41 million charges related writedown assets held sale fair value anticipation dissolution company’s joint venture supera farma laboratorios sa brazil interest paid 822 million 2020 841 million 2019 777 million 2018 15 taxes income reconciliation effective tax rate us statutory rate follows tax cuts jobs act tcja enacted december 2017 company reflected impact tcja 2017 financial statements however since application certain provisions tcja remained subject interpretation certain instances company made reasonable estimates effects tcja since finalized resulted additional income tax expense 2018 2019 company’s remaining transition tax liability tcja reduced payments utilization foreign tax credits 30 billion december 31 2020 390 million included income taxes payable remainder 26 billion included noncurrent liabilities result transition tax tcja company longer indefinitely reinvested respect undistributed earnings foreign subsidiaries provided deferred tax liability foreign withholding taxes would apply company remains indefinitely reinvested respect financial statement basis excess tax basis foreign subsidiaries determination deferred tax liability respect basis difference practicable foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants begin expire 2022 thereby yielding favorable impact effective tax rate compared us statutory rate 21 towards end 2020 new reduced tax rate arrangement agreed switzerland certain newly active legal entities income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss nol carryforwards several jurisdictions december 31 2020 464 million deferred taxes nol carryforwards relate foreign jurisdictions valuation allowances 433 million established foreign nol carryforwards foreign deferred tax assets addition company 330 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2020 2019 2018 27 billion 45 billion 15 billion respectively tax benefits relating stock option exercises 55 million 2020 65 million 2019 77 million 2018 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts 2019 reflects settlement irs discussed 2 amount 2019 includes 78 million related divestiture merck’s consumer care business 2014 company recognize unrecognized tax benefits 15 billion december 31 2020 income tax provision would reflect favorable net impact 15 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2020 could decrease approximately 160 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted expense benefit 27 million 2020 101 million 2019 51 million 2018 amounts reflect beneficial impacts various tax settlements including settlement discussed liabilities accrued interest penalties 268 million 243 million december 31 2020 2019 respectively 2019 internal revenue service irs concluded examinations merck’s 20122014 us federal income tax returns result company required make payment 107 million company’s reserves unrecognized tax benefits years examination exceeded adjustments relating examination period therefore company recorded 364 million net tax benefit 2019 net benefit reflects reductions reserves unrecognized tax benefits tax positions relating years examination partially offset additional reserves tax positions previously reserved irs currently conducting examinations company’s tax returns years 2015 2016 addition various state foreign tax examinations progress jurisdictions company’s income tax returns open examination period 2003 2020 16 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2020 2019 2018 5 million 2 million 6 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss changes aoci component follows 1relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 54 billion 51 billion december 31 2020 2019 respectively postretirement benefit plan net gain 391 million 247 million december 31 2020 2019 respectively well pension plan prior service credit 255 million 263 million december 31 2020 2019 respectively postretirement benefit plan prior service credit 244 million 305 million december 31 2020 2019 respectively 18 segment reporting company’s operations principally managed products basis include two operating segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccine sales made us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers company previously healthcare services segment provided services solutions focused engagement health analytics clinical services improve value care delivered patients company divested remaining businesses segment first quarter 2020 company previously alliances segment primarily included activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 sales company’s products follows us plus international may equal total due rounding 1 alliance revenue represents merck’s share profits product sales net cost sales commercialization costs see note 4 2 alliance revenue represents merck’s share profits sales bayer’s marketing territories product sales net cost sales commercialization costs see note 4 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 represents sales nonreportable segments healthcare services fully divested first quarter 2020 alliances concluded 2018 5 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales consolidated sales geographic area derived follows reconciliation segment profits income taxes follows pharmaceutical segment profits comprised segment sales less standard costs well selling general administrative expenses directly incurred segment animal health segment profits comprised segment sales less cost sales well selling general administrative expenses research development costs directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred merck research laboratories company’s research development division focuses human healthrelated activities general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill intangible asset impairment charges gains losses sales businesses expense income related changes estimated fair value liabilities contingent consideration miscellaneous income expense items equity income loss affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors stockholders merck co inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheet merck co inc subsidiaries “company” december 31 2020 2019 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2020 including related notes collectively referred “consolidated financial statements” also audited company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates customer discount accruals us medicaid managed care medicare part rebates described note 2 consolidated financial statements company records certain variable consideration including discounts estimated time sale generally using expected value method amounts accrued aggregate customer discounts december 31 2020 us 31 billion evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued certain discounts take form rebates amounts owed based upon definitive contractual agreements legal requirements private sector managed care public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers management uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision principal considerations determination performing procedures relating customer discount accruals us medicaid managed care medicare part rebates critical audit matter significant judgment management due significant measurement uncertainty involved developing provisions include assumptions related changes price historical customer segment utilization mix pertaining forecasted customer claims may fully paid subsequent period turn led high degree auditor judgment subjectivity effort applying procedures related assumptions evaluating evidence obtained procedures addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating customer discount accruals us medicaid managed care medicare part rebates including management’s controls assumptions used estimate corresponding rebate accruals procedures also included among others developing independent estimate rebate accruals utilizing third party data historical customer segment utilization mix us changes price terms specific rebate programs historical trend actual rebate claims paid ii comparing independent estimate rebate accruals recorded management iii testing actual rebate claims paid including evaluating claims consistency contractual terms company’s rebate agreements pricewaterhousecoopers llp florham park new jersey february 25 2021 served company’s auditor since 2002 item 9item 8 financial statements supplementary data consolidated balance sheets december 31 2000 1999 related statements consolidated income consolidated shareholders equity consolidated cash flows three years period ended december 31 2000 notes consolidated financial statements independent auditors report deloitte touche llp dated february 16 2001 quarterly data set forth companys 2000 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2011 2010 related consolidated statements income equity cash flows three years period ended december 31 2011 notes consolidated financial statements report dated february 27 2012 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated balance sheet consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc “merck” “the company” global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health consumer care products markets directly joint ventures company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances segments one reportable segment pharmaceutical segment pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets november 3 2009 legacy merck co inc scheringplough corporation “scheringplough” merged “merger” results scheringplough’s business included merck’s financial statements periods subsequent completion merger therefore merck’s financial results 2009 reflect full year scheringplough operations 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis mergers acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date merger acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies recognized fair value fair value reasonably estimated acquisition date fair value asset acquired liability assumed arises contingency cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date merger acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss “aoci” reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net result merger functional currency operations company’s international subsidiaries reevaluated resulted change functional currency certain subsidiaries cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost market cost substantial majority domestic pharmaceutical vaccine inventories determined using lastin firstout “lifo” method financial reporting tax purposes cost inventories determined using firstin firstout “fifo” method inventories consist currently marketed products certain products awaiting regulatory approval evaluating recoverability inventories produced preparation product launches company considers probability revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt equity securities classified availableforsale reported fair value fair values company’s investments determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income “oci” declines fair value equity securities considered otherthantemporary impairment losses charged income expense net company considers available evidence evaluating potential impairments investments including duration extent fair value less cost equity securities company’s ability intent hold investments debt securities otherthantemporary impairment occurred company expect recover entire amortized cost basis debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt equity securities included income expense net revenue recognition revenues sales products recognized time delivery title risk loss passes customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations domestically sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesaler known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts customers collection accounts receivable expected excess one year accruals chargebacks reflected direct reduction accounts receivable accruals rebates recorded current liabilities accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 87 million 17 billion respectively december 31 2011 117 million 12 billion respectively december 31 2010 company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission “sec” interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 10 50 years buildings 3 15 years machinery equipment office furnishings software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development capitalized software costs included property plant equipment amortized beginning software project substantially complete asset ready intended use capitalized software costs associated company’s multiyear implementation enterprisewide resource planning system amortized 6 10 years december 31 2011 2010 approximately 360 million 457 million respectively remaining unamortized capitalized software costs associated initiative capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses purchased goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed based upon company’s recent annual impairment test completed october 1 2011 likely fair value reporting unit excess carrying value acquired intangibles acquired intangibles include products product rights tradenames patents recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 3 40 years see note 9 events circumstances warrant review company assess recoverability acquired intangibles future operations using pretax undiscounted cash flows derived lowest appropriate asset groupings impairments recognized operating results extent carrying value intangible asset exceeds fair value determined based net present value estimated future cash flows inprocess research development inprocess research development “iprd” represents fair value assigned incomplete research projects company acquires business combinations time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination useful life intangible asset generally determined period substantially cash flows expected generated begin amortization company tests iprd impairment least annually frequently impairment indicators exist onestep test compares fair value iprd intangible asset carrying value fair value less carrying amount impairment loss recognized within company’s operating results research development research development expensed incurred upfront milestone payments due third parties connection research development collaborations prior regulatory approval expensed incurred payments due third parties upon subsequent regulatory approval capitalized amortized shorter remaining license product patent life nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs periods iprd impairment charges 587 million 24 billion 2011 2010 respectively sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states “gaap” accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection mergers acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets well subsequent fair value measurement additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards 2011 following new accounting standards issued fasb adopted company january 1 2011 company prospectively adopted new guidance revenue recognition multiple deliverables revenue arrangements entered materially modified adoption date guidance eliminates residual method current guidance replaces “relative selling price” method allocating revenue multiple deliverable arrangement selling price deliverable shall determined using vendor specific objective evidence selling price exists otherwise thirdparty evidence selling price shall used neither exists deliverable vendor shall use best estimate selling price deliverable effect adoption company’s financial position results operations material october 1 2011 conjunction annual goodwill impairment testing company early adopted amended guidance simplifies entity tests goodwill impairment amended guidance allows companies first assess qualitative factors determine likely fair value reporting unit less carrying value whether perform step one twostep goodwill impairment test recently issued accounting standards june 2011 fasb issued amended guidance presentation comprehensive income financial statements amendment provides companies option present components net income comprehensive income either one continuous statement comprehensive income two separate consecutive statements eliminates option present components comprehensive income part statement changes stockholders’ equity provisions new guidance effective interim annual periods beginning 2012 adoption new guidance impact company’s financial position results operations cash flows 3 merger november 3 2009 merck scheringplough completed merger scheringplough acquired shares merck became whollyowned subsidiary scheringplough renamed merck sharp dohme corp “msd” scheringplough continued surviving public company renamed merck co inc however accounting purposes merger treated acquisition merck considered accounting acquirer terms merger agreement issued outstanding share scheringplough common stock converted right receive combination 1050 cash 05767 share common stock company issued outstanding share merck common stock automatically converted share common stock newly combined company based closing price merck stock november 3 2009 consideration received scheringplough shareholders valued 2819 per share 496 billion aggregate cash portion consideration funded combination existing cash including sale merck’s interest merial limited sale redemption investments issuance debt upon completion merger issued outstanding share scheringplough 6 mandatory convertible preferred stock “scheringplough 6 preferred stock” converted accordance terms preferred stock remained outstanding one share merck 6 mandatory convertible preferred stock “6 preferred stock” rights set forth merck certificate incorporation rights substantially similar rights scheringplough 6 preferred stock august 2010 outstanding 6 preferred stock automatically converted terms right receive cash shares merck common stock see note 13 merger expanded company’s pipeline product candidates broadened company’s commercial portfolio expanded global presence increased manufacturing capabilities additionally company expects realize substantial cost savings synergies including opportunities consolidation sales marketing research development calculation consideration transferred millions except per shareunit amounts 1 upon completion merger period 15 days thereafter holders 6 preferred stock entitled convert share 6 preferred stock number units merger consideration equal “makewhole” conversion rate 82021 determined accordance terms preferred stock amount represents units merger consideration relating 6 preferred stock converted holders 15day period following merger 2 represents present value remaining dividend payments conversion date mandatory conversion date august 13 2010 paid holders 6 preferred stock elected convert connection merger using discount rate stipulated terms preferred stock 3 represents cash consideration paid holders scheringplough deferred stock units issued 2007 prior converted right receive cash specified merger agreement attributable precombination service 4 represents fair value scheringplough stock option performance share unit deferred stock unit replacement awards attributable precombination service issued holders awards merger fair value outstanding scheringplough stock option performance share unit awards issued 2007 prior immediately vested effective time merger attributed precombination service included consideration transferred stock option performance share unit deferred stock unit awards 2008 2009 immediately vest upon completion merger awards fair value awards attributed precombination service included part consideration transferred fair value attributed postcombination service recognized compensation cost requisite service period postcombination financial statements merck supplemental pro forma data scheringplough’s results operations included merck’s financial statements periods subsequent completion merger scheringplough contributed revenues 34 billion estimated losses 22 billion merck period consummation merger december 31 2009 following unaudited supplemental pro forma data presents consolidated information merger completed january 1 2008 unaudited supplemental pro forma data reflect application following adjustments • consolidation merckscheringplough partnership “msp partnership” became wholly owned company • additional depreciation amortization expense would recognized assuming fair value adjustments inventory property plant equipment intangible assets • additional interest expense financing costs would incurred borrowing arrangements loss interest income cash shortterm investments used fund merger • transaction costs associated merger • conversion portion outstanding 6 preferred stock unaudited supplemental pro forma financial information reflect potential realization cost savings relating integration two companies pro forma data considered indicative results would occurred merger related borrowings consummated january 1 2008 indicative future results 4 restructuring merger restructuring program february 2010 company commenced actions global restructuring program “merger restructuring program” conjunction integration legacy merck legacy scheringplough businesses merger restructuring program intended optimize cost structure combined company additional actions program continued 2010 july 2011 company announced latest phase merger restructuring program company expects reduce workforce measured time merger additional 12 13 across company worldwide majority workforce reductions phase merger restructuring program relate manufacturing including animal health administrative headquarters organizations previously announced workforce reductions approximately 17 earlier phases program primarily reflect elimination positions sales administrative headquarters organizations well sale closure certain manufacturing research development sites consolidation office facilities company continue hire employees strategic growth areas business necessary company continue pursue productivity efficiencies evaluate manufacturing supply chain capabilities ongoing basis may result future restructuring actions company recorded total pretax restructuring costs 18 billion 2011 18 billion 2010 15 billion 2009 related program since inception merger restructuring program december 31 2011 merck recorded total pretax accumulated costs approximately 51 billion eliminated approximately 18430 positions comprised employee separations well elimination contractors 2500 positions vacant time merger restructuring actions merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated expected substantially completed 2015 total cumulative pretax costs estimated approximately 58 billion 66 billion company estimates approximately twothirds cumulative pretax costs relate cash outlays primarily related employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested 2008 global restructuring program october 2008 merck announced global restructuring program “2008 restructuring program” reduce cost structure increase efficiency enhance competitiveness part 2008 restructuring program company expects eliminate approximately 7200 positions 6800 active employees 400 vacancies across company worldwide pretax restructuring costs 45 million 176 million 475 million recorded 2011 2010 2009 respectively related 2008 restructuring program since inception 2008 restructuring program december 31 2011 merck recorded total pretax accumulated costs 16 billion eliminated approximately 6250 positions comprised employee separations elimination contractors vacant positions 2008 restructuring program substantially completed end 2011 exception certain manufacturingrelated actions expected completed 2015 total cumulative pretax costs estimated 20 billion company estimates twothirds cumulative pretax costs relate cash outlays primarily employee separation expense approximately onethird cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested segment reporting restructuring charges unallocated expenses following table summarizes charges related merger restructuring program 2008 restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated 2011 approximately 6880 positions eliminated merger restructuring program approximately 450 positions eliminated 2008 restructuring program 2010 approximately 11410 positions eliminated merger restructuring program approximately 890 positions eliminated 2008 restructuring program 2009 approximately 3160 positions eliminated 2008 restructuring program approximately 140 positions eliminated merger restructuring program position eliminations comprised actual headcount reductions elimination contractors vacant positions 2009 certain employees anticipated separated part planned restructuring actions 2008 restructuring program instead transferred buyer conjunction sale facility accordingly accrual separation costs associated employees reversed resulting reduction expenses accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life site based upon anticipated date site closed divested depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future cash flows sufficient recover respective book values merck required accelerate depreciation site assets rather write immediately activity 2011 2010 2009 includes 72 million 152 million 15 million respectively asset abandonment shutdown related costs 2010 approximately 65 million contract termination costs additionally activity includes 53 million 88 million 109 million 2011 2010 2009 respectively employeerelated costs curtailment settlement termination charges associated pension postretirement benefit plans see note 15 sharebased compensation costs activity also reflects net pretax gains losses resulting sales facilities related assets 2011 2010 2009 10 million 49 million 52 million respectively adjustments recorded amounts material period following table summarizes charges spending relating merger restructuring program 2008 restructuring program activities 1 cash outlays associated merger restructuring program expected substantially completed end 2013 exception certain actions principally manufacturingrelated expected substantially completed 2015 cash outlays associated remaining restructuring reserves 2008 restructuring program primarily manufacturingrelated expected completed end 2015 legacy scheringplough program prior merger scheringplough commenced productivity transformation program designed reduce avoid costs increase productivity 2011 2010 2009 company recorded 20 million 22 million 7 million respectively accelerated depreciation costs included materials production costs addition restructuring costs reflect 7 million net gain 2010 primarily related sale manufacturing facility 39 million separation costs 2009 remaining reserve related plan substantially complete 18 million 47 million december 31 2011 2010 respectively 5 acquisitions divestitures research collaborations license agreements may 2011 merck completed acquisition inspire pharmaceuticals inc “inspire” specialty pharmaceutical company focused developing commercializing ophthalmic products terms merger agreement merck acquired outstanding shares common stock inspire price 500 per share cash total approximately 420 million transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially purchase price allocated inspire’s product right intangible assets related deferred tax liabilities deferred tax asset relating inspire’s net operating loss carryforwards goodwill transaction closed may 16 2011 accordingly results operations acquired business included company’s results operations since acquisition date pro forma financial information included inspire’s historical financial results significant compared company’s financial results march 2011 company sold merck biomanufacturing network provider contract manufacturing development services biopharmaceutical industry wholly owned merck fujifilm corporation “fujifilm” terms agreement fujifilm purchased equity interests two merck subsidiaries together owned assets merck biomanufacturing network comprising facilities located research triangle park north carolina billingham united kingdom part agreement fujifilm merck committed certain continued development manufacturing activities two companies transaction resulted gain 127 million 2011 reflected income expense net company acquired facility located billingham united kingdom completed acquisition avecia biologics limited february 2010 december 2010 company acquired outstanding stock smartcells inc “smartcells” private company developing glucose responsive insulin formulation treatment diabetes mellitus total purchase consideration company determined fair value acquisition date 138 million included upfront cash payment contingent consideration consisting future clinical development regulatory milestones well contingent consideration future sales products resulting acquisition transaction accounted acquisition business accordingly assets acquired liabilities assumed recorded respective fair values acquisition date determination fair value requires management make significant estimates assumptions connection acquisition substantially preliminary purchase price allocated iprd remaining net assets acquired significant fair value contingent consideration determined utilizing probability weighted estimated cash flow stream adjusted expected timing payment subsequent acquisition date quarterly basis contingent consideration liability remeasured current fair value changes recorded earnings de minimis transaction closed december 6 2010 accordingly results operations acquired business included company’s results operations since acquisition date pro forma financial information included smartcells’ historical financial results significant compared company’s financial results may 2010 merck announced restructured codevelopment cocommercialization agreement ariad pharmaceuticals inc “ariad” ridaforolimus mk8669 investigational orally available mtor inhibitor currently evaluated treatment multiple cancer types exclusive license agreement restructured agreement merck acquired full control development worldwide commercialization ridaforolimus ariad received 50 million upfront fee company recorded research development expense 2010 eligible receive milestone payments associated regulatory filings approvals ridaforolimus multiple cancer indications achievement significant sales thresholds lieu profit split us sales provided previous agreement ariad receive royalties global net sales ridaforolimus sales recorded merck assumed responsibility activities acquired decision rights matters relating development manufacturing commercialization ridaforolimus investigational new drug application transferred merck leading interactions regulatory agencies 2011 ridaforolimus accepted review food drug administration “fda” european medicines agency agreement ariad terminable merck upon nine months notice immediately upon good faith determination serious safety issue agreement terminable either party result insolvency party uncured material breach party ariad failure merck perform certain product development responsibilities 6 collaborative arrangements company continues strategy establishing external alliances complement substantial internal research capabilities including research collaborations licensing preclinical clinical compounds technology platforms drive near longterm growth company supplements internal research licensing external alliance strategy focused entire spectrum collaborations early research latestage compounds well new technologies across broad range therapeutic areas arrangements often include upfront payments royalty profit share payments contingent upon occurrence certain future events linked success asset development well expense reimbursements payments third party cozaarhyzaar 1989 merck ei dupont de nemours company “dupont” agreed form longterm research marketing collaboration develop class therapeutic agents high blood pressure heart disease discovered dupont called angiotensin ii receptor antagonists include cozaar hyzaar return merck provided dupont marketing rights united states canada prescription medicines sinemet cr company since regained global marketing rights sinemet cr pursuant 1994 agreement dupont company exclusive licensing agreement market cozaar hyzaar return royalties profit share payments dupont patents provided market exclusivity united states cozaar hyzaar expired april 2010 addition cozaar hyzaar lost patent protection number major european markets march 2010 remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc “centocor” johnson “jj” company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi golimumab fully human monoclonal antibody company exclusive marketing rights products outside united states japan certain asian markets december 2007 scheringplough centocor revised distribution agreement regarding development commercialization distribution remicade simponi extending company’s rights exclusively market remicade match duration company’s exclusive marketing rights simponi addition scheringplough centocor agreed share certain development costs relating simponi’s autoinjector delivery system october 6 2009 european commission approved simponi treatment rheumatoid arthritis immune system disorders two presentations novel autoinjector prefilled syringe result company’s marketing rights products extend 15 years first commercial sale simponi european union “eu” following receipt pricing reimbursement approval within eu april 2011 merck jj reached agreement amend agreement governing distribution rights remicade simponi terms amended distribution agreement merck relinquished marketing rights remicade simponi jj territories including canada central south america middle east africa asia pacific effective july 1 2011 merck retained exclusive marketing rights throughout europe russia turkey “retained territories” addition beginning july 1 2011 profits derived merck’s exclusive distribution two products retained territories equally divided merck jj prior terms distribution agreement contribution income profit split 58 merck 42 jj would declined merck increased jj year 2014 would equally divided jj also received onetime payment merck 500 million april 2011 company recorded charge income expense net 2011 7 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management significant portion company’s revenues denominated foreign currencies company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused volatility foreign exchange rates objective revenue hedging program reduce potential longerterm unfavorable changes foreign exchange rates decrease us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales expected occur planning cycle typically three years future company layer hedges time increasing portion thirdparty intercompany distributor entity sales hedged gets closer expected date forecasted foreign currency denominated sales probable hedged transaction occur portion sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments hedged anticipated sales specified component portfolio similarly denominated foreign currencybased sales transactions responds hedged currency risk manner company manages anticipated transaction exposure principally purchased local currency put options provide company right obligation sell foreign currencies future predetermined price us dollar strengthens relative currency hedged anticipated sales total changes options’ cash flows offset decline expected future us dollar equivalent cash flows hedged foreign currency sales conversely us dollar weakens options’ value reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows connection company’s revenue hedging program purchased collar option strategy may utilized purchased collar option strategy company writes local currency call option purchases local currency put option compared purchased put option strategy alone purchased collar strategy reduces upfront costs associated purchasing puts collection premium writing call options us dollar weakens relative currency hedged anticipated sales purchased put option value collar strategy reduces zero company benefits increase us dollar equivalent value anticipated foreign currency cash flows however benefit would capped strike level written call us dollar strengthens relative currency hedged anticipated sales written call option value collar strategy reduces zero changes purchased put cash flows collar strategy would offset decline expected future us dollar equivalent cash flows hedged foreign currency sales company may also utilize forward contracts revenue hedging program us dollar strengthens relative currency hedged anticipated sales increase fair value forward contracts offsets decrease expected future us dollar cash flows hedged foreign currency sales conversely us dollar weakens decrease fair value forward contracts offsets increase value anticipated foreign currency cash flows fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges effective portion unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized hedge relationship highly effective hedge ineffectiveness de minimis derivatives designated cash flow hedges unrealized gains losses recorded sales period cash flows contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes primary objective balance sheet risk management program mitigate exposure foreign currency denominated net monetary assets foreign subsidiaries us dollar functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts enable company buy sell foreign currencies future fixed exchange rates economically offset consequences changes foreign exchange monetary assets merck routinely enters contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument company also minimize effect exchange monetary assets liabilities managing operating activities net asset positions local level monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year 2009 company used may future use forward contracts hedge changes fair value certain foreign currency denominated availableforsale securities attributable fluctuations foreign currency exchange rates derivative contracts designated fair value hedges accordingly changes fair value hedged securities due fluctuations spot rates recorded income expense net offset fair value changes forward contracts attributable spot rate fluctuations changes contracts’ fair value due spotforward differences excluded designated hedge relationship recognized income expense net amounts well hedge ineffectiveness significant 2009 cash flows contracts reported operating activities consolidated statement cash flows company also uses forward exchange contracts hedge net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation company hedges portion net investment certain foreign operations measures ineffectiveness based upon changes spot foreign exchange rates effective portion unrealized gains losses contracts recorded foreign currency translation adjustment within oci remains aoci either sale complete substantially complete liquidation subsidiary cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci included cumulative translation adjustment pretax gains 6 million 2011 277 million 2010 78 million postmerger period 2009 eurodenominated notes designated effective economic hedges net investment foreign operation interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk february 2011 company entered nine payfloating receivefixed interest rate swap contracts notional amounts 35 billion aggregate designated fair value hedges fixedrate notes notional amounts matched amount hedged fixedrate notes two interest rate swap contracts designated fair value hedges fixedrate notes matured 2011 notional amounts 125 million effectively converted company’s 250 million 5125 fixedrate notes due 2011 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate “libor” swap rate fair value changes notes attributable changes benchmark interest rate recorded interest expense offset fair value changes swap contracts also 2011 company terminated payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes swaps effectively converted 51 billion fixedrate notes maturity dates varying march 2015 june 2019 floating rate instruments interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark libor swap rate result swap terminations company received 288 million cash included 43 million accrued interest unamortized adjustment carrying value debt associated interest rate swap contracts 245 million amortized reduction interest expense respective term notes cash flows contracts reported operating activities consolidated statement cash flows presented table fair value derivatives segregated derivatives designated hedging instruments designated hedging instruments december 31 table provides information location pretax gain loss amounts derivatives designated fair value hedging relationship ii designated cash flow hedging relationship iii designated foreign currency net investment hedging relationship iv designated hedging relationship 1 ineffectiveness hedge represents amount excluded hedge effectiveness testing 2 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates december 31 2011 company estimates 18 million pretax net unrealized losses derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information availableforsale investments december 31 follows availableforsale debt securities included shortterm investments totaled 14 billion december 31 2011 remaining debt securities 29 billion mature within five years december 31 2011 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity company’s level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily credit card auto loan home equity receivables weightedaverage lives primarily 5 years less mortgagebacked securities represent aaarated securities issued unconditionally guaranteed payment principal interest us government agencies 2 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant transfers level 1 level 2 2011 december 31 2011 cash equivalents 135 billion included 127 billion cash equivalents considered level 2 fair value hierarchy level 3 valuation techniques company’s level 3 investment securities included certain mortgagebacked securities valued primarily using pricing models incorporate transaction details contractual terms maturity timing amount future cash inflows well assumptions liquidity credit valuation adjustments marketplace participants table provides summary changes fair value financial assets measured fair value recurring basis using significant unobservable inputs level 3 1 amounts recorded income expense net financial instruments measured fair value company’s financial instruments measured fair value recurring basis recorded amounts approximate fair value due liquid shortterm nature cash equivalents receivables payables estimated fair value loans payable longterm debt including current portion december 31 2011 195 billion compared carrying value 175 billion december 31 2010 187 billion compared carrying value 179 billion fair value estimated using quoted dealer prices concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines approximately threequarters company’s cash equivalents invested three highly rated money market funds majority company’s accounts receivable arise product sales united states europe primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor economic conditions including volatility associated international sovereign economies associated impacts financial markets business taking consideration global economic downturn sovereign debt issues certain european countries company continues monitor credit economic conditions within greece spain italy portugal among members eu deteriorating economic conditions well inherent variability timing cash receipts resulted may continue result increase average length time takes collect accounts receivable outstanding time value money discounts recorded customers collection accounts receivable expected excess one year company expect writeoffs adjustments accounts receivable would material adverse effect financial position liquidity results operations december 31 2011 company’s accounts receivable greece italy spain portugal totaled approximately 16 billion amount hospital public sector receivables approximately 11 billion aggregate approximately 8 36 47 9 related greece italy spain portugal respectively december 31 2011 company’s total accounts receivable outstanding one year approximately 400 million approximately 90 related accounts receivable greece italy spain portugal mostly comprised hospital public sector receivables previously disclosed company received zero coupon bonds greek government settlement 20072009 receivables related certain government sponsored institutions 2011 company sold portion bonds company recorded impairment charges reduce remaining bonds fair value 2012 company sold remaining bonds 2011 2012 company continued receive payments 2011 2010 greek hospital public sector receivables 2011 company factored approximately 45 million hospital public sector accounts receivable nonrecourse basis spain italy december 2011 company executed factoring approximately 110 million hospital public sector accounts receivable italy factoring subject certain closing conditions company’s five largest customers cardinal health inc mckesson corporation amerisourcebergen corporation alliance healthcare zuellig pharma ltd represented aggregate approximately onefourth accounts receivable december 31 2011 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty december 31 2011 2010 company received cash collateral 327 million 157 million respectively various counterparties obligation return collateral recorded accrued current liabilities company advanced cash collateral counterparties december 31 2011 2010 8 inventories december 31 consisted inventories valued lifo method comprised approximately 27 26 inventories december 31 2011 2010 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2011 2010 amounts included 13 billion 10 billion respectively inventories expected sold within one year largely vaccines addition amounts included 127 million 197 million december 31 2011 2010 respectively inventories produced preparation product launches 9 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances reclassification goodwill pharmaceutical segment consumer care segment result segment change occurred 2011 see note 20 certain adjustments intangibles december 31 consisted 1 2011 company recorded impairment charge 118 million related marketed product 2 amounts capitalized inprocess research development accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life assets begin amortization 2011 2010 approximately 666 million 378 million respectively iprd reclassified products product rights upon receipt marketing approval major market connection merger company recorded fair value human animal health research projects underway scheringplough msp partnership significant projects include victrelis bridion vorapaxar well ezetimibeatorvastatin combination product victrelis approved fda eu 2011 company filed nda fda 2011 ezetimibeatorvastatin combination product vorapaxar phase iii clinical development bridion approved many countries outside united states remains phase iii clinical development united states 2011 company recorded 587 million iprd impairment charges within research development expenses primarily pipeline programs abandoned determined alternative use well expected delays launch timing changes cash flow assumptions certain compounds addition impairment charges related pipeline programs previously deprioritized either deemed alternative use period outlicensed third party consideration less related asset’s carrying value 2010 company recorded 24 billion iprd impairment charges within research development expenses amount 17 billion related writedown vorapaxar intangible asset company determined developments clinical research program vorapaxar including termination clinical trial constituted triggering event required company evaluate vorapaxar intangible asset impairment company continues monitor remaining 350 million asset value vorapaxar impairment remaining 763 million iprd impairment charges recorded 2010 attributable compounds abandoned determined either alternative use returned respective licensor well expected delays launch timing changes cash flow assumptions certain compounds iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates aggregate amortization expense primarily recorded within materials production costs 51 billion 2011 47 billion 2010 922 million 2009 estimated aggregate amortization expense next five years follows 2012 50 billion 2013 48 billion 2014 43 billion 2015 42 billion 2016 37 billion 10 joint ventures equity method affiliates equity income affiliates reflects performance company’s joint ventures equity method affiliates comprised following 1 upon completion merger 2009 msp partnership became wholly owned company see 2 primarily reflects results sanofi pasteur msd johnson°merck consumer pharmaceuticals company disposed september 29 2011 well merial limited disposed september 17 2009 astrazeneca lp 1982 merck entered agreement astra ab “astra” develop market astra products royaltybearing license 1993 merck’s total sales astra products reached level triggered first step establishment joint venture business carried astra merck inc “ami” merck astra owned 50 share joint venture formed 1994 developed marketed astra’s new prescription medicines united states including prilosec first class medications known proton pump inhibitors slows production acid cells stomach lining 1998 merck astra completed restructuring ownership operations joint venture whereby merck acquired astra’s interest ami renamed kbi inc “kbi” contributed kbi’s operating assets new us limited partnership astra pharmaceuticals lp “partnership” exchange 1 limited partner interest astra contributed net assets wholly owned subsidiary astra usa inc partnership exchange 99 general partner interest partnership renamed astrazeneca lp “azlp” upon astra’s 1999 merger zeneca group plc became exclusive distributor products kbi retained rights maintaining 1 limited partner interest azlp merck consent protective rights intended preserve business economic interests including restrictions power general partner make certain distributions dispositions furthermore limited events default additional rights granted company including powers direct actions remove replace partnership’s chief executive officer chief financial officer merck earns ongoing revenue based sales kbi products revenue 12 billion 13 billion 14 billion 2011 2010 2009 respectively primarily relating sales nexium well prilosec addition merck earns certain partnership returns recorded equity income affiliates reflected table returns include priority return provided partnership agreement preferential return representing merck’s share undistributed azlp gaap earnings variable return related company’s 1 limited partner interest conjunction 1998 restructuring discussed astra purchased option “asset option” payment 443 million recorded deferred income buy merck’s interest kbi products excluding gastrointestinal medicines nexium prilosec “nonppi products” april 2010 astrazeneca exercised asset option merck received 647 million astrazeneca representing net present value march 31 2008 projected future pretax revenue received merck nonppi products recorded reduction company’s investment azlp company recognized 443 million deferred income 2010 component income expense net addition 1998 merck granted astra option “shares option” buy merck’s common stock interest kbi merck’s interest nexium prilosec exercisable 2012 exercise price shares option primarily based net present value projected future pretax revenue received merck nexium prilosec determined time exercise subject certain trueup mechanisms company believes likely astrazeneca exercise shares option summarized financial information azlp follows 1 merck’s partnership returns azlp generally contractually determined noted based percentage income azlp respect merck’s 1 limited partnership interest sanofi pasteur msd 1994 merck pasteur mérieux connaught sanofi pasteur sa established equallyowned joint venture market vaccines europe collaborate development combination vaccines distribution europe joint venture vaccine sales 11 billion 2011 12 billion 2010 16 billion 2009 johnson°merck consumer pharmaceuticals company september 2011 merck sold 50 interest johnson°merck consumer pharmaceuticals company “jjmcp” joint venture jj venture merck jj formed 1989 develop manufacture market distribute certain overthecounter “otc” consumer products united states canada merck received onetime payment 175 million recognized pretax gain 136 million 2011 reflected income expense net merck’s rights pepcid brand outside united states canada affected transaction following transaction jj owns venture’s assets include exclusive rights market otc pepcid mylanta mylicon local otc brands currently sold united states canada partnership assets also included manufacturing facility sales products marketed joint venture 62 million period january 1 2011 september 29 2011 divestiture date 129 million 2010 203 million 2009 merckscheringplough partnership 2000 merck scheringplough collectively “partners” entered agreement create equally owned partnership develop market united states new prescription medicines cholesterol management 2002 ezetimibe first new class cholesterollowering agents launched united states zetia marketed ezetrol outside united states 2004 combination product containing active ingredients zetia zocor approved united states vytorin marketed inegy outside united states cholesterol agreements provided sharing operating income generated msp partnership based upon percentages varied product sales level country operating income included expenses partners contractually agreed share expenses incurred support msp partnership shared partners included equity income affiliates however costs reflected overall results partners result merger msp partnership became wholly owned company merck’s share results msp partnership date merger reflected equity income affiliates activity resulting sale msp partnership products merger consolidated merck’s results see note 12 information respect litigation involving msp partnership partners related sale promotion zetia vytorin summarized financial information msp partnership follows 1 merck’s share msp partnership’s income taxes differs equity income recognized msp partnership primarily due timing recognition certain transactions merck msp partnership including milestone payments merial limited 2009 merck sold 50 interest merial limited “merial” joint venture sanofiaventis merck sanofiaventis rhônepoulenc sa formed merial 1997 combining animal health businesses fully integrated animal health company standalone joint venture equally owned party merck received 40 billion cash recorded 32 billion pretax gain 2009 reflected income expense net sales products marketed joint venture 18 billion january 1 2009 september 17 2009 divestiture date march 2011 merck sanofiaventis mutually terminated agreement form new animal health joint venture termination agreement without penalty either party investments affiliates accounted using equity method including joint ventures totaled 886 million december 31 2011 494 million december 31 2010 amounts reported assets amounts due joint ventures included deferred income taxes current assets 276 million december 31 2011 348 million december 31 2010 summarized information affiliates excluding msp partnership azlp disclosed separately follows 1 includes information jjmcp divestiture september 29 2011 2 includes information merial divestiture september 17 2009 11 loans payable longterm debt commitments loans payable december 31 2011 included 11 billion commercial paper 403 million shortterm foreign borrowings 469 million longdated notes subject repayment option holders loans payable december 31 2010 included 15 billion notes due 2011 250 million commercial paper 142 million shortterm foreign borrowings 496 million longdated notes subject repayment option holders longterm debt december 31 consisted presented table included 28 million borrowings variable rates averaging 02 2011 04 2010 also included foreign borrowings 62 million 98 million december 31 2011 2010 respectively varying rates 85 2011 85 2010 exception 4375 notes due 2013 63 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices connection merger effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent merger certain company’s borrowings require merck comply financial covenants including requirement total debt capitalization ratio defined applicable agreements exceed 60 december 31 2011 company compliance covenants aggregate maturities longterm debt next five years follows 2012 24 million 2013 18 billion 2014 21 billion 2015 21 billion 2016 893 million may 2011 company entered new 20 billion 364day credit facility new 20 billion fouryear credit facility maturing may 2015 company terminated existing 20 billion 364day credit facility expired may 2011 20 billion revolving credit facility scheduled mature august 2012 outstanding facilities provide backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding either facility rental expense operating leases net sublease income 411 million 2011 431 million 2010 237 million 2009 minimum aggregate rental commitments noncancellable leases follows 2012 215 million 2013 157 million 2014 119 million 2015 98 million 2016 68 million thereafter 115 million company significant capital leases 12 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well additional matters antitrust actions except vioxx litigation enhance litigation defined separate assessments provided note opinion company unlikely resolution matters material company’s financial position results operations cash flows given preliminary nature litigation discussed including vioxx litigation enhance litigation complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made result number factors product liability insurance become less available cost increased significantly company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance certain product liabilities effective august 1 2004 including liability legacy merck products first sold date company continue evaluate insurance needs costs availability benefits product liability insurance future vioxx litigation product liability lawsuits previously disclosed merck defendant approximately 100 federal state lawsuits alleging personal injury economic loss result purchase use vioxx remaining cases coordinated multidistrict litigation us district court eastern district louisiana “vioxx mdl” judge eldon e fallon actions discussed paragraph “other lawsuits” collectively referred “vioxx product liability lawsuits” us vioxx product liability lawsuits tried 2011 one currently scheduled trial 2012 merck previously disclosed outcomes several vioxx product liability lawsuits tried prior 2011 posttrial appeals resolved december 16 2011 texas supreme court denied plaintiff’s petition review ernst v merck previously disclosed details associated ernst case lawsuits pending various us courts putative class actions purportedly brought behalf individual purchasers users vioxx seeking reimbursement alleged economic loss vioxx mdl proceeding approximately 30 class actions remain june 2010 merck moved strike class claims judgment pleadings regarding master complaint includes abovereferenced cases briefing motion completed september 2010 vioxx mdl court heard oral argument merck’s motion october 2010 took advisement 2008 missouri state court certified class missouri plaintiffs seeking reimbursement outofpocket costs relating vioxx trial scheduled begin may 21 2012 addition indiana plaintiffs filed motion certify class indiana vioxx purchasers case pending circuit court marion county indiana april 2010 kentucky state court denied merck’s motion summary judgment certified class kentucky plaintiffs seeking reimbursement outofpocket costs relating vioxx trial court subsequently entered amended class certification order january 27 2011 merck appealed order kentucky court appeals february 10 2012 kentucky court appeals reversed trial court’s amended class certification order denied certification class kentucky plaintiffs merck also named defendant several lawsuits brought behalf government entities eleven suits brought state attorneys general one brought behalf county actions vioxx mdl proceeding actions allege merck misrepresented safety vioxx one suits seek recovery expenditures vioxx governmentfunded health care programs medicaid along relief penalties attorneys’ fees action brought attorney general kentucky seeks penalties alleged consumer fraud act violations judge fallon remanded kentucky case state court january 3 2012 merck appealing decision lawsuit brought county putative class action filed santa clara county california behalf similarly situated california counties merck moved judgment pleadings case brought santa clara county september 2011 court heard oral argument motion january 18 2012 addition merck moved dismiss case brought attorney general oklahoma december 2010 march 2010 judge fallon partially granted partially denied merck’s motion summary judgment louisiana attorney general case trial remaining claims judge fallon completed april 2010 judge fallon found favor merck june 2010 dismissing louisiana attorney general’s remaining claims prejudice louisiana attorney general filed notice appeal fifth circuit dismissed appeal without prejudice pursuant scheduling rules october 2011 louisiana attorney general requested stay appeal shareholder lawsuits previously disclosed addition vioxx product liability lawsuits various putative class actions individual lawsuits federal securities laws state laws filed merck various current former officers directors “vioxx securities lawsuits” vioxx securities lawsuits coordinated multidistrict litigation us district court district new jersey judge stanley r chesler consolidated purposes august 8 2011 judge chesler granted part denied part merck’s motion dismiss fifth amended class action complaint consolidated securities action among things claims based statements made voluntary withdrawal vioxx september 30 2004 dismissed october 7 2011 defendants answered fifth amended class action complaint discovery currently proceeding accordance court’s scheduling order scheduling order plaintiff’s class certification motion must filed april 10 2012 fact discovery must completed march 13 2013 previously disclosed several individual securities lawsuits filed foreign institutional investors also consolidated vioxx securities lawsuits october 2011 plaintiff’s filed amended complaints pending individual securities lawsuits also october 2011 new individual securities lawsuit filed district new jersey several foreign institutional investors case also consolidated vioxx securities lawsuits january 20 2012 defendants filed motions dismiss one individual lawsuits “abp lawsuit” stipulation order defendants required respond complaints remaining individual securities lawsuits resolution motions dismiss abp lawsuit addition previously disclosed various putative class actions filed federal court employee retirement income security act “erisa” merck certain current former officers directors “vioxx erisa lawsuits” cases consolidated judge chesler august 16 2011 parties reached agreement principle merck would pay 495 million settle vioxx erisa lawsuits november 29 2011 judge chesler granted final approval settlement dismissed vioxx erisa lawsuits prejudice international lawsuits previously disclosed addition lawsuits discussed merck named defendant litigation relating vioxx australia brazil canada europe israel collectively “vioxx foreign lawsuits” following trial representative action 2009 first instance judge federal court australia entered orders 2010 dismissed claims merck regard merck’s australian subsidiary merck sharp dohme australia pty ltd “msd australia” court dismissed certain claims awarded applicant court found suffered myocardial infarction “mi” ingesting vioxx approximately 33 months au 330465 based statutory claims vioxx fit purpose merchantable quality even though court rejected applicant’s claim merck msd australia knew ought known prior voluntary withdrawal vioxx september 2004 vioxx materially increased risk mi court also determined findings fact law common claims group members whose individual claims would proceed reference findings msd australia appealed adverse findings full federal court “full court” heard appeal crossappeal august 2011 october 2011 full court allowed msd australia’s appeal set aside judgment favor applicant dismissed action full court held vioxx proven cause applicant’s mi msd australia liable applicant damages negligence former trade practices act full court also affirmed first instance decision favor msd australia applicant’s statutory defect claim holding msd australia’s state art defense proven based development scientific knowledge time effect decision upon claims remaining group members remains determined applicant seeking leave appeal full court’s judgment high court australia january 19 2012 merck announced entered agreement “canada settlement agreement” resolve claims including certain class actions putative class actions related vioxx canada agreement pending approval courts canada’s provinces canada settlement agreement approved specified conditions including among others right merck terminate optouts met conditions set forth certain merck termination rights accordingly may waived merck would make payments aggregating minimum c21806250 approximately 215 million us dollars december 31 2011 maximum c36881250 approximately 363 million us dollars december 31 2011 “canada settlement amount” exact canada settlement amount depend number individuals submit documented claims determined meet certain threshold “gates” relating alleged injury event alleged usage vioxx addition payments eligible claimants experienced diagnosed mi sudden cardiac death diagnosed ischemic stroke settlement also includes fixed payments c3500000 provinces territories c6000000 towards class counsel fees c1000000 administrative expenses involved implementation canada settlement agreement approved legal fees administrative expenses exceed specified amounts excess would paid amount funded eligible claimants derivative claimants company recorded reserve fourth quarter 2011 settlement canada settlement agreement provides merck denies allegations denies damages payable concede admit liability merck make payment pay notice dissemination costs certain administrative costs unless approvals courts canada’s provinces secured termination rights expired without merck terminated canada settlement agreement entirety merck also certain rights terminate canada settlement agreement part relation provinces territories ontario quebec insurance company directors officers insurance coverage applicable vioxx securities lawsuits remaining stated upper limits approximately 175 million result previously disclosed insurance arbitration additional insurance coverage claims also available needed upperlevel excess policies provide coverage variety risks disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated upper limits investigations previously disclosed merck received subpoenas department justice “doj” requesting information related merck’s research marketing selling activities respect vioxx federal health care investigation criminal statutes previously disclosed march 2009 merck received letter us attorney’s office district massachusetts identifying target grand jury investigation regarding vioxx 2010 company established 950 million reserve “vioxx liability reserve” connection anticipated resolution doj’s investigation november 22 2011 company announced reached resolution federal state authorities regarding matter pending court approval civil settlement agreements signed united states individually 44 states district columbia merck pay approximately twothirds vioxx liability reserve resolve civil allegations related vioxx result united states participating states released merck civil liability related government’s allegations regarding sale promotion vioxx company also agreed plead guilty one count misdemeanor misbranding vioxx federal food drug cosmetic act promoting drug treatment rheumatoid arthritis prior fda’s approval indication april 2002 company pay fine approximately onethird vioxx liability reserve federal government part plea agreement december 16 2011 us district court district massachusetts conducted hearing regard resolution hearing parties advised court nature resolution core documents comprising resolution court scheduled subsequent hearing march 2012 court may issue ruling concerning whether accepts merck’s plea resolution reserves company believes meritorious defenses vioxx product liability lawsuits vioxx securities lawsuits vioxx foreign lawsuits collectively “vioxx lawsuits” vigorously defend view inherent difficulty predicting outcome litigation particularly many claimants seek indeterminate damages company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect remaining vioxx lawsuits noted company established vioxx liability reserve respect canada settlement agreement company established liability reserves respect vioxx litigation unfavorable outcomes vioxx litigation could material adverse effect company’s financial position liquidity results operations product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax “fosamax litigation” december 31 2011 approximately 2345 cases include approximately 2800 plaintiff groups filed pending merck either federal state court including one case seeks class action certification well damages andor medical monitoring approximately 1180 actions plaintiffs allege among things suffered osteonecrosis jaw “onj” generally subsequent invasive dental procedures tooth extraction dental implants andor delayed healing association use fosamax addition plaintiffs approximately 1165 actions generally allege sustained femur fractures andor bone injuries association use fosamax cases alleging onj andor jaw related injuries august 2006 judicial panel multidistrict litigation “jpml” ordered certain fosamax product liability cases pending federal courts nationwide transferred consolidated one multidistrict litigation “fosamax mdl” coordinated pretrial proceedings fosamax mdl transferred judge john keenan us district court southern district new york result jpml order approximately 945 cases judge keenan judge keenan issued case management order various amendments thereto set forth schedule governing proceedings focused primarily upon resolving class action certification motions 2007 completing fact discovery initial group 25 cases october 1 2008 first fosamax mdl trial boles v merck fosamax mdl court declared mistrial eight person jury could reach unanimous verdict boles case retried june 2010 resulted verdict favor plaintiff amount 8 million merck filed posttrial motions seeking judgment matter law alternative new trial october 2010 court denied merck’s posttrial motions sua sponte ordered remittitur reducing verdict 15 million plaintiff rejected remittitur ordered court requested new trial damages scheduled take place september 10 2012 merck intends appeal verdict boles new trial damages concluded next fosamax mdl trial maley v merck jury may 2010 returned unanimous verdict merck’s favor february 2010 judge keenan selected new bellwether case judith graves v merck replace flemings v merck bellwether case fosamax mdl court dismissed granted summary judgment favor merck november 2010 second circuit affirmed court’s granting summary judgment favor merck flemings case graves jury returned unanimous verdict favor merck november 2010 jury secrest v merck returned unanimous verdict favor merck october 2011 next trial scheduled fosamax mdl raber v merck subsequently dismissed addition february 2011 judge keenan ordered two bellwether trials conducted fosamax mdl spano v merck scheduled tried may 7 2012 jellema v merck scheduled tried may 7 2012 dismissed plaintiff replacement case selected first quarter 2012 case tried beginning november 13 2012 outside fosamax mdl trial florida anderson v merck scheduled begin june 2010 florida state court postponed trial date new date set january 14 2013 trial ready date carballo v merck continued august 22 2011 april 30 2012 ward v merck case scheduled tried june 11 2012 addition july 2008 application made atlantic county superior court new jersey requesting fosamax cases pending new jersey considered mass tort designation centralized management one judge new jersey october 2008 new jersey supreme court ordered pending future actions filed new jersey arising use fosamax seeking damages existing dental jawrelated injuries including onj solely seeking medical monitoring designated mass tort centralized management purposes judge carol e higbee atlantic county superior court december 31 2011 approximately 225 onj cases pending merck atlantic county new jersey july 2009 judge higbee entered case management order various amendments thereto setting forth schedule contemplates completing fact expert discovery initial group cases reviewed trial february 2011 jury rosenberg v merck first trial new jersey coordinated proceeding returned verdict merck’s favor trial sessner v merck case commenced february 27 2012 flores v merck case scheduled tried jointly sessner v merck february 27 2012 judge higbee severed flores case sessner trial flores trial rescheduled california parties reviewing claims three plaintiffs carrie smith et al v merck case claims pedrojetti v merck cases one plaintiffs expected tried mid2012 discovery ongoing fosamax mdl litigation new jersey coordinated proceeding remaining jurisdictions fosamax cases pending company intends defend lawsuits cases alleging femur fractures andor bone injuries december 31 2011 approximately 825 cases alleging femur fractures andor bone injuries filed new jersey state court pending judge higbee atlantic county superior court parties selected initial group 30 cases reviewed fact discovery plaintiffs subsequently dismissed advised dismiss seven cases selected discovery remaining cases continuing trial dates new jersey state femur fracture cases set march 2011 merck submitted motion transfer jpml seeking federal cases alleging femur fractures bone injuries consolidated one multidistrict litigation coordinated pretrial proceedings motion transfer granted may 2011 federal cases involving allegations femur fracture bone injuries transferred district new jersey fosamax mdl sited judge garrett brown initially assigned preside second fosamax mdl proceeding judge joel pisano assigned preside litigation november 2011 due judge brown’s retirement case management order entered requires parties review 40 cases later reduced 33 cases fact discovery deadline july 31 2012 expert discovery deadline november 28 2012 projected trial date first case tried sometime march 1 2013 petition filed seeking coordinate femur fracture cases filed california state court single judge orange county california petition granted judge ronald l bauer appointed preside coordinated proceedings expected replaced judge steven perk 2012 scheduling order yet entered additionally four femur fracture cases pending state courts one femur fracture case pending federal court outside mdl one case pending state courts massachusetts florida alabama georgia one pending federal court texas also one osteonecrosis hip case pending federal court idaho discovery ongoing federal state courts femur fracture cases pending company intends defend lawsuits nuvaring previously disclosed beginning may 2007 number complaints filed various jurisdictions asserting claims company’s subsidiaries organon usa inc organon pharmaceuticals usa inc organon international collectively “organon” scheringplough arising organon’s marketing sale nuvaring combined hormonal contraceptive vaginal ring plaintiffs contend organon scheringplough among things failed adequately design manufacture nuvaring failed adequately warn alleged increased risk venous thromboembolism “vte” posed nuvaring andor downplayed risk vte plaintiffs seek damages injuries allegedly sustained product use including alleged deaths heart attacks strokes majority cases currently pending federal multidistrict litigation “nuvaring mdl” venued missouri coordinated proceeding new jersey state court december 31 2011 approximately 950 nuvaring cases approximately 820 pending nuvaring mdl us district court eastern district missouri judge rodney sippel approximately 125 pending coordinated discovery proceedings bergen county superior court new jersey judge brian r martinotti four additional cases pending various state courts pursuant orders judge sippel nuvaring mdl parties originally selected pool twenty cases prepare trial pool since narrowed eight cases first trials nuvaring mdl selected pursuant judge martinotti’s order new jersey proceeding parties selected ten trial pool cases prepared trial parties completed fact discovery originally selected trial pool cases jurisdiction company anticipates expert discovery completed first trial pool cases summer 2012 certain cases original trial pool voluntarily dismissed two cases judgment entered merck’s favor result certain replacement trial pool cases remain fact discovery moreover january 31 2012 parties new jersey coordinated proceeding selected additional 10 trial pool cases completion fact discovery company anticipates status conferences held coordinated proceeding following completion expert discovery summer 2012 determine methodology selecting first cases tried time parties also discuss time frame filing motions relating admissibility expert testimony causation company intends defend lawsuits propeciaproscar previously disclosed merck defendant product liability lawsuits united states involving propecia andor proscar december 31 2011 approximately 70 lawsuits involving total approximately 170 plaintiffs instances spouses joined suits allege experienced persistent sexual side effects following cessation treatment propecia andor proscar filed merck lawsuits early stages pending federal courts new jersey washington dc florida illinois colorado missouri ohio state court new jersey certain federal plaintiffs petitioned jpml federal lawsuits consolidated pretrial purposes certain new jersey state court plaintiffs petitioned consolidation new jersey state court cases resolution motions remains pending company intends defend lawsuits governmental proceedings effective august 2 2010 merck us department health human services office inspector general “hhsoig” executed unified corporate integrity agreement “unified cia” replaced individual cias signed merck scheringplough prior merger unified cia incorporated certain requirements individual cias merck scheringplough similar although identical legacy cias merck assumed compliance obligations unified cia february 5 2013 effective november 22 2011 merck hhsoig executed new corporate integrity agreement “new cia” replaced unified cia term five years previously disclosed merck received civil investigative demand “cid” issued doj addressed inspire pharmaceuticals inc company acquired merck may 2011 cid advises relates false claims act investigation concerning allegations inspire caused submission false claims federal health benefits programs drug azasite marketing treatment indications approved fda company cooperating government investigation previously disclosed company received subpoena doj requesting information relating company’s marketing selling activities respect integrilin avelox january 2003 june 2010 civil federal health care investigation company also previously disclosed received subpoena requesting information related company’s marketing selling activities respect temodar pegintron intron january 1 2004 present federal health care investigation criminal statutes company cooperating doj’s investigations previously disclosed company received letters doj sec seek information activities number countries reference foreign corrupt practices act company cooperating agencies requests believes inquiry part broader review pharmaceutical industry practices foreign countries regard company received may continue receive additional requests information either doj sec vytorinzetia litigation previously disclosed april 2008 merck shareholder filed putative class action lawsuit federal court consolidated district new jersey another federal securities lawsuit caption merck co inc vytorin securities litigation amended consolidated complaint filed october 2008 named defendants merck merckscheringplough pharmaceuticals llc certain company’s current former officers directors complaint alleges merck delayed releasing unfavorable results enhance clinical trial regarding efficacy vytorin merck made false misleading statements expected earnings knowing results enhance study released sales vytorin would decline merck’s earnings would suffer december 2008 merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court denied defendants’ motion dismiss june 2011 lead plaintiffs filed motion leave amend consolidated complaint granted february 7 2012 parties currently briefing lead plaintiffs’ motion class certification similar consolidated putative class action securities lawsuit pending district new jersey filed scheringplough shareholder scheringplough former chairman president chief executive officer fred hassan caption scheringplough corporationenhance securities litigation amended consolidated complaint filed september 2008 names defendants scheringplough merckscheringplough pharmaceuticals certain company’s current former officers directors underwriters participated august 2007 public offering scheringplough’s common preferred stock december 2008 scheringplough defendants filed motions dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court denied defendants’ motion dismiss parties currently briefing lead plaintiffs’ motion class certification previously disclosed april 2008 member merck erisa plan filed putative class action lawsuit merck certain company’s current former officers directors alleging breached fiduciary duties erisa since time similar erisa lawsuits filed merck district new jersey lawsuits consolidated caption merck co inc vytorin erisa litigation consolidated amended complaint filed february 2009 names defendants merck various current former members company’s board directors plaintiffs allege erisa plans’ investment merck stock imprudent merck’s earnings dependent commercial success cholesterol drug vytorin defendants knew known results scientific study would cause medical community turn less expensive drugs cholesterol management april 2009 merck defendants moved dismiss lawsuit grounds plaintiffs failed state claim relief granted september 2009 court denied defendants’ motion dismiss similar consolidated putative class action erisa lawsuit currently pending district new jersey filed member scheringplough erisa plan scheringplough certain current former officers directors alleging breached fiduciary duties erisa caption scheringplough corp enhance erisa litigation consolidated amended complaint filed october 2009 names defendants scheringplough various thencurrent former members scheringplough’s board directors thencurrent former members committees scheringplough’s board directors november 2009 company defendants filed motion dismiss lawsuit grounds plaintiffs failed state claim relief granted motion denied june 2010 november 4 2011 parties reached agreement principle settle matter november 7 2011 parties informed court would submit motion preliminary approval settlement classwide basis november 14 2011 court ordered case dismissed without costs without prejudice right upon good cause shown within 60 days seek reopen action settlement consummated january 9 2012 court extended 60day period additional 60 days november 2009 stockholder company filed shareholder derivative lawsuit local 38 international brotherhood electrical workers pension fund v clark “local 38” district new jersey behalf nominal defendant company shareholders company certain company’s officers directors alleged insiders certain predecessor companies’ former officers directors alleged insiders alleged breaches fiduciary duties waste unjust enrichment gross mismanagement similar shareholder derivative lawsuit cain v hassan filed scheringplough stockholder district new jersey lawsuit company scheringplough’s thencurrent board directors certain company’s thencurrent former officers directors alleged insiders plaintiffs local 38 cain v hassan alleged defendants withheld enhance study results made false misleading statements thereby deceiving causing harm company scheringplough respectively investing public unjustly enriching insiders wasting corporate assets plaintiff local 38 voluntarily dismissed suit without prejudice july 2011 also july 2011 intervenorplantiff cain v hassan action filed second amended complaint defendants moved dismiss second amended complaint october 2011 december 2011 parties cain v hassan executed stipulation settlement would terminate litigation plaintiff moved approval settlement proposed settlement include payment monetary consideration immaterial legal fees plaintiffs’ counsel hearing held february 28 2012 motion approval settlement november 2010 company shareholder filed derivative lawsuit state court new jersey case captioned rose v hassan asserts claims substantially identical claims alleged cain v hassan april 2011 defendants rose v hassan moved stay case dismiss without prejudice favor federal derivative action august 2011 new jersey state court dismissed rose v hassan without prejudice september 2011 plaintiff rose v hassan filed notice appeal january 17 2012 plaintiff moved additional 60 days file appeal brief event cain v hassan settlement approved discovery federal lawsuits referred section collectively “enhance litigation” coordinated substantially complete company believes meritorious defenses enhance litigation intends vigorously defend lawsuits company unable predict outcome matters time cannot reasonably estimate possible loss range loss respect enhance litigation unfavorable outcomes resulting enhance litigation could material adverse effect company’s financial position liquidity results operations insurance company directors officers insurance coverage applicable vytorin shareholder lawsuits brought legacy scheringplough shareholders stated upper limits approximately 250 million company fiduciary insurance vytorin erisa lawsuits stated upper limits approximately 265 million disputes insurers availability company’s insurance coverage claims likely additional disputes amounts actually recovered policies discussed paragraph may less stated limits commercial litigation awp litigation previously disclosed company andor certain subsidiaries remain defendants cases brought various states alleging manipulation pharmaceutical manufacturers average wholesale prices “awp” sometimes used public private payors calculating provider reimbursement levels outcome lawsuits could include substantial damages imposition substantial fines penalties injunctive administrative remedies 2011 company settled certain awp cases brought states utah south carolina alaska idaho kentucky pennsylvania mississippi wisconsin iowa massachusetts certain new york counties company andor certain subsidiaries continue defendants cases brought 10 states kdur antitrust litigation previously disclosed june 1997 january 1998 scheringplough settled patent litigation upshersmith inc “upshersmith” esi lederle inc “lederle” respectively relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upshersmith filed abbreviated new drug applications “andas” following commencement administrative proceeding united states federal trade commission “ftc” 2001 alleging anticompetitive effects settlements resolved scheringplough’s favor putative class nonclass action suits filed behalf direct indirect purchasers kdur scheringplough upshersmith lederle consolidated multidistrict litigation us district court district new jersey suits claimed violations federal state antitrust laws well state statutory common law causes action sought unspecified damages april 2008 indirect purchasers voluntarily dismissed case february 2009 special master recommended district court dismiss remaining lawsuits summary judgment march 2010 district court adopted recommendation granted summary judgment defendants dismissed matter entirety plaintiffs appealed decision third circuit court appeals defendants simultaneously appealing december 2008 decision district court certify certain direct purchaser plaintiffs’ claims class action patent litigation time generic manufacturers pharmaceutical products file andas fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies certain products company marketed via agreements companies currently involved patent infringement litigation united states include azasite cancidas nasonex nexium noxafil vytorin zetia similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement generic companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect legacy scheringplough products potentially significant intangible asset impairment charges azasite may 2011 patent infringement suit filed united states sandoz inc “sandoz” respect sandoz’s application fda seeking prepatent expiry approval market generic version azasite lawsuit automatically stays fda approval sandoz’s anda october 2013 adverse court decision whichever may occur earlier cancidas november 2009 patent infringement lawsuit filed united states teva parenteral medicines inc “tpm” respect tpm’s application fda seeking prepatent expiry approval sell generic version cancidas lawsuit dismissed rights granted tpm also march 2010 patent infringement lawsuit filed united states sandoz respect sandoz’s application fda seeking prepatent expiry approval sell generic version cancidas june 2011 sandoz amended challenge merck’s cancidas patents stating seek fda approval earlier expiry patent occurs july 26 2015 sandoz maintain challenge cancidas patent expires september 28 2017 therefore lawsuit continue however fda cannot approve sandoz’s application earlier july 26 2015 integrilin february 2009 patent infringement lawsuit filed jointly millennium pharmaceuticals inc united states tpm respect tpm’s application fda seeking approval sell generic version integrilin prior expiry last expire listed patent october 2011 parties entered settlement agreement allowing tpm sell generic version integrilin beginning june 2 2015 nasonex december 2009 patent infringement suit filed united states apotex corp “apotex” respect apotex’s application fda seeking prepatent expiry approval market generic version nasonex lawsuit automatically stays fda approval apotex’s anda may 2012 adverse court decision whichever may occur earlier trial expected take place 2012 nexium november 2005 patent infringement lawsuit filed jointly astrazeneca united states ranbaxy laboratories ltd “ranbaxy” respect ranbaxy’s application fda seeking prepatent expiry approval sell generic version nexium previously disclosed astrazeneca merck ranbaxy entered settlement agreement provided ranbaxy entitled bring generic esomeprazole product market united states may 27 2014 company astrazeneca received cid ftc july 2008 regarding settlement agreement ranbaxy company cooperating ftc responding cid march 2006 patent infringement lawsuit filed jointly astrazeneca ivax pharmaceuticals inc “ivax” later acquired teva pharmaceuticals inc “teva” respect ivax’s application fda seeking prepatent expiry approval sell generic version nexium january 2010 astrazeneca merck tevaivax entered settlement agreement provides tevaivax entitled bring generic esomeprazole product market united states may 27 2014 patent infringement lawsuits also filed united states dr reddy’s laboratories “dr reddy’s” sandoz lupin ltd “lupin” respect respective applications fda seeking prepatent expiry approval sell generic versions nexium january 2011 astrazeneca merck dr reddy’s entered settlement agreement provides dr reddy’s entitled bring generic esomeprazole product market united states may 27 2014 june 2011 astrazeneca merck sandoz entered settlement agreement provides sandoz entitled bring generic esomeprazole product market united states may 27 2014 january 2012 astrazeneca merck lupin entered settlement agreement provides lupin entitled bring generic esomeprazole product market united states may 27 2014 february 2011 patent infringement lawsuit filed jointly astrazeneca united states hamni usa inc “hamni” respect hamni’s application fda seeking prepatent expiry approval sell generic version nexium august 2011 patent infringement lawsuit filed jointly astrazeneca united states hetero drugs ltd unit iii “hetero” respect hetero’s application fda seeking prepatent expiry approval sell generic version nexium january 2012 patent infringement lawsuit filed jointly astrazeneca united states torrent pharmaceuticals ltd “torrent” respect torrent’s application fda seeking prepatent expiry approval sell generic version nexium patent infringement lawsuit also filed jointly astrazeneca february 2010 united states sun pharma global fze “sun pharma” respect application fda seeking prepatent expiry approval sell generic version nexium iv october 2011 astrazeneca merck sun pharma entered settlement agreement provides sun pharma entitled bring generic esomeprazole iv product market united states january 1 2014 noxafil may 2011 patent infringement suit filed united states sandoz respect sandoz’s application fda seeking prepatent expiry approval market generic version noxafil lawsuit automatically stays fda approval sandoz’s anda september 2013 adverse court decision whichever may occur earlier nuvaring february 2011 patent infringement suit brought merck international trade commission “itc” femina pharma incorporated “femina” respect product nuvaring complaint alleged nuvaring infringes patent owned femina’s itc complaint sought exclusion order importation nuvaring united states hearing began itc proceeding january 17 2012 january 18 2012 femina withdrew complaint terminated action addition november 2011 femina brought patent infringement lawsuit merck eastern district virginia asserting nuvaring infringes patent case stayed pending outcome itc proceeding company believes femina intends pursue litigation eastern district virginia propecia december 2010 patent infringement lawsuit filed united states hetero drugs limited “hetero” respect hetero’s application fda seeking prepatent expiry approval sell generic version propecia march 2011 company settled lawsuit hetero agreeing allow hetero sell generic 1 mg finasteride product beginning july 1 2013 temodar july 2007 patent infringement action filed jointly cancer research technologies limited “crt” united states barr laboratories “barr” later acquired teva respect barr’s application fda seeking prepatent expiry approval sell generic version temodar january 2010 court issued decision finding crt patent unenforceable grounds prosecution laches inequitable conduct november 2010 appeals court issued decision reversing trial court’s finding december 2010 barr filed petition seeking rehearing en banc appeal petition denied june 2011 barr filed petition review us supreme court denied virtue agreement barr launch product appeal process company agreed barr launch product august 2013 september 2010 patent infringement lawsuit filed jointly crt united states sun pharmaceutical industries inc “sun” respect sun’s application fda seeking prepatent expiry approval sell generic version temodar lawsuit automatically stayed fda approval sun’s anda february 2013 adverse court decision whichever may occur earlier november 2010 patent infringement lawsuit filed jointly crt united states accord healthcare inc “accord” respect application fda seeking prepatent expiry approval sell generic version temodar lawsuit automatically stayed fda approval accord’s application april 13 2013 adverse court decision whichever may occur earlier company crt entered agreements sun accord stay respective lawsuits pending outcome us supreme court appeal process barr lawsuit light us supreme court’s denial barr’s petition sun accord agreed withdraw challenges temodar patent respective lawsuits withdrawn vytorin december 2009 patent infringement lawsuit filed united states mylan pharmaceuticals inc “mylan” respect mylan’s application fda seeking prepatent expiry approval sell generic version vytorin lawsuit automatically stays fda approval mylan’s application may 2012 adverse court decision whichever may occur earlier trial mylan jointly respect zetia vytorin conducted december 2011 decision expected 2012 february 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version vytorin july 2011 patent infringement lawsuit dismissed teva agreed sell generic versions zetia vytorin company’s exclusivity rights expire april 25 2017 except certain circumstances august 2010 patent infringement lawsuit filed united states impax laboratories inc “impax” respect impax’s application fda seeking prepatent expiry approval sell generic version vytorin agreement reached impax stay lawsuit pending outcome lawsuit mylan october 2011 patent infringement lawsuit filed united states actavis inc “actavis” respect actavis’ application fda seeking prepatent expiry approval sell generic version vytorin lawsuit automatically stays fda approval actavis’ application may 2012 adverse court decision whichever may occur earlier zetia march 2007 patent infringement lawsuit filed united states glenmark pharmaceuticals inc usa parent corporation collectively “glenmark” respect glenmark’s application fda seeking prepatent expiry approval sell generic version zetia may 2010 glenmark agreed settlement virtue glenmark permitted launch generic product united states december 12 2016 subject receiving final fda approval june 2010 patent infringement lawsuit filed united states mylan respect mylan’s application fda seeking prepatent expiry approval sell generic version zetia lawsuit automatically stays fda approval mylan’s application december 2012 adverse court decision whichever may occur earlier trial mylan jointly respect zetia vytorin conducted december 2011 decision expected 2012 september 2010 patent infringement lawsuit filed united states teva respect teva’s application fda seeking prepatent expiry approval sell generic version zetia july 2011 patent infringement lawsuit dismissed without rights granted teva litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial position results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2011 2010 approximately 240 million 190 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial position results operations liquidity capital resources company taken active role identifying providing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties previously disclosed approximately 2200 plaintiffs filed amended complaint merck 12 defendants us district court eastern district california asserting claims clean water act resource conservation recovery act well negligence nuisance suit seeks damages personal injury diminution property value medical monitoring alleged real personal property damage associated groundwater surface water soil contamination found site former merck subsidiary merced california certain defendants suit settled plaintiffs regarding aspects plaintiffs’ claims lawsuit proceeding phased manner jury trial commenced february 2011 jury asked make certain factual findings regarding whether contamination moved offsite areas plaintiffs could exposed contamination amounts defendants “phase 1” trial included merck three original 12 defendants march 2011 phase 1 jury returned mixed verdict finding favor merck defendants plaintiffs’ claims specifically jury found contamination site enter affect plaintiffs’ municipal water supply wells private domestic wells jury found however plaintiffs could exposed contamination via air emissions prior 1994 well via surface water form storm drainage channeled adjacent irrigation canal including flood april 2006 response posttrial motions merck defendants september 7 2011 court entered order setting aside part phase 1 jury’s findings favor plaintiffs specifically court held plaintiffs could exposed contamination surface flood water april 2006 flood fact time later 1991 merck’s motion reconsideration remainder jury’s phase verdict adverse merck denied following retirement judge handling case september 21 2011 case assigned judge david carter us district court central district california judge carter selected 10 plaintiffs whose claims reviewed depending outcome merck’s anticipated summary judgment motions possibly tried early 2013 previously disclosed doj us environmental protection agency “epa” notified company pursuing civil penalties merck excess 2 million alleged violations air water waste regulations resulting epa’s multimedia inspections merck’s west point riverside pennsylvania facilities 2006 merck’s subsequent information submissions epa stipulation settling matter filed us district court middle district pennsylvania september 28 2011 pursuant company denied alleged violations agreed civil penalty amount 15 million following court’s approval stipulation november 17 2011 merck paid civil penalty united states claims merck dismissed prejudice management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 171 million 185 million december 31 2011 2010 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 133 million aggregate management also believe expenditures result material adverse effect company’s financial position results operations liquidity capital resources year 13 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock authorized shares preferred stock series 11500000 shares designated 6 mandatory convertible preferred stock 6 mandatory convertible preferred stock connection merger holders scheringplough 6 preferred stock received 6 preferred stock rights substantially similar rights scheringplough 6 preferred stock accordance merck restated certificate incorporation result merger 6 preferred stock became subject “makewhole” acquisition provisions preferred stock effective november 3 2009 makewhole acquisition conversion period ended november 19 2009 6 preferred stock convertible makewhole conversion rate 82021 share preferred stock converted period holder received 8612 cash 47302 merck common shares holders also received dividend makewhole payment 1079 1082 per share depending date conversion total 9110423 shares 6 preferred stock converted 43093881 shares merck common stock cash payments approximately 785 million made holders converted addition makewhole dividend payments 98 million made holders converted representing present value remaining future dividend payments conversion date mandatory conversion date august 13 2010 using discount rate stipulated terms preferred stock august 13 2010 remaining outstanding 6 mandatory convertible preferred stock automatically converted terms right receive cash shares merck common stock share 6 mandatory convertible preferred stock holders received 8506 cash 46719 shares merck common stock result conversion approximately 72 million paid holders approximately 4 million merck common shares issued capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans 2 pursuant merger agreement certain merck’s treasury shares cancelled noncontrolling interests connection 1998 restructuring ami merck assumed 24 billion par value preferred stock obligation dividend rate 5 per annum carried kbi included noncontrolling interests astrazeneca exercises shares option see note 10 preferred stock obligation retired 14 sharebased compensation plans company sharebased compensation plans employees nonemployee directors employees certain company’s equity method investees may granted options purchase shares company common stock fair market value time grant addition stock options company grants performance share units “psus” restricted stock units “rsus” certain management level employees plans approved company’s shareholders result merger scheringplough 2006 stock incentive plan “scheringplough 2006 sip” amended restated sharebased compensation instruments remain available future grant scheringplough 2006 sip merck employees scheringplough prior merger outstanding sharebased compensation instruments well sharebased compensation instruments available future grant legacy merck legacy scheringplough incentive plans also result merger certain sharebased compensation instruments previously granted scheringplough 2006 sip legacy scheringplough incentive plans exchanged merck replacement awards related precombination services became payable cash fair value replacement awards attributable precombination service 525 million included calculation consideration transferred see note 3 significant portion legacy scheringplough awards vested opening balance sheet time merger scheringplough sharebased compensation instruments immediately vest upon completion merger exchanged merck replacement awards generally vest basis original grants made scheringplough legacy incentive plans immediately vested employee terminated company within two years merger certain circumstances fair value merck replacement awards attributed postcombination services recognized compensation cost subsequent merger requisite service period awards december 31 2011 164 million shares collectively authorized future grants company’s sharebased compensation plans prior merger employee sharebased compensation awards settled primarily treasury shares subsequent merger awards either settled newly issued shares treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus certain psus granted december 31 2009 employees participate dividends basis common shares dividends nonforfeitable holder rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting fair value stock option rsu psu replacement awards determined fixed time merger psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period generally three years subject terms applicable awards total pretax sharebased compensation cost recorded 2011 2010 2009 369 million 509 million 415 million respectively related income tax benefits 118 million 173 million 132 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2011 2010 2009 3647 3430 2431 per option respectively weighted average fair value options granted 2011 2010 2009 539 799 402 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table 1 fair value stock options vested 2009 excludes fair value options vested result merger attributable precombination service summary nonvested rsu psu activity shares thousands follows december 31 2011 391 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 18 years segment reporting sharebased compensation costs unallocated expenses 15 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries pension benefits united states based formula considers final average pay years credited service addition company provides medical dental life insurance benefits principally eligible us retirees similar benefits dependents postretirement benefit plans december 2011 changes company’s benefit plans approved discussed company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost pension postretirement benefit plans consisted following components higher costs 2011 2010 compared 2009 primarily due incremental costs associated merger net periodic benefit cost attributable us pension plans included table 406 million 2011 289 million 2010 289 million 2009 connection restructuring actions see note 4 termination charges recorded 2011 2010 2009 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded 2011 2010 2009 pension postretirement benefit plans addition settlements recorded 2011 2010 2009 certain domestic international pension plans obligations funded status summarized information changes plan assets benefit obligation funded status amounts recorded december 31 follows fair value us pension plan assets included preceding table 68 billion 72 billion december 31 2011 2010 respectively projected benefit obligation us pension plans 87 billion 84 billion respectively approximately 40 company’s pension projected benefit obligation december 31 2011 2010 relates international defined benefit plans individual plan significant relative total projected benefit obligation december 31 2011 2010 accumulated benefit obligation 129 billion 118 billion respectively pension plans 78 billion 69 billion respectively related us pension plans pension plans projected benefit obligations excess plan assets december 31 2011 2010 fair value plan assets 93 billion 43 billion respectively benefit obligations 119 billion 64 billion respectively plans accumulated benefit obligations excess plan assets december 31 2011 2010 fair value plan assets 36 billion 26 billion respectively accumulated benefit obligations 54 billion 38 billion respectively plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2011 2010 637 million 648 million respectively approximately 50 company’s pension investments year end categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 plans’ level 3 investments real estate generally valued market appraisals 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows total pension postretirement benefit plan assets excluded fair value hierarchy include interest receivable well payables receivables related purchases sales investments respectively company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 45 60 us equities 20 30 international equities 15 25 fixedincome investments 8 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 13 reflects equity allocation diversification benefits among asset classes portfolio invests nonus pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions pension plans postretirement benefit plans 2012 expected approximately 700 million 100 million respectively expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees following amounts reflected components oci estimated net loss gain prior service cost credit amounts amortized aoci net pension postretirement benefit cost 2012 237 million 66 million respectively pension plans 37 million 67 million respectively postretirement benefit plans actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining pension plan us pension postretirement benefit plan information follows 2009 net cost rates preceding table include costs associated scheringplough benefit plans date merger december 31 2009 expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined country basis developing expected rate return within country longterm historical returns data considered well actual returns plan assets capital markets experience using reference information longterm return expectations asset category weighted average expected return country’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2012 company’s expected rate return range 575 875 compared range 525 875 2011 us pension postretirement benefit plans health care cost trend rate assumptions postretirement benefit plans follows one percentage point change health care cost trend rate would following effects benefit plan changes december 2011 compensation benefits committee company’s board directors approved management’s proposal change merck’s primary us defined benefit pension plans’ benefit formulas “cash balance” formulas beginning service january 1 2013 active participants plans december 31 2012 accrue pension benefits prospectively using new cash balance formulas based age service pay interest however transition period january 1 2013 december 31 2019 participants earn greater benefit calculated employee’s legacy final average pay formula new cash balance formula years service december 31 2019 participants earn future benefits cash balance formula changes plans reduced pension benefit obligations december 31 2011 approximately 752 million corresponding offset aoci largely attributable change using final average pay career average pay amortized reduction net periodic benefit cost employees’ future service period approximately 11 years also december 2011 company approved changes us retiree healthcare plans including changes certain employees contribution subsidy level eligibility criteria subsidized retiree medical coverage elimination certain retiree dental coverage reduce merck’s future costs related plans changes reduced company’s benefit obligations related us retiree healthcare plans december 31 2011 approximately 150 million corresponding offset aoci amortized reduction net periodic benefit cost employees’ future service period approximately 11 years savings plans company also maintains defined contribution savings plans united states including plans assumed connection merger company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2011 2010 2009 166 million 155 million 111 million respectively 16 income expense net increase interest income 2011 compared 2010 primarily reflects higher average investment balances decline interest income increase interest expense 2010 compared 2009 largely attributable merger exchange losses 2010 reflect 200 million losses due two venezuelan currency devaluations discussed net presented table 2011 reflects 500 million charge related resolution arbitration proceeding involving company’s rights market remicade simponi see note 6 136 million gain disposition company’s interest jjmcp joint venture see note 10 127 million gain sale certain manufacturing facilities related assets see note 5 net 2010 reflects 950 million charge vioxx liability reserve see note 12 charges related settlement certain pending awp litigation partially offset 443 million income recognized upon astrazeneca’s asset option exercise see note 10 102 million income recognized settlement certain disputed royalties net 2009 primarily reflects 75 billion gain resulting recognizing merck’s previously held equity interest msp partnership fair value result obtaining control msp partnership merger 32 billion gain sale merck’s interest merial see note 10 noted exchange losses 2010 reflect losses relating venezuelan currency devaluations effective january 11 2010 venezuelan government devalued currency bsf 215 per us dollar twotiered official exchange rate 1 “the essentials rate” bsf 260 per us dollar 2 “the nonessentials rate” bsf 430 per us dollar january 2010 company required remeasure local currency operations venezuela us dollars venezuelan economy determined hyperinflationary throughout 2010 company settled transactions essentials rate therefore remeasured monetary assets liabilities utilizing essentials rate december 2010 venezuelan government announced would eliminate essentials rate effective january 1 2011 transactions would settled official rate bsf 430 per us dollar result announcement company remeasured december 31 2010 monetary assets liabilities new official rate interest paid 600 million 2011 763 million 2010 351 million 2009 excludes commitment fees interest paid 2011 net 288 million received company termination certain interest rate swap contracts year see note 7 17 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effect contingency reserves research credits export incentives miscellaneous items 2011 2010 tax rate reconciliation percentages reflect impact significant decline company’s income taxes resulting primarily full year acquisitionrelated costs including iprd impairment charges restructuring charges well arbitration settlement charge 2011 charge vioxx liability reserve 2010 income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss “nol” carryforwards several jurisdictions december 31 2011 approximately 239 million deferred taxes nol carryforwards relate foreign jurisdictions none individually significant approximately 194 million valuation allowances established foreign nol carryforwards addition company approximately 299 million deferred tax assets relating various us tax credit carryforwards nol carryforwards amounts 247 million expected fully utilized prior expiry income taxes paid 2011 2010 2009 27 billion 16 billion 958 million respectively stock option exercises significant impact taxes paid 2011 2010 2009 reconciliation beginning ending amount unrecognized tax benefits follows 1 amount 2011 reflects conclusion irs examination merck’s 20022005 federal income tax returns resolution interest rate swap dispute irs discussed company recognize unrecognized tax benefits 43 billion december 31 2011 income tax provision would reflect favorable net impact 36 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2011 could decrease 600 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted benefit expense 95 million 2011 144 million 2010 163 million 2009 liabilities accrued interest penalties 13 billion 16 billion december 31 2011 2010 respectively april 2011 irs concluded examination merck’s 20022005 federal income tax returns result company required make net payments approximately 465 million company’s unrecognized tax benefits years examination exceeded adjustments related examination period therefore company recorded net 700 million tax provision benefit 2011 net benefit reflects decrease unrecognized tax benefits years examination partially offset increases unrecognized tax benefits years subsequent examination period result settlement company disagrees irs treatment one issue raised examination appealing matter irs administrative process previously disclosed october 2006 canada revenue agency “cra” issued merck notice reassessment containing adjustments related certain intercompany pricing matters february 2009 merck cra negotiated settlement agreement regard matters accordance settlement merck paid additional tax approximately 300 million interest approximately 360 million additional amounts penalties due assessment settlement accounted first quarter 2009 merck previously established reserves matters portion taxes paid expected creditable us tax purposes addition previously disclosed cra proposed adjustments 1999 2000 relating intercompany pricing matters july 2011 cra issued assessments miscellaneous audit issues tax years 20012004 adjustments would increase canadian tax due approximately 330 million plus approximately 380 million interest december 31 2011 company disagrees positions taken cra believes without merit company continues contest assessments cra appeals process cra expected prepare similar adjustments later years management believes resolution matters material effect company’s financial position liquidity october 2001 internal revenue service “irs” auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income taxes 279 million interest company’s tax reserves adequate cover payments scheringplough filed refund claims taxes interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount taxes interest decision favor government announced august 2009 affirmed us court appeals third circuit june 2011 2010 irs finalized examination scheringplough’s 20032006 tax years audit cycle company reached agreement irs adjustment income related intercompany pricing matters income adjustment mostly reduced nols tax credit carryforwards additionally company seeking resolution one issue raised examination irs administrative appeals process company’s reserves uncertain tax positions adequate cover adjustments related examination period irs began examination 20072009 tax years 2010 addition various state foreign tax examinations progress significant tax jurisdictions us state foreign company’s income tax returns open examination period 2001 2011 december 31 2011 foreign earnings 443 billion retained indefinitely subsidiary companies reinvestment therefore provision made income taxes would payable upon distribution earnings would practicable determine amount related unrecognized deferred income tax liability addition company subsidiaries operating puerto rico singapore tax incentive grants begin expire 2013 18 earnings per share company calculates earnings per share pursuant twoclass method earnings allocation formula determines earnings per share common stock participating securities according dividends declared participation rights undistributed earnings method earnings distributed undistributed allocated common shares participating securities based respective rights receive dividends rsus certain psus granted december 31 2009 certain management level employees see note 14 participate dividends basis common shares dividends nonforfeitable holder result rsus psus meet definition participating security rsus psus issued january 1 2010 dividends declared vesting period payable employees upon vesting therefore rsus psus meet definition participating security calculations earnings per share twoclass method follows 1 issuable primarily sharebased compensation plans 2011 2010 2009 169 million 174 million 228 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 19 comprehensive income loss components comprehensive income loss follows also included cumulative translation adjustment pretax gains losses approximately 392 million 12 billion 2011 2010 respectively relating translation impacts intangible assets recorded conjunction merger components accumulated comprehensive loss follows 20 segment reporting company’s operations principally managed products basis comprised four operating segments pharmaceutical animal health consumer care alliances includes revenue equity income company’s relationship azlp animal health consumer care alliances segments material separate reporting included table pharmaceutical segment includes human health pharmaceutical vaccine products marketed either directly company joint ventures human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccines sold us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles company also animal health operations discover develop manufacture market animal health products including vaccines company sells veterinarians distributors animal producers additionally company consumer care operations develop manufacture market overthecounter foot care sun care products sold wholesale retail drug food chain mass merchandiser outlets segment composition reflects certain managerial changes implemented consumer care product sales outside united states canada previously included pharmaceutical segment included consumer care segment disclosures prior years recast comparable basis 2011 accounting policies segments described note 2 revenues profits segments follows segment profits comprised segment sales less certain elements materials production costs operating expenses including components equity income loss affiliates depreciation amortization expenses internal management reporting presented chief operating decision maker merck allocate production costs standard costs research development expenses general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits sales1 company’s products follows 1 sales legacy scheringplough products 2009 included postmerger period addition prior merger substantially sales zetia vytorin recognized msp partnership results merck’s interest msp partnership recorded equity income affiliates result merger msp partnership became wholly owned company accordingly sales msp partnership products merger reflected table sales zetia vytorin 2009 reflect merck’s sales products latin america part msp partnership well sales products postmerger period 2009 2 amounts reflect sales vaccines sold major european markets company’s joint venture sanofi pasteur msd results reflected equity income affiliates amounts however reflect supply sales sanofi pasteur msd 3 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 4 reflects nonreportable segments including animal health consumer care revenue company’s relationship azlp primarily relating sales nexium well prilosec revenue azlp 12 billion 13 billion 14 billion 2011 2010 2009 respectively 5 revenues primarily comprised miscellaneous corporate revenues thirdparty manufacturing sales related divested products businesses supply sales included segment results consolidated revenues geographic area derived follows reconciliation total segment profits consolidated income taxes follows profits losses primarily comprised miscellaneous corporate profits losses well operating profits losses related thirdparty manufacturing sales divested products businesses supply sales adjustments represent elimination effect double counting certain items income expense equity income affiliates includes taxes paid joint venture level portion equity income reported segment profits expenses net include expenses corporate manufacturing cost centers miscellaneous income expense net property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors shareholders merck co inc opinion accompanying consolidated balance sheets related consolidated statements income equity cash flows present fairly material respects financial position merck co inc subsidiaries december 31 2011 december 31 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also opinion merck maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso merck’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report item 9a responsibility express opinions financial statements merck’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 27 2012 b supplementary data selected quarterly financial data 2011 2010 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2010 include impact vioxx liability reserve see note 12 2 amounts 2011 include net benefit relating settlement federal income tax audit see note 17 amounts 2010 reflect income recognized astrazeneca’s asset option exercise see note 10 3 amounts 2011 include charge relating resolution arbitration proceeding jj see note 6 4 amounts 2011 2010 reflect impacts merger including amortization purchase accounting adjustments inprocess research development impairment charges see note 9 amounts 2011 2010 also include impact restructuring actions see note 4 item 9item 8 financial statements supplementary data consolidated balance sheets december 31 2002 2001 related statements consolidated income consolidated shareholders equity consolidated cash flows three years period ended december 31 2002 notes consolidated financial statements independent auditors report deloitte touche llp dated february 25 2003 unaudited quarterly data set forth beginning page 24 companys 2002 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data scheringplough corporation subsidiaries statements consolidated operations amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated cash flows amounts millions accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries consolidated balance sheets amounts millions except per share figures accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries statements consolidated shareholders’ equity amounts millions accompanying notes integral part consolidated financial statements scheringplough corporation subsidiaries notes consolidated financial statements 1 summary significant accounting policies overview scheringplough discovers develops manufactures markets medical therapies treatments enhance human health scheringplough also markets leading consumer brands overthecounter otc foot care sun care markets operates global animal health business principles consolidation consolidated financial statements include scheringplough corporation subsidiaries scheringplough intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates use assumptions affect certain reported amounts disclosures actual amounts may differ equity method accounting scheringplough accounts share activity merckscheringplough cholesterol joint venture partnership joint venture merck co inc merck using equity method accounting scheringplough significant influence joint venture’s operating financial policies accordingly scheringplough’s net sales include sales joint venture scheringplough’s share earnings joint venture included consolidated net incomeloss equity income cholesterol joint venture included profit prescription pharmaceutical segment revenue sales vytorin zetia recognized joint venture title risk loss passed customer equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck see note 3 “equity income cholesterol joint venture” information regarding joint venture cash equivalents cash equivalents include operating cash highly liquid investments original maturities three months less shortterm investments shortterm investments carried fair value classified availableforsale investments consist time deposits certificates deposit commercial paper maturities less year inventories valued lower cost market cost determined using lastin firstout lifo method substantial portion inventories located us cost inventories determined firstin firstout method fifo depreciation property equipment depreciation provided estimated useful lives properties generally use straightline method notes consolidated financial statements continued useful lives property generally follows scheringplough reviews carrying value property equipment indications impairment accordance statement financial accounting standard sfas 144 “accounting impairment disposal longlived assets” depreciation expense including accelerated depreciation related manufacturing streamlining 93 million 443 million 362 million 340 million 2006 2005 2004 respectively foreign currency translation net assets scheringplough’s international subsidiaries translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included comprehensive income loss remaining international subsidiaries nonmonetary assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income exchange gains losses arising translating intercompany balances longterm investment nature recorded foreign currency translation account transactional exchange gains losses included income revenue recognition scheringplough’s pharmaceutical products sold direct purchasers include wholesalers retailers certain health maintenance organizations price discounts rebates sales paid federal state agencies indirect purchasers market participants managed care organizations indemnify beneficiaries health plans pharmaceutical costs pharmacy benefit managers scheringplough recognizes revenue title risk loss pass purchaser reliable estimates following determined commercial discount rebate arrangements ii rebate obligations certain federal state governmental programs iii sales returns normal course business recognizing revenue scheringplough estimates records applicable commercial governmental discounts rebates well sales returns expected granted made products sold period amounts deducted sales period reliable estimates items cannot made scheringplough defers recognition revenue estimates recorded prior periods reevaluated part process earnings per common share diluted earningsloss per common share computed dividing net incomeloss available common shareholders sum weighted average number common shares outstanding plus dilutive effect shares issuable deferred stock units exercise stock options dilutive effect shares issuable upon conversion scheringplough’s mandatory convertible preferred stock notes consolidated financial statements continued basic earningsloss per common share computed dividing net incomeloss available common shareholders weighted average number common shares outstanding goodwill intangible assets sfas 142 “goodwill intangible assets” requires intangible assets acquired either individually group assets initially recognized measured based fair value intangible finite life amortized useful life intangible indefinite life including goodwill amortized scheringplough evaluates goodwill impairment using fairvaluebased test goodwill determined impaired written estimated fair value scheringplough’s goodwill primarily related animal health business assets included assets capitalized software 246 million 219 million december 31 2006 2005 respectively amortization expense 76 million 71 million 67 million 2006 2005 2004 respectively income taxes deferred income taxes recognized future tax effects temporary differences financial income tax reporting basis scheringplough’s assets liabilities based enacted tax laws rates accounting sharebased compensation prior january 1 2006 scheringplough accounted stockbased compensation arrangements using intrinsic value method sharebased employee compensation cost reflected net incomeloss scheringplough’s deferred stock units performance plans stock options granted plans exercise price equal market value underlying common stock date grant effective january 1 2006 scheringplough accounts sharebased compensation accordance fasb statement financial accounting standard 123 revised 2004 “sharebased payment” sfas 123r see note 4 “sharebased compensation” additional information impact recently issued accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” effective calendar year companies january 1 2008 statement defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement codifies definition fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date standard clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions scheringplough currently assessing potential impacts implementing standard september 2006 sec staff issued staff accounting bulletin sab topic 1n sab 108 “financial statements considering effects prior year misstatements quantifying misstatements current year financial statements” effective calendar year companies december 31 2006 sab 108 provides guidance prior year misstatements taken consideration quantifying misstatements current year financial statements purposes determining whether financial statements materially misstated guidance companies take account effect misstatement current year balance sheet well impact upon current year income statement assessing materiality current year misstatement current year misstatement quantified guidance notes consolidated financial statements continued sab topic 1m “financial statements materiality” sab 99 applied determine whether misstatement material implementation sab 108 impact scheringplough’s financial statements july 2006 fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxes” fin 48 prescribes detailed guidance financial statement recognition measurement disclosure uncertain tax positions recognized enterprise’s financial statements accordance fasb statement 109 “accounting income taxes” scheringplough required apply provisions interpretation beginning january 1 2007 provisions fin 48 applied existing uncertain income tax positions effective date upon implementation fin 48 cumulative effect applying provisions interpretation reported adjustment opening balance retained earnings see note 6 “income taxes” additional information regarding expected impacts adoption fin 48 scheringplough’s financial statements 2 special charges manufacturing streamlining manufacturing streamlining 2006 scheringplough implemented changes manufacturing operations puerto rico new jersey streamlined global supply chain enhanced scheringplough’s longterm competitiveness changes resulted phaseout closure scheringplough’s manufacturing operations manati puerto rico additional workforce reductions las piedras puerto rico new jersey total actions resulted elimination 1000 positions special charges special charges 2006 related changes scheringplough’s manufacturing operations totaled 102 million charges consisted approximately 47 million severance 55 million fixed asset impairments cost sales included 2006 cost sales approximately 146 million consisting 93 million accelerated depreciation 46 million inventory writeoffs 7 million charges related closure scheringplough’s manufacturing facilities manati puerto rico following table summarizes activities reflected consolidated financial statements related changes scheringplough’s manufacturing operations completed 2006 notes consolidated financial statements continued accrued liability balance december 31 2006 expected paid first quarter 2007 scheringplough expect incur material additional charges related manufacturing streamlining actions announced 2006 2004 2005 special charges activity special charges incurred 2005 2004 follows litigation charges 2005 litigation reserves increased 250 million resulting total reserve approximately 500 million massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 19 “legal environmental regulatory matters” august 29 2006 scheringplough announced reached agreement us attorney’s office district massachusetts us department justice settle massachusetts investigation aggregate amount 435 million plus interest settlement amount relates massachusetts investigation awp investigations litigation ongoing remaining reserve adequate cover matters subsequent december 31 2006 scheringplough made payments totaling 388 million related massachusetts settlement including interest 12 million scheringplough expects pay remaining payments next several quarters see note 19 “legal environmental regulatory matters” additional information employee termination costs august 2003 scheringplough announced global workforce reduction initiative first phase initiative voluntary early retirement program verp us program eligible employees us december 15 2003 elect early retirement receive enhanced retirement benefit approximately 900 employees elected retire program retired december 31 2005 total cost program approximately 191 million comprised increased pension costs 108 million increased postretirement health care costs 57 million vacation payments 4 million costs related accelerated vesting stock grants 22 million amounts recognized 2005 2004 program 7 million 20 million respectively employee termination costs associated verp totaled 21 million 99 million 2005 2004 respectively notes consolidated financial statements continued following summarizes activity accounts related employee termination costs asset impairment charges year ended december 31 2005 scheringplough recognized asset impairment charges 16 million related primarily consolidation scheringplough’s us biotechnology organizations year ended december 31 2004 scheringplough recognized asset impairment charges 27 million based discounted cash flows charges 7 million related primarily shutdown small european research development facility 3 equity income cholesterol joint venture may 2000 scheringplough merck co inc merck entered two separate sets agreements jointly develop market certain products us including 1 two cholesterollowering drugs 2 allergyasthma drug december 2001 cholesterol agreements expanded include countries world except japan general companies agreed collaborative activities agreements would operate virtual joint venture maximum degree possible relying respective infrastructures two companies agreements generally provide equal sharing development costs copromotion approved products company cholesterol agreements provide scheringplough merck jointly develop ezetimibe marketed zetia us asia ezetrol europe oncedaily monotherapy ii coadministration statin drug iii oncedaily fixedcombination tablet ezetimibe simvastatin zocor merck’s cholesterolmodifying medicine combination medication ezetimibesimvastatin marketed vytorin us inegy many international countries zetiaezetrol ezetimibe vytorininegy combination ezetimibesimvastatin approved use us launched several international markets scheringplough utilizes equity method accounting recording share activity merckscheringplough cholesterol joint venture scheringplough’s net sales include sales joint notes consolidated financial statements continued venture cholesterol joint venture agreements provide sharing operating income generated joint venture based upon percentages vary product sales level country us market scheringplough receives greater share profits first 300 million annual zetia sales 300 million annual zetia sales merck scheringplough partners generally share profits equally scheringplough’s allocation joint venture income increased milestones recognized either partner’s share joint venture’s income operations subject reduction partner fails perform specified minimum number physician details particular country partners agree annually minimum number physician details country partners bear costs general sales forces commercial overhead marketing joint venture products around world us canada puerto rico cholesterol agreements provide reimbursement partner physician details set annual basis italy contractual amount included profit sharing calculation reimbursed us canada puerto rico amount equal partner’s physician details multiplied contractual fixed fee scheringplough reports amounts part equity income cholesterol joint venture amounts represent reimbursement specific incremental identifiable costs scheringplough’s detailing cholesterol product markets addition amounts reflective scheringplough’s sales effort related joint venture scheringplough’s sales force related costs associated joint venture generally estimated higher year ended december 31 2005 scheringplough recognized milestones 20 million milestones related certain european approvals vytorin ezetimibesimvastatin 2005 2004 scheringplough recognized milestone 7 million related approval ezetimibesimvastatin mexico 2004 certain conditions specified joint venture agreements merck scheringplough could earn additional milestones totaling 105 million costs joint venture partners contractually share portion manufacturing costs specifically identified promotion costs including directtoconsumer advertising direct identifiable outofpocket promotion agreed upon costs specific services market support market research market expansion specialty sales force physician education programs certain specified research development expenses generally shared equally partners following information provides summary components scheringplough’s equity income cholesterol joint venture year ended december 31 equity income joint venture excludes profit arising transactions scheringplough joint venture time underlying profit realized joint venture transaction party scheringplough merck due virtual nature cholesterol joint venture scheringplough incurs substantial costs selling general administrative costs reflected equity income borne overall cost structure scheringplough costs reported respective line items statements consolidated operations separately identifiable cholesterol agreements provide notes consolidated financial statements continued jointly owned facilities products resulting joint venture manufactured facilities owned either scheringplough merck allergyasthma agreements provide joint development marketing partners oncedaily fixedcombination tablet containing claritin singulair merck’s oncedaily leukotriene receptor antagonist treatment asthma seasonal allergic rhinitis january 2002 merckscheringplough respiratory joint venture reported results phase iii clinical trials fixedcombination tablet containing claritin singulair phase iii study demonstrate sufficient added benefits treatment seasonal allergic rhinitis although claritin singulair combination tablet approval country phase iii clinical development ongoing 4 sharebased compensation prior january 1 2006 scheringplough accounted stock compensation arrangements using intrinsic value method followed recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations prior 2006 stockbased employee compensation cost reflected net income stock options scheringplough plans stock options granted required exercise price equal market value underlying common stock grant date scheringplough adopted statement financial accounting standards 123 revised 2004 “sharebased payment” sfas 123r effective january 1 2006 sfas 123r requires companies recognize compensation expense amount equal fair value sharebased payments granted employees scheringplough elected modified prospective transition method therefore adjustments prior periods required result adopting sfas 123r method provisions sfas 123r apply awards granted date adoption unrecognized expense awards unvested date adoption based grant date fair value sfas 123r also amends sfas 95 “statement cash flows” require excess tax benefits reflected operating cash flows reflected financing cash flows november 10 2005 financial accounting standards board fasb issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” scheringplough elected adopt transition method provided fasb staff position purposes calculating pool excess tax benefits available absorb tax deficiencies recognized subsequent adoption sfas 123r second quarter 2006 stock incentive plan 2006 plan approved scheringplough’s shareholders terms 2006 plan 92 million scheringplough’s authorized common shares may granted stock options awarded deferred stock units officers certain employees scheringplough december 2011 december 31 2006 76 million options deferred stock units remain available future year grants 2006 plan scheringplough intends utilize unissued authorized shares satisfy stock option exercises issuance deferred stock units grants issued retirementeligible employees prior adoption sfas 123r scheringplough recognized compensation costs stated vesting period stock option deferred stock unit acceleration unrecognized compensation costs upon retirement employee upon adoption sfas 123r scheringplough recognizes compensation costs sharebased grants made january 1 2006 service period earlier employees’ retirement eligibility date service period award notes consolidated financial statements continued implementation sfas 123r first quarter 2006 scheringplough recognized benefit income 22 million cumulative effect change accounting principle related two longterm compensation plans required accounted liability plans sfas 123r tax benefits recognized related stockbased compensation related cash flow impacts material 2006 scheringplough us net operating loss position stock options stock options granted employees exercise prices equal fair market value scheringplough’s stock dates grant stock options 2006 plan generally vest three years term seven years certain options granted previous plans vest longer periods ranging three nine years term 10 years compensation costs stock options recognized requisite service period separately vesting portion stock option award expense recognized net estimated forfeitures vesting period options using accelerated method expense recognized 2006 approximately 56 million weightedaverage assumptions used blackscholes optionpricing model 2006 2005 2004 follows dividend yields based historical dividend yields expected volatilities based historical volatilities scheringplough’s common stock riskfree interest rate based us treasury yield curve effect time grant periods corresponding expected life options expected term options represents weighted average period time options granted expected outstanding giving consideration vesting schedules scheringplough’s historical exercise patterns amount cash received exercise stock options 2006 2005 2004 87 million 60 million 27 million respectively notes consolidated financial statements continued stockbased compensation prior january 1 2006 determined using intrinsic value method following table provides supplemental information 2005 2004 stockbased compensation computed sfas 123 summarized information stock options outstanding exercisable december 31 2006 follows weightedaverage fair value stock options granted 2006 2005 2004 522 704 615 respectively intrinsic value stock options exercised 21 million 24 million 14 million 2006 2005 2004 respectively total fair value options vested 2006 2005 2004 73 million 69 million 77 million respectively december 31 2006 total remaining unrecognized compensation cost related nonvested stock options amounted 45 million amortized weightedaverage remaining requisite service period 20 years notes consolidated financial statements continued following table summarizes stock option activity december 31 2006 changes year ended current prior plans aggregate intrinsic value stock options outstanding december 31 2006 267 million aggregate intrinsic value stock options currently exercisable december 31 2006 158 million intrinsic value stock options calculated based exercise price underlying awards quoted price scheringplough’s common stock reporting date following table summarizes nonvested stock option activity december 31 2006 changes year ended current prior plans deferred stock units fair value deferred stock units determined based number shares granted quoted price scheringplough’s common stock date grant deferred stock units generally vest end three years provided employee remains service scheringplough expense recognized straightline basis vesting period deferred stock units payable equivalent number common shares expense recognized 2006 2005 2004 112 million 89 million 59 million respectively notes consolidated financial statements continued summarized information deferred stock units outstanding december 31 2006 follows weightedaverage fair value deferred stock units granted 1927 2065 1811 2006 2005 2004 respectively total fair value deferred stock units vested 2006 2005 2004 68 million 39 million 51 million respectively december 31 2006 total remaining unrecognized compensation cost related deferred stock units amounted 173 million amortized weightedaverage remaining requisite service period 19 years following table summarizes deferred stock unit activity december 31 2006 changes year ended current prior plans incentive plans scheringplough two compensation plans classified liability plans sfas 123r ultimate cash payout plans based scheringplough’s stock performance compared stock performance peer group upon adoption sfas 123r january 1 2006 scheringplough recognized cumulative income effect change accounting principle 22 million order recognize liability plans fair value income expense amounts related liability plans based change fair value reporting date fair value plans estimated using lattice valuation model using expected volatility assumptions appropriate determining fair value amount recognized 2006 exclusive impact cumulative effect change accounting principle statements consolidated operations related liability awards expense 24 million december 31 2006 total remaining unrecognized compensation cost related incentive plans amounted 28 million amortized weightedaverage remaining requisite service period 18 years amount vary reporting period based changes fair value notes consolidated financial statements continued 5 incomeexpense net components incomeexpense net follows 2006 scheringplough participated healthcare refinancing programs adopted local government fiscal authorities major european market december 31 2006 scheringplough transferred 38 million trade accounts receivables owned foreign subsidiary thirdparty financial institution without recourse transfer trade accounts receivable qualified sales accounts receivable sfas 140 “accounting transfers servicing financial assets extinguishments liabilities” year ended december 31 2006 loss transfer trade accounts receivable immaterial included interest expense cash flows transactions included change accounts receivable operating activities 6 income taxes components consolidated incomeloss income taxes years ended december 31 follows income cholesterol joint venture included table based jurisdiction income earned notes consolidated financial statements continued components income tax expense years ended december 31 follows 2005 scheringplough repatriated approximately 94 billion accordance planned repatriation provisions ajca maximum amount foreign earnings qualified effectively reduced tax rate 525 percent fourth quarter 2004 scheringplough accrued us federal tax liability approximately 417 million state income tax liability approximately 6 million intended repatriation scheringplough continue use repatriated funds qualified spending scheringplough’s tax provision year ended december 31 2005 includes us federal income tax benefit approximately 42 million result irs notice issued august 2005 provisions notice resulted reduction previously accrued tax liability attributable american jobs creation act 2004 ajca repatriation also reduced 2005 us net operating loss nol carried forward subsequent years prior ajca scheringplough’s intent indefinitely reinvest unremitted earnings international subsidiaries except amounts repatriated ajca scheringplough maintains intent indefinitely reinvest earnings international subsidiaries scheringplough provided deferred taxes approximately 42 billion undistributed foreign earnings december 31 2006 determining tax liability would arise earnings remitted practicable liability would depend number factors including amount earnings distributed whether us operations generating taxable profits losses 2004 due changes tax planning strategies triggered scheringplough’s intent repatriate earnings ajca management longer able conclude likely would realize benefit net us deferred tax assets including benefit related us operating losses therefore general scheringplough established valuation allowance net us deferred tax asset december 31 2004 continues maintain valuation allowance net us deferred tax asset december 31 2006 deferred income taxes provided temporary differences financial reporting basis tax basis scheringplough’s assets liabilities scheringplough’s deferred tax assets result principally recording certain items currently deductible tax purposes net operating loss tax credit carryforwards scheringplough’s deferred tax liabilities principally result use accelerated depreciation tax purposes notes consolidated financial statements continued components scheringplough’s deferred tax assets liabilities december 31 follows change valuation allowance 2005 2006 due decrease deferred tax asset recorded us nol carryforward offset increase deferred tax assets recorded expenses currently nondeductible tax purposes decrease deferred asset recorded us nol carryforward primarily attributable reduction estimated impact irs examination scheringplough’s open tax years impact statement operations balance may subsequently increased decreased following resolution examinations deferred tax assets net operating losses tax credit carryforwards principally relate us nols research development rd tax credits us foreign tax credits federal alternative minimum tax amt credit carryforwards december 31 2006 scheringplough approximately 154 billion us nols income tax purposes available offset future us taxable income us nols us operating losses adjusted differences financial tax reporting us nols expire varying amounts 2024 2026 unused december 31 2006 scheringplough approximately 105 million rd tax credits carryforwards expire 2022 2026 188 million foreign tax credit carryforwards expire 2011 2016 44 million amt tax credit carryforwards indefinite life us nol carryforward could materially reduced examination scheringplough’s income tax returns irs scheringplough reduced deferred tax assets related valuation allowance recorded us nols tax credit carryforwards reflect estimated resolution examinations notes consolidated financial statements continued difference income taxes based us statutory tax rate scheringplough’s income tax expense years ending december 31 due following lower tax rates jurisdictions 2006 2005 2004 net primarily attributable scheringplough’s manufacturing subsidiaries puerto rico singapore ireland operate various incentive tax grants begin expire 2011 overall income tax expense primarily relates foreign taxes include benefit related us operating losses net consolidated income tax paymentsrefunds exclusive payments related tax examinations litigation discussed 2006 2005 2004 234 million 592 million 144 million respectively january 2006 internal revenue service irs completed examination scheringplough’s 19931996 federal income tax returns scheringplough made cash payment third quarter 2005 form tax deposit approximately 239 million anticipation settlement 19931996 tax examination prevent additional irs interest charges payment fully satisfied liability associated tax examination consistent previously recorded reserves irs process completing examination scheringplough’s 19972002 federal income tax returns scheringplough anticipates examination completed end 2007 finalization examination may result adjustments scheringplough’s accrual tax contingencies us nols reported scheringplough’s income tax returns scheringplough’s 20032005 us federal income tax returns remain subject examination scheringplough believes accrual tax contingencies adequate open years based experience interpretations tax law judgments potential actions taxing authorities scheringplough accrues liabilities identified tax contingencies result tax positions taken could challenged tax authorities scheringplough’s tax reserves reflect probable outcome identified tax contingencies however reasonably possible ultimate resolution tax matters may materially greater less amount accrued scheringplough adopt fin 48 “accounting uncertainty income taxes” january 1 2007 see impact recently issued accounting standards note 1 “summary significant accounting policies” although scheringplough still evaluating potential impact fin 48 expects decrease opening retained earnings january 1 2007 225 million 300 million corresponding increase appropriate tax liability accounts upon adoption interpretation scheringplough’s potential tax exposures result varying application statutes regulations interpretations include exposures intercompany terms cross border arrangements utilization cash held foreign subsidiaries investment us property although scheringplough’s cross border arrangements notes consolidated financial statements continued affiliates based upon internationally accepted standards tax authorities various jurisdictions may disagree subsequently challenge amount profits taxed country october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently discovery phase scheringplough’s tax reserves adequate cover abovementioned payments 7 retirement plans postretirement benefits plan descriptions scheringplough defined benefit pension plans covering eligible employees us certain foreign countries us plan benefits normal retirement primarily based upon participant’s average final earnings years service social security income modified early retirement death disability benefits also available plan benefits become fully vested five years service plan provides continued accrual credited service employees opt postpone retirement remain employed scheringplough reaching normal retirement age nonus pension plans offer benefits competitive local market conditions addition scheringplough provides postretirement medical life insurance benefits primarily eligible us retirees dependents postretirement benefit plans effective december 31 2006 scheringplough accounts retirement plans postretirement benefit plans accordance sfas 158 “employers’ accounting defined benefit pension postretirement plans” amendment sfas 87 88 106 132r sfas 158 requires recognition asset overfunded plans liability underfunded plans scheringplough’s consolidated balance sheets statement also requires recognition changes funded status plans year changes occur provided sfas 158 requirement measure plans’ assets liabilities fiscal yearend extended effective years ending december 15 2008 currently majority scheringplough’s retirement postretirement benefit plans’ assets liabilities measured december 31 notes consolidated financial statements continued incremental effects resulting implementation sfas 158 individual line items scheringplough’s consolidated balance sheets december 31 2006 follows december 31 2006 included scheringplough’s accumulated comprehensive loss 841 million 692 million net tax effects costs recognized components net periodic benefit costs pursuant sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” components costs december 31 2006 follows actuarial losses primarily represent cumulative difference actuarial assumptions actual returns plan assets changes discount rates plans’ experience total loss amounts net excess certain thresholds amortized net pension postretirement benefit cost average remaining service life employees amounts accumulated comprehensive loss expected recognized components net periodic costs 2007 follows notes consolidated financial statements continued actuarial assumptions consolidated weighted average assumptions used determine benefit obligations december 31 assumptions used develop benefit obligations yearend consolidated weighted average assumptions used determine net benefit costs years ended december 31 assumptions used determine net periodic benefit costs year established end previous year assumptions used determine benefit obligations established yearend net periodic benefit costs actuarial present value benefit obligations based actuarial assumptions determined annually based evaluation longterm trends well market conditions may impact cost providing retirement benefits longterm expected rates return plan assets derived return assumptions determined major asset classes equities fixed income real estate proportional basis return expectations asset classes based largely assumptions economic growth inflation supported longterm historical data weighted average assumed healthcare cost trend rate used postretirement measurement purposes 10 percent 2007 trending 48 percent 2015 one percent increase assumed healthcare cost trend rate would increase combined postretirement service interest cost 9 million postretirement benefit obligation 83 million one percent decrease assumed health care cost trend rate would decrease combined postretirement service interest cost 7 million postretirement benefit obligation 67 million average retirement age assumed based annual rates retirement experienced scheringplough components net periodic benefit costs net pension postretirement benefit costs totaled 204 million 165 million 155 million 2006 2005 2004 respectively notes consolidated financial statements continued components net pension postretirement benefits expense follows accordance fasb staff position 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 medicare act scheringplough began accounting effect federal subsidy medicare act third quarter 2004 result scheringplough’s net postretirement benefits expense reduced 7 million 2004 reduction postretirement benefits expense 2004 consists reductions service cost interest cost net amortization 2 million 3 million 2 million respectively benefit obligations components changes benefit obligations follows notes consolidated financial statements continued funded status balance sheets presentation components changes plan assets follows addition plan assets indicated december 31 2006 2005 securities investments 71 million 70 million respectively held nonqualified trust designated provide pension benefits certain underfunded plans accordance sfas 158 december 31 2006 net asset overfunded plans 21 million related scheringplough’s retirement plans included longterm assets net liability underfunded plans december 31 2006 totaled 1037 million follows prior december 31 2006 scheringplough accounted retirement plans postretirement benefit plans accordance sfas 87 88 106 132r following table reconciliation funded status plans net assetliability december 31 2005 notes consolidated financial statements continued december 31 2005 components net assetliability recorded consolidated balance sheets follows december 31 2005 scheringplough’s additional minimum pension liability 416 million primarily related domestic retirement plans resulted adjustment accumulated comprehensive loss net tax 56 million 2005 december 31 2006 2005 accumulated benefit obligations abo retirement plans 2042 million 1844 million respectively aggregated accumulated benefit obligations fair values plan assets retirement plans accumulated benefit obligations excess plan assets 1780 million 1357 million respectively december 31 2006 1671 million 1232 million respectively december 31 2005 plan assets fair value asset allocation consolidated retirement plans december 31 2006 2005 target allocation 2007 follows asset allocation postretirement benefit trusts december 31 2006 2005 target allocation 2007 follows scheringplough’s investments related plans broadly diversified consisting primarily equities fixed income securities objective generating longterm investment returns consistent acceptable level overall portfolio market value risk assets periodically rebalanced back target allocations notes consolidated financial statements continued estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid scheringplough’s practice fund qualified pension plans least sufficient amounts meet minimum requirements set forth applicable laws scheringplough expects contribute approximately 180 million retirement plans 2007 including approximately 125 million us retirement plan defined contribution plans scheringplough makes contributions defined contribution savings plans equal three percent eligible employee earnings plus matching two percent eligible employee earnings based employee contributions plan total scheringplough contributions plan 2006 2005 70 million 58 million respectively 8 earnings per common share following table reconciles components basic diluted earningsloss per share computations equivalent common shares issuable scheringplough’s stock incentive plans excluded computation diluted eps effect would antidilutive 48 million 39 million 89 million respectively years ended december 31 2006 2005 2004 respectively addition years ended december 31 2006 2005 2004 65 million 69 million 27 million common shares respectively obtainable upon conversion mandatory convertible preferred stock excluded computation diluted earnings per share effect would antidilutive notes consolidated financial statements continued 9 accumulated comprehensive loss components accumulated comprehensive incomeloss december 31 2006 2005 follows 1 see note 7 “retirement plans postretirement benefits” additional information regarding impacts scheringplough’s financial statements upon adoption sfas 158 effective december 31 2006 scheringplough accounts retirement postretirement benefit plans accordance sfas 158 implementation sfas 158 resulted increase 521 million net tax effects accumulated comprehensive loss reduced shareholders’ equity gross unrealized pretax gains investments 2006 2005 4 million 0 million respectively unrealized losses immaterial 10 inventories consisted following december 31 included 2006 noncurrent assets 71 million inventory expected sold within one year inventories valued lastin firstout lifo basis comprised approximately 20 percent 19 percent total inventories december 31 2006 2005 respectively estimated replacement cost total inventories december 31 2006 2005 1795 million 1652 million respectively cost inventories determined firstin firstout method fifo notes consolidated financial statements continued 11 intangible assets components intangible assets net follows december 31 included pension assets 61 million december 31 2005 effective december 31 2006 pension assets eliminated result scheringplough’s adoption sfas 158 see note 7 “retirement plans postretirement benefit plans” additional information patents licenses trademarks amortized straightline method respective useful lives residual value intangible assets estimated zero fourth quarter 2006 scheringplough received rights trademarks tradenames entity minority interest trademarks tradenames fair value approximately 18 million trademarks tradenames included scheringplough’s intangible assets december 31 2006 amortized straightline method 10 years included intangible assets approximately 120 million related license copromotion agreements bayer amounts amortized effective useful lives agreements ranging seven 14 years see note 12 “product licenses acquisitions” additional information transactions amortization expense related intangible assets 2006 2005 2004 47 million 49 million 42 million respectively included primarily selling general administrative expenses statement consolidated operations intangible assets reviewed determine recoverability comparing carrying values expected undiscounted future cash flows events circumstances warrant review annual amortization expenses related intangible assets years 2007 2012 expected approximately 45 million 12 product licenses acquisitions august 2005 scheringplough announced exercised right develop commercialize centocor inc centocor golimumab new antitnfalpha monoclonal antibody developed therapy treatment rheumatoid arthritis immunemediated inflammatory diseases pursuant exercise scheringplough received exclusive worldwide marketing rights golimumab excluding us japan china including hong kong taiwan indonesia exchange rights agreement scheringplough made upfront payment amount 124 million centocor tax benefit 6 million payment included research development expenses year ended december 31 2005 scheringplough sharing development costs centocor scheringplough centocor collaborating resolving difference parties’ opinions expiration date scheringplough’s rights golimumab august 2006 scheringplough received determination arbitration rights market golimumab extend 15 years first commercial sales territories centocor appealed ruling effective september 1 2005 scheringplough restructured integrilin copromotion agreement millennium terms restructured agreement scheringplough acquired exclusive us development commercialization rights integrilin exchange upfront payment 36 million royalties integrilin sales scheringplough agreed pay minimum royalties 85 million per year millennium notes consolidated financial statements continued 2006 2007 scheringplough also purchased existing integrilin inventory millennium 36 million upfront payment capitalized included intangible assets 2004 scheringplough entered collaboration license agreement toyama chemical co ltd toyama terms agreement scheringplough acquired exclusive worldwide rights excluding japan korea china develop use sell garenoxacin human veterinary uses excluding topical ophthalmic applications garenoxacin toyama’s quinolone antibacterial agent currently regulatory review us connection execution agreement scheringplough incurred charge second quarter 2004 front fee 80 million toyama amount expensed reported research development year ended december 31 2004 scheringplough entered strategic agreement bayer intended enhance scheringplough’s pharmaceutical resources terms agreement scheringplough exclusive rights us puerto rico market sell distribute avelox cipro antibiotics uses excluding certain topical formulations administration eye ear scheringplough pays bayer royalties generally excess 50 percent products based sales agreement scheringplough also undertook bayer’s us commercialization activities erectile dysfunction medicine levitra bayer’s copromotion agreement glaxosmithkline plc japanese market bayer comarket scheringplough’s cholesterolabsorption inhibitor zetia approved scheringplough received recorded deferred revenue 120 million related sale zetia copromotion rights bayer deferred revenue begin recognized upon regulatory approval japan zetia currently regulatory review japan certain circumstances zetia receive regulatorymarketing approval japan certain date amount required repaid bayer agreement bayer potentially restricts scheringplough marketing products us would compete products agreement result scheringplough expects sublicense rights garenoxacin quinolone antibacterial agent scheringplough licensed toyama 2004 13 shortterm borrowings longterm debt commitments short longterm borrowings scheringplough’s outstanding borrowings december 31 2006 2005 follows scheringplough’s shortterm borrowings consist primarily bank loans commercial paper issued us weighted average interest rate shortterm borrowings 64 percent 47 percent december 31 2006 2005 respectively notes consolidated financial statements continued senior unsecured notes november 26 2003 scheringplough issued 125 billion aggregate principal amount 53 percent senior unsecured notes due 2013 115 billion aggregate principal amount 65 percent senior unsecured notes due 2033 net proceeds offering 237 billion interest notes payable semiannually subject rate adjustment follows rating assigned particular series notes either moody’s investors service inc moody’s standard poor’s rating services sp changes rating set forth interest rate payable series notes initial interest rate 53 percent notes due 2013 65 percent notes due 2033 plus additional interest rate set forth moody’s sp event interest rate notes increase 2 percent initial coupon rates 53 percent 65 percent respectively either moody’s sp subsequently upgrades ratings interest rates correspondingly reduced 53 percent 65 percent respectively furthermore interest rate payable particular series notes return 53 percent 65 percent respectively rate adjustment provisions permanently cease apply following downgrade either moody’s sp a3 a− respectively notes subsequently rated baa1 moody’s bbb sp upon issuance notes rated a3 moody’s sp july 14 2004 moody’s lowered rating notes baa1 accordingly interest payable note increased 25 basis points effective december 1 2004 resulted 555 percent interest rate payable notes due 2013 675 percent interest rate payable notes due 2033 increased december 31 2006 notes rated baa1 moody’s a− sp senior unsecured notes redeemable whole part scheringplough’s option time redemption price equal greater 1 100 percent principal amount notes 2 sum present values remaining scheduled payments principal interest discounted using rate treasury notes comparable remaining terms plus 25 basis points 2013 notes 35 basis points 2033 notes credit facilities scheringplough 15 billion credit facility matures may 2009 requires scheringplough maintain total debt capital ratio 60 percent credit line available general corporate purposes considered support scheringplough’s commercial paper borrowings credit facility may drawn us parent company whollyowned international subsidiaries accompanied parent guarantee facility require compensating balances however nominal commitment fee paid december 31 2005 325 million drawn facility whollyowned international subsidiary purposes funding repatriations ajca 2006 borrowing amount fully repaid december 31 2006 borrowings outstanding facility addition credit facility scheringplough entered 575 million credit facility fourth quarter 2005 purposes funding repatriations ajca december 31 2005 entire amount drawn whollyowned international subsidiary fund repatriations facility paid full terminated 2006 addition scheringplough’s international subsidiaries approximately 219 million available unused lines credit various financial institutions december 31 2006 notes consolidated financial statements continued commitments total rent expense amounted 118 million 110 million 100 million 2006 2005 2004 respectively future annual minimum rental commitments next five years noncancelable operating leases december 31 2006 follows 2007 85 million 2008 65 million 2009 41 million 2010 24 million 2011 14 million aggregate minimum lease obligations 35 million due thereafter december 31 2006 scheringplough commitments totaling 179 million 2 million related capital expenditures made 2007 2008 respectively 14 financial instruments sfas 133 “derivative instruments financial hedging activities” amended requires derivatives recorded balance sheets fair value addition statement also requires 1 effective portion qualifying cash flow hedges recognized income hedged item affects income 2 changes fair value derivatives qualify fair value hedges along change fair value hedged risk recognized occur 3 changes fair value derivatives qualify hedge treatment well ineffective portion qualifying hedges recognized income occur risks policy objectives scheringplough exposed market risk primarily changes foreign currency exchange rates lesser extent interest rate equity price changes currently scheringplough deemed cost effective engage formulabased program hedging profits cash flows international operations using derivative financial instruments limited basis scheringplough hedge selective foreign currency risks derivatives scheringplough’s international subsidiaries purchase significant quantities inventory payable us dollars managing level inventory related payables rate inventory turnover provide natural level protection adverse changes exchange rates furthermore risk adverse exchange rate change somewhat mitigated fact scheringplough’s international operations widespread scheringplough mitigates credit risk derivative instruments dealing counterparties considered high credit quality accordingly scheringplough anticipate loss nonperformance scheringplough enter derivative instruments generate trading profits table presents carrying values estimated fair values certain scheringplough’s financial instruments december 31 estimated fair values determined based market prices available dealer quotes carrying values financial instruments including cash equivalents approximated estimated fair values december 31 2006 2005 notes consolidated financial statements continued longterm investments longterm investments included noncurrent assets primarily consist debt equity securities held nonqualified trusts fund longterm employee benefit obligations included liabilities consolidated balance sheets assets used fund related liabilities 15 shareholders’ equity scheringplough authorized 50000000 shares preferred stock consists 12000000 preferred shares designated series junior participating preferred stock 28750000 preferred shares designated 6 percent mandatory convertible preferred stock 9250000 preferred shares whose designations yet determined 6 percent mandatory convertible preferred stock shelf registration august 10 2004 scheringplough issued 28750000 shares 6 percent mandatory convertible preferred stock preferred stock face value 144 billion net proceeds scheringplough 14 billion deducting commissions discounts underwriting expenses share preferred stock automatically convert 22451 27840 common shares scheringplough depending average closing price scheringplough’s common shares period immediately preceding mandatory conversion date september 14 2007 defined prospectus preferred shareholders may elect convert time prior september 14 2007 minimum conversion ratio 22451 common shares per share preferred stock additionally time prior mandatory conversion date closing price scheringplough’s common shares exceeds 3341 least 20 trading days within period 30 consecutive trading days scheringplough may elect cause conversion less preferred stock outstanding minimum conversion ratio 22451 common shares preferred share preferred stock accrues dividends annual rate 6 percent shares outstanding dividends cumulative date issuance extent scheringplough legally permitted pay dividends board directors declares dividend payable scheringplough pay dividends dividend payment date dividend payment dates march 15 june 15 september 15 december 15 first dividend paid december 15 2004 december 31 2006 scheringplough ability issue 563 million principal amount securities currently effective securities exchange commission sec shelf registration treasury stock summary treasury share transactions years ended december 31 follows notes consolidated financial statements continued included treasury share balance 702 million shares acquired subsidiary scheringplough openmarket purchase program 19941995 shares considered treasury shares new jersey law however like treasury shares may voted considered outstanding shares determining necessary votes approve matter submitted stockholder vote subsidiary receive dividends shares preferred share purchase rights scheringplough preferred share purchase rights outstanding attached presently trade scheringplough’s common shares exercisable rights become exercisable person group acquires 20 percent scheringplough’s common stock announces tender offer completed would result ownership person group 20 percent scheringplough’s common stock person group acquire 20 percent scheringplough’s outstanding common stock merger business combination transaction right entitle holder acquirer purchase common shares scheringplough market value twice exercise price right exercise price rights 100 following acquisition person group beneficial ownership 20 percent less 50 percent scheringplough’s common stock board directors may call exchange rights owned acquirer whole part exchange ratio one common share one twohundredth share series junior participating preferred stock per right also prior acquisition person group beneficial ownership 20 percent scheringplough’s common stock rights redeemable 005 per right option board directors rights expire july 10 2007 unless earlier redeemed exchanged board directors also authorized reduce 20 percent thresholds referred less greater sum 001 percent largest percentage outstanding shares common stock known scheringplough beneficially owned person group affiliated associated persons ii 10 percent except following acquisition person group beneficial ownership 20 percent scheringplough’s common stock reduction may adversely affect interests holders rights 16 insurance coverage scheringplough maintains insurance coverage deductibles selfinsurance management believes adequate needs current circumstances coverage reflects market conditions including cost availability existing time written relationship insurance coverage selfinsurance varies accordingly result recent external events availability insurance become restrictive scheringplough considers impact changes continually assesses best way provide insurance needs future scheringplough selfinsures substantial proportion risk relates products’ liability notes consolidated financial statements continued 17 segment information scheringplough three reportable segments prescription pharmaceuticals consumer health care animal health segment sales profit data follow consistent scheringplough’s current management reporting structure prescription pharmaceuticals segment discovers develops manufactures markets human pharmaceutical products consumer health care segment develops manufactures markets overthecounter foot care sun care products primarily us animal health segment discovers develops manufactures markets animal health products net sales major product segment net sales geographic area notes consolidated financial statements continued scheringplough subsidiaries 50 countries outside us net sales presented geographic area scheringplough’s customers located following foreign countries accounted 5 percent consolidated net sales past three years net sales customer sales single customer accounted 10 percent scheringplough’s consolidated net sales past three years follows profit segment scheringplough’s net sales include sales vytorin zetia managed partnership merck scheringplough accounts joint venture equity method accounting see note 3 “equity income cholesterol joint venture” additional information profit prescription pharmaceuticals segment includes equity income cholesterol joint venture “corporate other” includes interest income expense foreign exchange gains losses headquarters expenses special charges miscellaneous items accounting policies used segment reporting described note 1 “summary significant accounting policies” 2006 “corporate other” includes special charges 102 million primarily related changes scheringplough’s manufacturing operations us puerto rico announced june 2006 related prescription pharmaceuticals segment included 2006 cost sales charges approximately notes consolidated financial statements continued 146 million manufacturing streamlining actions primarily related prescription pharmaceuticals segment 2005 “corporate other” includes special charges 294 million including 28 million employee termination costs 16 million asset impairment charges increase litigation reserves 250 million resulting total reserve 500 million representing scheringplough’s current estimate resolve massachusetts investigation well investigations state litigation disclosed “awp litigation investigations” note 19 “legal environmental regulatory matters” estimated charges relate reportable segments follows prescription pharmaceuticals 289 million consumer health care 2 million animal health 1 million corporate 2 million 2004 “corporate other” includes special charges 153 million including 119 million employee termination costs well 27 million asset impairment charges 7 million closure costs primarily related exit small european research development facility estimated charges relate reportable segments follows prescription pharmaceuticals 135 million consumer health care 3 million animal health 2 million corporate 13 million supplemental sales information sales products comprising 10 percent scheringplough’s us international sales year ended december 31 2006 follows longlived assets geographic location longlived assets shown geographic location primarily property scheringplough disaggregate assets segment basis internal management reporting therefore information presented 18 consent decree may 2002 scheringplough agreed fda entry consent decree resolve issues related compliance current good manufacturing practices cgmp certain scheringplough’s facilities new jersey puerto rico “consent decree” “decree” notes consolidated financial statements continued summary decree required scheringplough make payments totaling 500 million two equal installments 250 million paid 2002 2003 addition decree required scheringplough complete revalidation programs manufacturing processes used produce bulk active pharmaceutical ingredients finished drug products covered facilities well implement comprehensive cgmp work plan facility decree required foregoing completed accordance strict schedules provided possible imposition additional payments event scheringplough adhere approved schedules final completion work made subject certification independent experts whose certifications turn made subject fda acceptance september 30 2005 scheringplough completed revalidation third party certification bulk active pharmaceutical ingredients december 31 2005 scheringplough completed revalidation thirdparty certification finished drug products scheringplough also completed 212 significant steps cgmp work plan december 31 2005 requirements completed accordance schedules required decree scheringplough obtained thirdparty certification completion work plan required decree possible fda may disagree expert’s certification event possible fda may assess additional payments permitted decree described detail general cgmp work plan contained 212 significant steps whose timely satisfactory completion subject payments 15 thousand per business day deadline missed payments may exceed 25 million 2002 50 million years 2003 2004 2005 payments subject overall cap 175 million scheringplough would expense additional payments assessed decree incurred terms decree provided fda notified scheringplough significant violation fda law regulations decree fiveyear period since decree’s entry may 2002 scheringplough may petition court decree dissolved fda oppose scheringplough’s petition assurance particular date consent decree lifted 19 legal environmental regulatory matters background scheringplough involved various claims investigations legal proceedings scheringplough records liability contingencies probable liability incurred amount reasonably estimated scheringplough adjusts liabilities contingencies reflect current best estimate probable loss minimum liability case may best estimate determinable scheringplough records minimum amount within probable range liability expected insurance recoveries considered determining amounts recorded liabilities environmental related matters scheringplough believes loss contingency reasonably possible rather probable amount loss cannot estimated liability recorded however liability reasonably possible disclosure loss contingency made scheringplough reviews status claims investigations legal proceedings ongoing basis including related insurance coverages time scheringplough may settle otherwise resolve matters terms conditions management believes best interests scheringplough resolution claims investigations legal proceedings individually aggregate could material adverse effect scheringplough’s results operations cash flows financial condition addition resolution investigations could involve injunctive administrative remedies would adversely impact business exclusion government reimbursement programs turn would material adverse impact business future financial condition cash flows results operations notes consolidated financial statements continued except matters discussed remainder note recorded liabilities contingencies december 31 2006 related expenses incurred year ended december 31 2006 material opinion management based advice legal counsel ultimate outcome matters except matters discussed remainder note material impact scheringplough’s results operations cash flows financial condition patent matters described “patents trademarks intellectual property rights” part business intellectual property protection critical scheringplough’s ability successfully commercialize product innovations potential litigation regarding scheringplough’s intellectual property rights always exists may initiated third parties attempting abridge scheringplough’s rights well scheringplough protecting rights patent matters described potential material effect scheringplough dr scholl’s freeze away patent july 26 2004 orasure technologies filed action us district court eastern district pennsylvania alleging patent infringement scheringplough healthcare products sale dr scholl’s freeze away wart removal product complaint seeks permanent injunction unspecified damages including treble damages massachusetts investigation august 29 2006 scheringplough announced reached agreement us attorney’s office district massachusetts settle investigation involving scheringplough’s sales marketing clinical trial practices programs along warrick pharmaceuticals warrick scheringplough’s generic subsidiary “massachusetts investigation” investigation focused following alleged practices providing remuneration managed care organizations physicians others induce purchase schering pharmaceutical products offlabel marketing drugs submitting false pharmaceutical pricing information government purposes calculating rebates required paid medicaid program agreement provided aggregate settlement amount 435 million criminal fine 180 million 255 million resolve civil aspects investigation january 17 2007 schering sales corporation subsidiary scheringplough pled guilty one count conspiracy make false statements government connection settlement scheringplough signed addendum existing corporate integrity agreement office inspector general us department health human services addendum affect scheringplough’s ongoing business customers including federal government notes consolidated financial statements continued 2005 scheringplough recorded liability 500 million related massachusetts investigation well investigations state litigation described “awp litigation investigations” settlement amount 435 million relates massachusetts investigation awp litigation investigations ongoing awp litigation investigations scheringplough continues respond existing new litigation certain states private payors investigations department health human services department justice several states industry scheringplough practices regarding average wholesale price awp scheringplough cooperating investigations litigations investigations relate whether awp used pharmaceutical companies certain drugs improperly exceeds average prices paid providers consequence results unlawful inflation certain reimbursements drugs state programs private payors based awp complaints allege violations federal state law including fraud medicaid fraud consumer protection violations among claims majority cases plaintiffs seeking class certifications cases classes certified outcome litigations investigations could include substantial damages imposition substantial fines penalties injunctive administrative remedies securities class action litigation federal securities litigation following scheringplough’s announcement fda conducting inspections scheringplough’s manufacturing facilities new jersey puerto rico issued reports citing deficiencies concerning compliance current good manufacturing practices several lawsuits filed scheringplough certain named officers lawsuits allege defendants violated federal securities law allegedly failing disclose material information making material misstatements specifically allege scheringplough failed disclose alleged serious risk new drug application clarinex would delayed result manufacturing issues allege scheringplough failed disclose alleged depth severity manufacturing issues complaints consolidated one action us district court district new jersey consolidated amended complaint filed october 11 2001 purporting represent class shareholders purchased shares scheringplough stock may 9 2000 february 15 2001 complaint seeks compensatory damages behalf class court certified shareholder class october 10 2003 discovery ongoing shareholder derivative actions two lawsuits filed us district court district new jersey scheringplough certain officers directors former director seeking damages behalf scheringplough including disgorgement trading profits made defendants allegedly obtained basis material nonpublic information complaints allege failure disclose material information breach fiduciary duty directors relating fda inspections investigations scheringplough’s pricing practices sales marketing clinical trials practices lawsuits shareholder derivative actions purport assert claims behalf scheringplough two shareholder derivative actions pending us district court district new jersey consolidated one action august 20 2001 erisa litigation march 31 2003 scheringplough served putative class action complaint filed us district court new jersey alleging scheringplough retired chairman ceo president richard jay kogan scheringplough’s employee savings plan administrator several current former directors certain corporate officers messrs larosa moore breached fiduciary obligations certain participants notes consolidated financial statements continued plan complaint seeks damages amount losses allegedly suffered plan complaint dismissed june 29 2004 plaintiffs appealed august 19 2005 us court appeals third circuit reversed dismissal district court matter remanded back district court proceedings kdur antitrust litigation scheringplough settled patent litigation upshersmith inc upshersmith esi lederle inc lederle relating generic versions kdur scheringplough’s longacting potassium chloride product supplement used cardiac patients lederle upsher smith filed abbreviated new drug applications following commencement ftc administrative proceeding alleging anticompetitive effects settlements alleged class action suits filed federal state courts behalf direct indirect purchasers kdur scheringplough upshersmith lederle suits claim violations federal state antitrust laws well state statutory common law causes action suits seek unspecified damages discovery ongoing thirdparty payor actions several supported class action litigations filed following announcement settlement massachusetts investigation plaintiffs actions seek damages behalf thirdparty payors resulting allegations offlabel promotion improper payments physicians issue massachusetts investigation tax matters october 2001 irs auditors asserted two interest rate swaps scheringplough entered unrelated party recharacterized loans affiliated companies resulting additional tax liability 1991 1992 tax years september 2004 scheringplough made payments irs amount 194 million income tax 279 million interest scheringplough filed refund claims tax interest irs december 2004 following irs’s denial scheringplough’s claims refund scheringplough filed suit may 2005 us district court district new jersey refund full amount tax interest refund litigation currently discovery phase scheringplough’s tax reserves adequate cover mentioned payments pending administrative obligations connection settlement investigation us department justice us attorney’s office eastern district pennsylvania scheringplough entered fiveyear corporate integrity agreement cia amended august 2006 connection settlement massachusetts investigation commencing new fiveyear term disclosed note 18 “consent decree” scheringplough subject obligations consent decree fda failure comply obligations cia consent decree result financial penalties matters nitrodur investigation august 2003 scheringplough received civil investigative subpoena issued office inspector general us department health human services seeking documents concerning scheringplough’s classification nitrodur medicare rebate purposes scheringplough’s use nominal pricing bundling product sales scheringplough cooperating investigation appears subpoena one number addressed pharmaceutical companies concerning inquiry issues relating payment government rebates notes consolidated financial statements continued french matter based complaint french competition authority competitor france pursuant court order french competition authority obtained documents french subsidiary scheringplough relating one products subsidiary markets sells resolution matter adverse french subsidiary could result imposition civil fines injunctive administrative remedies environmental scheringplough responsibilities environmental cleanup various state local federal laws including comprehensive environmental response compensation liability act commonly known superfund several superfund sites equivalent sites state law scheringplough alleged potentially responsible party prp scheringplough believes remote time material liability relation sites scheringplough estimates obligations cleanup costs superfund sites based information obtained federal environmental protection agency epa equivalent state agency andor studies prepared independent engineers probable costs paid prps scheringplough records liability environmental assessments andor cleanup probable loss incurred amount reasonably estimated report independent registered public accounting firm board directors shareholders scheringplough corporation audited accompanying consolidated balance sheets scheringplough corporation subsidiaries “company” december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2006 audits also included financial statement schedule listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position scheringplough corporation subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 4 consolidated financial statements effective january 1 2006 company adopted statement financial accounting standards “sfas” 123 revised 2004 “sharebased payment” also discussed note 7 consolidated financial statements effective december 31 2006 company adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans” also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 27 2007 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp parsippany new jersey february 27 2007 scheringplough corporation subsidiaries quarterly data unaudited net sales third quarter 2006 included favorable impact approximately 47 million resulting reversal previously accrued rebate amounts tricare retail pharmacy program us federal court appeals ruled pharmaceutical manufacturers obligated pay see note 2 “special charges manufacturing changes” consolidated financial statements additional information relating special charges scheringplough’s announced manufacturing changes scheringplough’s approximate number holders record common shares january 31 2007 36360 item 9item 8 financial statements supplementary data financial statements consolidated balance sheet merck co inc subsidiaries december 31 2019 2018 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2019 notes consolidated financial statements report dated february 26 2020 pricewaterhousecoopers llp independent registered public accounting firm follows consolidated statement income merck co inc subsidiaries years ended december 31 millions except per share amounts consolidated statement comprehensive income merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statements consolidated balance sheet merck co inc subsidiaries december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement equity merck co inc subsidiaries years ended december 31 millions except per share amounts accompanying notes integral part consolidated financial statement consolidated statement cash flows merck co inc subsidiaries years ended december 31 millions accompanying notes integral part consolidated financial statement notes consolidated financial statements merck co inc subsidiaries millions except per share amounts 1 nature operations merck co inc merck company global health care company delivers innovative health solutions prescription medicines vaccines biologic therapies animal health products company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients company recently sold certain businesses healthcare services segment process divesting remaining businesses alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 planned spinoff women’s health legacy brands biosimilars new company february 2020 merck announced intention spinoff products women’s health trusted legacy brands biosimilars businesses new yettobenamed independent publicly traded company newco distribution newco’s publicly traded stock company shareholders distribution expected qualify taxfree company shareholders us federal income tax purposes legacy brands included transaction consist dermatology pain respiratory select cardiovascular products including zetia vytorin well rest merck’s diversified brands franchise merck’s existing research pipeline programs continue owned developed within merck planned newco development capabilities initially focused latestage development lifecycle management expected time develop research capabilities selected therapeutic areas spinoff expected completed first half 2021 subject market certain conditions subsequent spinoff historical results woman’s health legacy brands biosimilars businesses reflected discontinued operations company’s consolidated financial statements 2 summary accounting policies principles consolidation consolidated financial statements include accounts company subsidiaries controlling interest maintained intercompany balances transactions eliminated controlling interest determined majority ownership interest absence substantive thirdparty participating rights case variable interest entities majority exposure expected losses residual returns consolidated subsidiaries merck ownership less 100 outside shareholders’ interests shown noncontrolling interests equity investments affiliates company significant influence controlling interest interests entities owned equally company third party shared control carried equity basis acquisitions business combination acquisition method accounting requires assets acquired liabilities assumed recorded date acquisition respective fair values limited exceptions assets acquired liabilities assumed business combination arise contingencies generally recognized fair value fair value cannot determined asset liability recognized probable reasonably estimable criteria met asset liability recognized fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date accordingly company may required value assets fair value measures reflect company’s intended use assets excess purchase price consideration transferred estimated fair values net assets acquired recorded goodwill transaction costs restructure acquired company expensed incurred operating results acquired business reflected company’s consolidated financial statements date acquisition company determines assets acquired meet definition business acquisition method accounting transaction accounted acquisition assets rather business combination therefore goodwill recorded asset acquisition acquired inprocess research development iprd alternative future use charged expense contingent consideration recognized acquisition date foreign currency translation net assets international subsidiaries local currencies determined functional currencies translated us dollars using current exchange rates us dollar effects arise translating net assets subsidiaries changing rates recorded foreign currency translation account included accumulated comprehensive income loss aoci reflected separate component equity subsidiaries operate highly inflationary economies subsidiaries us dollar determined functional currency nonmonetary foreign currency assets liabilities translated using historical rates monetary assets liabilities translated current rates us dollar effects rate changes included income expense net cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories valued lower cost net realizable value cost substantial majority us pharmaceutical vaccine inventories determined using lastin firstout lifo method financial reporting tax purposes cost inventories determined using firstin firstout fifo method inventories consist currently marketed products well certain inventories produced preparation product launches considered high probability regulatory approval evaluating recoverability inventories produced preparation product launches company considers likelihood revenue obtained future sale related inventory together status product within regulatory approval process investments marketable debt securities classified availableforsale reported fair value fair values company’s investments marketable debt securities determined using quoted market prices active markets identical assets liabilities quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities changes fair value considered temporary reported net tax comprehensive income oci company considers available evidence evaluating potential impairments investments marketable debt securities including duration extent fair value less cost otherthantemporary impairment occurred company expect recover entire amortized cost basis marketable debt security company intend sell impaired debt security likely required sell debt security recovery amortized cost basis amount otherthantemporary impairment recognized earnings recorded income expense net limited portion attributed credit loss remaining portion otherthantemporary impairment related factors recognized oci realized gains losses debt securities included income expense net investments publicly traded equity securities reported fair value determined using quoted market prices active markets identical assets quoted prices similar assets inputs observable corroborated observable market data changes fair value included income expense net investments equity securities without readily determinable fair values recorded cost plus minus subsequent observable price changes orderly transactions identical similar investments minus impairments adjustments recognized income expense net realized gains losses equity securities included income expense net revenue recognition january 1 2018 company adopted asu 201409 revenue contracts customers subsequent amendments asc 606 new guidance using modified retrospective method comparative information prior periods restated continues reported accounting standards effect periods recognition revenue requires evidence contract probable collection sales proceeds completion substantially performance obligations merck acts principal substantially customer arrangements therefore records revenue gross basis majority company’s contracts related pharmaceutical animal health segments single performance obligation promise transfer goods shipping considered immaterial context overall customer arrangement damages loss goods transit rare therefore shipping deemed separately recognized performance obligation vast majority revenues sales products recognized point time control goods transferred customer company determined title risks rewards ownership transfer customer company entitled payment company recognizes revenue sales vaccines federal government placement vaccine stockpiles accordance securities exchange commission sec interpretation commission guidance regarding accounting sales vaccines bioterror countermeasures federal government placement pediatric vaccine stockpile strategic national stockpile interpretation allows companies recognize revenue sales vaccines us government stockpiles even though sales might meet criteria revenue recognition accounting guidance businesses within company’s healthcare services segment certain services animal health segment revenue recognized time generally ratably contract term services provided service revenues material nature company’s business gives rise several types variable consideration including discounts returns estimated time sale generally using expected value method although likely amount method used prompt pay discounts united states sales discounts issued customers pointofsale intermediary wholesaler known chargebacks form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns established time sale addition revenues recorded net time value money discounts collection accounts receivable expected excess one year us provision aggregate customer discounts covering chargebacks rebates 118 billion 2019 107 billion 2018 107 billion 2017 chargebacks discounts occur contracted customer purchases intermediary wholesaler contracted customer generally purchases product wholesaler contracted price plus markup wholesaler turn charges company back difference price initially paid wholesaler contract price paid wholesaler customer provision chargebacks based expected sellthrough levels company’s wholesale customers contracted customers well estimated wholesaler inventory levels rebates amounts owed based upon definitive contractual agreements legal requirements private sector public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers company uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision amounts accrued aggregate customer discounts evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued balances relative provisions chargebacks rebates included accounts receivable accrued current liabilities 233 million 22 billion respectively december 31 2019 245 million 24 billion respectively december 31 2018 outside united states variable consideration form discounts rebates combination commerciallydriven discounts highly competitive product classes discounts required gain maintain reimbursement legislatively mandated rebates certain european countries legislatively mandated rebates calculated based estimate government’s total unbudgeted spending company’s specific payback obligation rebates may also required based specific product sales thresholds company applies estimated factor actual invoiced sales represent expected level future discount rebate obligations associated sale company maintains returns policy allows us pharmaceutical customers return product within specified period prior subsequent expiration date generally three six months 12 months product expiration estimate provision returns based upon historical experience actual returns additionally company considers factors levels inventory distribution channel product dating expiration period whether products discontinued entrance market generic competition changes formularies launch overthecounter products among others outside united states returns allowed certain countries limited basis merck’s payment terms us pharmaceutical customers typically 36 days receipt invoice us animal health customers typically 30 days receipt invoice however certain products including keytruda longer payment terms 90 days outside united states payment terms typically 30 days 90 days although certain markets longer payment terms depreciation provided estimated useful lives assets principally using straightline method tax purposes accelerated tax methods used estimated useful lives primarily range 25 45 years buildings 3 15 years machinery equipment office furnishings depreciation expense 17 billion 2019 14 billion 2018 15 billion 2017 advertising promotion costs advertising promotion costs expensed incurred company recorded advertising promotion expenses 21 billion 21 billion 22 billion 2019 2018 2017 respectively software capitalization company capitalizes certain costs incurred connection obtaining developing internaluse software including external direct costs material services payroll costs employees directly involved software development costs included property plant equipment addition company capitalizes certain costs incurred implement cloud computing arrangement considered service agreement included assets capitalized software costs amortized beginning software project substantially complete asset ready intended use capitalized software costs associated projects amortized 6 10 years including company’s ongoing multiyear implementation enterprisewide resource planning system 548 million 439 million net accumulated amortization december 31 2019 2018 respectively capitalized software costs amortized periods ranging 3 5 years costs incurred preliminary project stage postimplementation stage well maintenance training costs expensed incurred goodwill represents excess consideration transferred fair value net assets businesses acquired goodwill assigned reporting units evaluated impairment least annual basis frequently impairment indicators exist first assessing qualitative factors determine whether likely fair value reporting unit less carrying amount company concludes likely fair value reporting unit less carrying amount quantitative fair value test performed carrying value reporting unit greater fair value goodwill impairment charge recorded difference carrying value goodwill acquired intangibles acquired intangibles include products product rights licenses trade names patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives ranging 2 24 years see note 8 company periodically evaluates whether current facts circumstances indicate carrying values acquired intangibles may recoverable circumstances determined exist estimate undiscounted future cash flows assets appropriate asset groupings compared carrying value determine whether impairment exists asset determined impaired loss measured based difference carrying value intangible asset fair value determined based net present value estimated future cash flows acquired inprocess research development iprd company acquires conjunction acquisition business represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project merck make determination thenuseful life intangible asset generally determined period substantial majority cash flows expected generated begin amortization company evaluates iprd impairment least annually frequently impairment indicators exist performing quantitative test compares fair value iprd intangible asset carrying value fair value less carrying amount impairment loss recognized operating results contingent consideration certain company’s acquisitions involve potential future payment consideration contingent upon achievement performance milestones including product development milestones royalty payments future product sales transaction accounted acquisition business fair value contingent consideration liabilities determined acquisition date using unobservable inputs include estimated amount timing projected cash flows probability success achievement contingent event riskadjusted discount rate used present value probabilityweighted cash flows subsequent acquisition date reporting period contingency resolved contingent consideration liability remeasured current fair value changes either expense income recorded earnings significant events increase decrease probability achieving development regulatory milestones increase decrease projected cash flows result corresponding increases decreases fair values related contingent consideration obligations transaction accounted acquisition asset rather business contingent consideration recognized acquisition date instances product development milestones recognized upon achievement salesbased milestones recognized milestone deemed probable company achieved research development research development expensed incurred nonrefundable advance payments goods services used future research development activities expensed activity performed goods received rather payment made research development expenses include restructuring costs iprd impairment charges addition research development expenses include expense income related changes estimated fair value measurement liabilities contingent consideration research development expenses also include upfront milestone payments related asset acquisitions licensing transactions involving clinical development programs yet received regulatory approval collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners merck principal sales transactions third parties company recognizes sales cost sales selling general administrative expenses gross basis profit sharing amounts pays collaborative partners recorded within cost sales collaborative partner principal sales transactions third parties company records profit sharing amounts received collaborative partners alliance revenue within sales alliance revenue recorded net cost sales includes adjustment share commercialization costs partners accordance collaboration agreement adjustment determined comparing commercialization costs merck incurred directly reported within selling general administrative expenses costs collaborative partner incurred research development costs merck incurs related collaborations recorded within research development expenses cost reimbursements collaborative partner payments received collaborative partner share costs pursuant terms collaboration agreements recorded increases decreases research development expenses addition terms collaboration agreements may require company make payments based upon achievement certain developmental regulatory approval commercial milestones upfront milestone payments payable merck collaborative partners prior regulatory approval expensed incurred included research development expenses payments due collaborative partners upon subsequent regulatory approval capitalized amortized estimated useful life corresponding intangible asset cost sales provided future cash flows support amounts capitalized salesbased milestones payable merck collaborative partners accrued capitalized subject cumulative amortization catchup probable achieved amortization catchup calculated either time first regulatory approval indications unapproved time collaboration formed time formation collaboration approved products related intangible asset recognized amortized cost sales remaining useful life subject impairment testing sharebased compensation company expenses sharebased payments employees requisite service period based grantdate fair value awards restructuring costs company records liabilities costs associated exit disposal activities period liability incurred accordance existing benefit arrangements employee termination costs accrued restructuring actions probable estimable accruing costs company recognize amount within range costs best estimate within range amount within range better estimate amount company recognizes minimum amount within range costs onetime termination benefits employee required render service termination order receive benefits recognized ratably future service period contingencies legal defense costs company records accruals contingencies legal defense costs expected incurred connection loss contingency probable liability incurred amount reasonably estimated taxes income deferred taxes recognized future tax effects temporary differences financial income tax reporting based enacted tax laws rates company evaluates tax positions determine whether benefits tax positions likely sustained upon audit based technical merits tax position tax positions likely sustained upon audit company recognizes largest amount benefit greater 50 likely realized upon ultimate settlement financial statements tax positions likely sustained upon audit company recognize portion benefit financial statements company recognizes interest penalties associated uncertain tax positions component taxes income consolidated statement income company accounts tax effects tax global intangible lowtaxed income gilti certain foreign subsidiaries income tax provision period tax arises use estimates consolidated financial statements prepared conformity accounting principles generally accepted united states gaap accordingly include certain amounts based management’s best estimates judgments estimates used accounting amounts recorded connection acquisitions including initial fair value determinations assets liabilities primarily iprd intangible assets contingent consideration well subsequent fair value measurements additionally estimates used determining items provisions sales discounts returns depreciable amortizable lives recoverability inventories including produced preparation product launches amounts recorded contingencies environmental liabilities accruals contingent salesbased milestone payments reserves pension postretirement benefit plan assumptions sharebased compensation assumptions restructuring costs impairments longlived assets including intangible assets goodwill investments taxes income uncertainty inherent estimates actual results may differ estimates reclassifications certain reclassifications made prior year amounts conform current year presentation recently adopted accounting standards february 2016 financial accounting standards board fasb issued new accounting guidance accounting reporting leases asu 201602 subsequently issued several updates new guidance asc 842 new leasing guidance new leasing guidance requires lessees recognize rightofuse asset lease liability leases meet definition shortterm lease leases classified either operating finance operating leases result straightline expense income statement similar previous operating leases finance leases result expense recognized earlier years lease term similar previous capital leases company adopted new standard january 1 2019 using modified retrospective approach merck elected transition method allows application standard adoption date rather beginning earliest comparative period presented financial statements company also elected available practical expedients upon adoption company recognized 11 billion additional assets related liabilities consolidated balance sheet see note 9 adoption new leasing guidance impact company’s consolidated statements income cash flows april 2018 fasb issued new guidance accounting costs incurred implement cloud computing arrangement considered service arrangement new guidance requires capitalization costs aligning accounting costs associated developing obtaining internaluse software company adopted new standard third quarter 2019 using prospective application eligible costs immaterial august 2018 fasb issued new guidance modifying disclosure requirements employers sponsor defined benefit pension postretirement plans new guidance removes disclosures longer considered cost beneficial clarifies specific requirements certain disclosures adds disclosure requirements identified relevant company elected early adopt new guidance 2019 retrospective basis resulting minor changes employee benefit plan disclosures see note 13 also august 2018 fasb issued new guidance fair value measurements adds removes modifies certain disclosure requirements company elected early adopt new guidance 2019 resulting minor changes fair value disclosures see note 6 recently issued accounting standards yet adopted june 2016 fasb issued new guidance accounting credit losses financial instruments new guidance introduces expected loss model estimating credit losses replacing incurred loss model new guidance also changes impairment model availableforsale debt securities requiring use allowance record estimated credit losses subsequent recoveries company adopted new guidance effective january 1 2020 impact company’s consolidated financial statements upon adoption november 2018 fasb issued new guidance collaborative arrangements intended reduce diversity practice clarifying whether certain transactions collaborative arrangement participants accounted revenue recognition guidance asc 606 company adopted new guidance effective january 1 2020 result minor changes footnote presentation information related company’s collaborative arrangements december 2019 fasb issued amended guidance accounting reporting income taxes guidance intended simplify accounting income taxes removing exceptions related certain intraperiod tax allocations deferred tax liabilities clarifying guidance primarily related evaluating stepup tax basis goodwill business combination reflecting enacted changes tax laws rates annual effective tax rate amended guidance effective interim annual periods 2021 early adoption permitted application amendments new guidance applied retrospective basis modified retrospective basis cumulativeeffect adjustment retained earnings prospectively depending amendment company currently evaluating impact adoption consolidated financial statements january 2020 fasb issued new guidance intended clarify certain interactions accounting standards related equity securities equity method investments certain derivatives guidance addresses accounting transition equity method accounting measuring certain purchased options forward contracts acquire investments new guidance effective interim annual periods 2021 applied prospectively early adoption permitted company currently evaluating impact adoption consolidated financial statements 3 acquisitions divestitures research collaborations license agreements company continues pursue acquisition businesses establishment external alliances research collaborations licensing agreements complement internal research capabilities arrangements often include upfront payments well expense reimbursements payments third party milestone royalty profit share arrangements contingent upon occurrence certain future events linked success asset development company also reviews marketed products pipeline examine candidates may provide value outlicensing part portfolio assessment process may also divest certain assets pro forma financial information acquired businesses presented historical financial results acquired entity significant compared company’s financial results recently completed transaction january 2020 merck acquired arqule inc arqule publicly traded biopharmaceutical company focused kinase inhibitor discovery development treatment patients cancer diseases 27 billion arqule’s lead investigational candidate mk1026 formerly arq 531 novel oral bruton’s tyrosine kinase btk inhibitor currently phase 2 dose expansion study treatment bcell malignancies company process determining preliminary fair value assets acquired liabilities assumed total consideration transferred transaction accounted acquisition business 2019 transactions july 2019 merck acquired peloton therapeutics inc peloton clinicalstage biopharmaceutical company focused development novel small molecule therapeutic candidates targeting hypoxiainducible factor2α hif2α treatment patients cancer nononcology diseases peloton’s lead candidate mk6482 formerly pt2977 novel oral hif2α inhibitor latestage development renal cell carcinoma merck made upfront payment 12 billion cash additionally former peloton shareholders eligible receive 50 million upon us regulatory approval 50 million upon first commercial sale united states 105 billion salesbased milestones transaction accounted acquisition asset merck recorded cash 157 million deferred tax liabilities 52 million net liabilities 4 million acquisition date research development expenses 993 million 2019 related transaction april 1 2019 merck acquired antelliq corporation antelliq leader digital animal identification traceability monitoring solutions help veterinarians farmers pet owners gather critical data improve management health wellbeing livestock pets merck paid 23 billion acquire outstanding shares antelliq spent 13 billion repay antelliq’s debt transaction accounted acquisition business estimated fair value assets acquired liabilities assumed antelliq follows 1 estimated fair values identifiable intangible assets relate primarily trade names determined using income approach future net cash flows discounted present value utilizing discount rate 115 actual cash flows likely different assumed 2 goodwill recognized largely attributable anticipated synergies expected arise acquisition allocated animal health segment goodwill deductible tax purposes company’s results 2019 include eight months activity antelliq company incurred 47 million transaction costs directly related acquisition antelliq consisting largely advisory fees reflected selling general administrative expenses 2019 also april 2019 merck acquired immune design latestage immunotherapy company employing nextgeneration vivo approaches enable body’s immune system fight disease 301 million cash transaction accounted acquisition business merck recognized intangible assets iprd 156 million cash 83 million net assets 42 million excess consideration transferred fair value net assets acquired 20 million recorded goodwill allocated pharmaceutical segment deductible tax purposes fair values identifiable intangible assets related iprd determined using income approach actual cash flows likely different assumed 2018 transactions 2018 company recorded aggregate charge 423 million within cost sales conjunction termination collaboration agreement entered 2014 samsung bioepis co ltd samsung insulin glargine charge reflects termination payment 155 million represents reimbursement fees previously paid samsung merck agreement plus interest well release merck’s ongoing obligations agreement charge also included fixed asset abandonment charges 137 million inventory writeoffs 122 million well related costs 9 million termination agreement impact company’s collaboration samsung june 2018 merck acquired viralytics limited viralytics australian publicly traded company focused oncolytic immunotherapy treatments range cancers aud 502 million 378 million transaction provided merck full rights v937 formerly cva21 viralytics’s investigational oncolytic immunotherapy v937 based viralytics’s proprietary formulation oncolytic virus coxsackievirus type a21 shown preferentially infect kill cancer cells v937 currently evaluated multiple clinical trials intratumoral intravenous agent including combination keytruda previous agreement merck viralytics study investigating use keytruda v937 combination melanoma prostate lung bladder cancers transaction accounted acquisition asset merck recorded net assets 34 million primarily cash acquisition date research development expenses 344 million 2018 related transaction future contingent payments associated acquisition march 2018 merck eisai co ltd eisai entered strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai see note 4 2017 transactions october 2017 merck acquired rigontec gmbh rigontec leader accessing retinoic acidinducible gene pathway part innate immune system novel distinct approach cancer immunotherapy induce immediate longterm antitumor immunity rigontec’s lead candidate mk4621 formerly rgt100 development treatment patients various tumors terms agreement merck made upfront cash payment €119 million 140 million may make additional contingent payments €349 million €184 million related achievement research milestones regulatory approvals €165 million related achievement commercial targets transaction accounted acquisition asset upfront payment reflected within research development expenses 2017 july 2017 merck astrazeneca plc astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types see note 4 march 2017 merck acquired controlling interest vallée sa vallée leading privately held producer animal health products brazil vallée extensive portfolio products spanning parasiticides antiinfectives vaccines include products livestock horses companion animals terms agreement merck acquired 935 shares vallée 358 million total purchase price 176 million placed escrow pending resolution certain contingent items transaction accounted acquisition business merck recognized intangible assets 297 million related currently marketed products net deferred tax liabilities 102 million net assets 32 million noncontrolling interest 25 million addition company recorded liabilities 37 million contingencies identified acquisition date corresponding indemnification assets 37 million representing amounts reimbursed merck contingent liabilities paid excess consideration transferred fair value net assets acquired 156 million recorded goodwill allocated animal health segment deductible tax purposes estimated fair values identifiable intangible assets related currently marketed products determined using income approach actual cash flows likely different assumed intangible assets related currently marketed products amortized estimated useful lives 15 years fourth quarter 2017 merck acquired additional 45 interest vallée 18 million reduced noncontrolling interest related vallée remicadesimponi 1998 subsidiary scheringplough entered licensing agreement centocor ortho biotech inc centocor johnson jj company market remicade prescribed treatment inflammatory diseases 2005 scheringplough’s subsidiary exercised option contract centocor license rights develop commercialize simponi fully human monoclonal antibody company marketing rights products throughout europe russia turkey remicade lost market exclusivity major european markets 2015 company longer market exclusivity marketing territories company continues market exclusivity simponi marketing territories profits derived merck’s distribution two products countries equally divided merck jj 4 collaborative arrangements merck entered collaborative arrangements provide company varying rights develop produce market products together collaborative partners parties arrangements active participants exposed significant risks rewards dependent commercial success activities collaboration merck’s significant collaborative arrangements discussed astrazeneca july 2017 merck astrazeneca plc astrazeneca entered global strategic oncology collaboration codevelop cocommercialize astrazeneca’s lynparza multiple cancer types lynparza oral poly adpribose polymerase parp inhibitor currently approved certain types ovarian breast cancer companies jointly developing commercializing lynparza monotherapy combination trials potential medicines independently merck astrazeneca develop commercialize lynparza combinations respective pd1 pdl1 medicines keytruda imfinzi companies also jointly develop commercialize astrazeneca’s selumetinib oral potent selective inhibitor mek part mitogenactivated protein kinase mapk pathway currently developed multiple indications terms agreement astrazeneca merck share development commercialization costs lynparza selumetinib monotherapy nonpdl1pd1 combination therapy opportunities gross profits lynparza selumetinib product sales generated monotherapies combination therapies shared equally merck fund development commercialization costs keytruda combination lynparza selumetinib astrazeneca fund development commercialization costs imfinzi combination lynparza selumetinib astrazeneca principal lynparza sales transactions merck records share lynparza product sales net cost sales commercialization costs alliance revenue share development costs associated collaboration part research development expenses reimbursements received astrazeneca research development expenses recognized reductions research development costs part agreement merck made upfront payment astrazeneca 16 billion 2017 made payments 750 million multiyear period certain license options 250 million paid december 2017 400 million paid december 2018 100 million paid december 2019 company recorded aggregate charge 235 billion research development expenses 2017 related upfront payment license option payments addition agreement provides additional contingent payments merck astrazeneca related successful achievement salesbased regulatory milestones 2019 merck determined probable annual sales lynparza future would trigger 300 million salesbased milestone payment merck astrazeneca accordingly 2019 merck recorded 300 million liability corresponding increase intangible asset related lynparza prior 2019 merck accrued salesbased milestone payments aggregating 700 million 200 million 250 million paid astrazeneca 2019 2018 respectively remainder 250 million paid january 2020 potential future salesbased milestone payments 31 billion yet accrued deemed company probable time 2019 lynparza received regulatory approval european union eu monotherapy treatment certain adult patients advanced breast cancer monotherapy maintenance treatment certain adult patients brcamutated advanced ovarian cancer approvals triggered 30 million capitalized milestone payment merck astrazeneca 2018 lynparza received regulatory approvals triggering capitalized milestone payments 140 million aggregate merck astrazeneca potential future regulatory milestone payments 17 billion remain agreement intangible asset balance related lynparza includes capitalized salesbased regulatory milestone payments 955 million december 31 2019 included intangibles net consolidated balance sheet amount amortized estimated useful life 2028 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 represents amortization capitalized milestone payments 2 amount 2017 includes 235 billion related upfront payment license option payments 3 includes accrued milestone payments eisai march 2018 merck eisai announced strategic collaboration worldwide codevelopment cocommercialization lenvima orally available tyrosine kinase inhibitor discovered eisai agreement merck eisai develop commercialize lenvima jointly monotherapy combination merck’s keytruda eisai records lenvima product sales globally eisai principal lenvima sales transactions merck eisai share gross profits equally merck records share lenvima product sales net cost sales commercialization costs alliance revenue expenses incurred codevelopment including studies evaluating lenvima monotherapy shared equally two companies reflected research development expenses agreement merck made upfront payment eisai 750 million make payments 650 million certain option rights 2021 325 million paid march 2019 200 million expected paid march 2020 125 million expected paid march 2021 company recorded aggregate charge 14 billion research development expenses 2018 related upfront payment future option payments addition agreement provides additional contingent payments merck eisai related successful achievement salesbased regulatory milestones 2019 merck determined probable annual sales lenvima future would trigger salesbased milestone payments merck eisai aggregating 682 million accordingly 2019 merck recorded 682 million liabilities corresponding increases intangible asset related lenvima 2018 merck accrued salesbased milestone payments aggregating 268 million related lenvima amounts 50 million paid eisai 2019 additional 150 million paid january 2020 potential future salesbased milestone payments 30 billion yet accrued deemed company probable time 2018 lenvima received regulatory approvals triggering capitalized milestone payments 250 million aggregate merck eisai potential future regulatory milestone payments 135 million remain agreement intangible asset balance related lenvima includes capitalized salesbased regulatory milestone payments 956 million december 31 2019 included intangibles net consolidated balance sheet amount amortized estimated useful life 2026 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 represents amortization capitalized milestone payments 2 amount 2018 includes 14 billion related upfront payment option payments 3 includes accrued milestone future option payments bayer ag 2014 company entered worldwide clinical development collaboration bayer ag bayer market develop soluble guanylate cyclase sgc modulators including bayer’s adempas approved treat pulmonary arterial hypertension chronic thromboembolic pulmonary hypertension two companies implemented joint development commercialization strategy collaboration also includes clinical development bayer’s vericiguat phase 3 trials worsening heart failure well optin rights earlystage sgc compounds development bayer merck turn made available earlystage sgc compounds similar terms agreement bayer leads commercialization adempas americas merck leads commercialization rest world vericiguat potential optin products bayer lead commercialization rest world merck lead americas products candidates included agreement companies share development costs profits sales right copromote territories lead revenue adempas includes sales merck’s marketing territories well merck’s share profits sale adempas bayer’s marketing territories addition agreement provides additional contingent payments merck bayer related successful achievement salesbased milestones 2018 merck determined probable annual worldwide sales adempas future would trigger 375 million salesbased milestone payment merck bayer accordingly merck recorded 375 million liability corresponding increase intangible asset related adempas 2018 company made 350 million milestone payment bayer accrued 2016 merck deemed payment probable additional 400 million potential future salesbased milestone payment yet accrued deemed company probable time intangible asset balance related adempas includes acquired intangible asset balance well capitalized salesbased milestone payments 883 million december 31 2019 included intangibles net consolidated balance sheet amount amortized estimated useful life 2027 supported projected future cash flows subject impairment testing summarized financial information related collaboration follows 1 includes amortization intangible assets 2 represents accrued milestone payment 5 restructuring early 2019 merck approved new global restructuring program restructuring program part worldwide initiative focused optimizing company’s manufacturing supply network well reducing global real estate footprint program continuation company’s plant rationalization builds prior restructuring programs include actions associated planned spinoff newco company continues evaluate global footprint overall operating model subsequently identified additional actions restructuring program could identify actions time actions currently contemplated restructuring program expected substantially completed end 2023 cumulative pretax costs incurred company implement program estimated approximately 25 billion company estimates approximately 60 cumulative pretax costs result cash outlays primarily related employee separation expense facility shutdown costs approximately 40 cumulative pretax costs noncash relating primarily accelerated depreciation facilities closed divested company expects record charges approximately 800 million 2020 related restructuring program actions previous global restructuring programs substantially completed company recorded total pretax costs 927 million 2019 658 million 2018 927 million 2017 related restructuring program activities segment reporting restructuring charges unallocated expenses following table summarizes charges related restructuring program activities type cost separation costs associated actual headcount reductions well headcount reductions probable could reasonably estimated accelerated depreciation costs primarily relate manufacturing research administrative facilities equipment sold closed part programs accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closed divested equipment disposed depreciation expense determined utilizing useful life prior restructuring actions sites continue operate respective closure dates since future undiscounted cash flows sufficient recover respective book values merck recording accelerated depreciation revised useful life site assets anticipated site closure dates particularly related manufacturing locations may continue adjusted reflect changes resulting regulatory factors activity 2019 2018 2017 includes asset abandonment facility shutdown related costs well pretax gains losses resulting sales facilities related assets additionally activity includes certain employeerelated costs associated pension postretirement benefit plans see note 13 sharebased compensation following table summarizes charges spending relating restructuring program activities 1 remaining cash outlays expected substantially completed end 2023 6 financial instruments derivative instruments hedging activities company manages impact foreign exchange rate movements interest rate movements earnings cash flows fair values assets liabilities operational means use various financial instruments including derivative instruments significant portion company’s revenues earnings foreign affiliates exposed changes foreign exchange rates objectives accounting related company’s foreign currency risk management program well interest rate risk management activities discussed foreign currency risk management company established revenue hedging balance sheet risk management net investment hedging programs protect volatility future foreign currency cash flows changes fair value caused changes foreign exchange rates objective revenue hedging program reduce variability caused changes foreign exchange rates would affect us dollar value future cash flows derived foreign currency denominated sales primarily euro japanese yen chinese renminbi achieve objective company hedge portion forecasted foreign currency denominated thirdparty intercompany distributor entity sales forecasted sales expected occur planning cycle typically two years future company layer hedges time increasing portion forecasted sales hedged gets closer expected date forecasted sales portion forecasted sales hedged based assessments costbenefit profiles consider natural offsetting exposures revenue exchange rate volatilities correlations cost hedging instruments company manages anticipated transaction exposure principally purchased local currency put options forward contracts purchased collar options fair values derivative contracts recorded either assets gain positions liabilities loss positions consolidated balance sheet changes fair value derivative contracts recorded period either current earnings oci depending whether derivative designated part hedge transaction type hedge transaction derivatives designated cash flow hedges unrealized gains losses contracts recorded aoci reclassified sales hedged anticipated revenue recognized derivatives designated cash flow hedges serve economic hedges forecasted sales unrealized gains losses recorded sales period cash flows designated nondesignated contracts reported operating activities consolidated statement cash flows company enter derivatives trading speculative purposes company manages operating activities net asset positions local subsidiary order mitigate effects exchange monetary assets liabilities company also uses balance sheet risk management program mitigate exposure net monetary assets denominated currency subsidiary’s functional currency effects volatility foreign exchange instances merck principally utilizes forward exchange contracts offset effects exchange exposures denominated developed country currencies primarily euro japanese yen exposures developing country currencies company enter forward contracts partially offset effects exchange exposures deemed economical based costbenefit analysis considers magnitude exposure volatility exchange rate cost hedging instrument cash flows contracts reported operating activities consolidated statement cash flows monetary assets liabilities denominated currency functional currency given subsidiary remeasured spot rates effect balance sheet date effects changes spot rates reported income expense net forward contracts designated hedges marked market income expense net accordingly fair value changes forward contracts help mitigate changes value remeasured assets liabilities attributable changes foreign currency exchange rates except extent spotforward differences significant due shortterm nature contracts typically average maturities inception less one year company also uses forward exchange contracts hedge portion net investment foreign operations movements exchange rates forward contracts designated hedges net investment foreign operation unrealized gains losses contracts recorded foreign currency translation adjustment within oci remain aoci either sale complete substantially complete liquidation subsidiary company excludes certain portions change fair value derivative instruments assessment hedge effectiveness excluded component changes fair value excluded components recognized oci company recognizes earnings initial value excluded component straightline basis life derivative instrument rather using marktomarket approach cash flows contracts reported investing activities consolidated statement cash flows foreign exchange risk also managed use foreign currency debt company’s senior unsecured eurodenominated notes designated effective economic hedges net investment foreign operation accordingly foreign currency transaction gains losses due spot rate fluctuations eurodenominated debt instruments included foreign currency translation adjustment within oci effects company’s net investment hedges oci consolidated statement income shown 1 amounts reclassified aoci income related sale subsidiary interest rate risk management company may use interest rate swap contracts certain investing borrowing transactions manage net exposure interest rate changes reduce overall cost borrowing company use leveraged swaps general leverage investment activities would put principal capital risk december 31 2019 company party 19 payfloating receivefixed interest rate swap contracts designated fair value hedges fixedrate notes notional amounts match amount hedged fixedrate notes detailed table interest rate swap contracts designated hedges fair value changes notes attributable changes benchmark london interbank offered rate libor swap rate fair value changes notes attributable changes libor swap rate recorded interest expense along offsetting fair value changes swap contracts cash flows contracts reported operating activities consolidated statement cash flows table presents location amounts recorded consolidated balance sheet related cumulative basis adjustments fair value hedges december 31 presented table fair value derivatives gross basis segregated derivatives designated hedging instruments designated hedging instruments december 31 noted company records derivatives gross basis consolidated balance sheet company master netting agreements several financial institution counterparties see concentrations credit risk following table provides information company’s derivative positions subject master netting arrangements presented net basis allowing right offset counterparty cash collateral exchanged per master agreements related credit support annexes december 31 table provides information regarding location amount pretax gains losses derivatives designated fair value cash flow hedging relationships 1 interest expense component income expense net table provides information regarding income statement effects derivatives designated hedging instruments 1 derivative contracts mitigate changes value remeasured foreign currency denominated monetary assets liabilities attributable changes foreign currency exchange rates 2 derivative contracts serve economic hedges forecasted transactions december 31 2019 company estimates 31 million pretax net unrealized gains derivatives maturing within next 12 months hedge foreign currency denominated sales period reclassified aoci sales amount ultimately reclassified sales may differ foreign exchange rates change realized gains losses ultimately determined actual exchange rates maturity investments debt equity securities information investments debt equity securities december 31 follows 1 unrealized net gains recognized income expense net equity securities still held december 31 2019 160 million 2019 unrealized net losses recognized income expense net equity securities still held december 31 2018 35 million 2018 december 31 2019 2018 company also 420 million 568 million respectively equity investments without readily determinable fair values included assets 2019 2018 company recognized unrealized gains 20 million 167 million respectively income expense net certain equity investments based favorable observable price changes transactions involving similar investments investee addition 2019 2018 company recognized unrealized losses 13 million 26 million respectively income expense net related certain investments based unfavorable observable price changes cumulative unrealized gains cumulative unrealized losses based observable prices changes investments equity investments without readily determinable fair values 109 million 21 million respectively availableforsale debt securities included shortterm investments totaled 749 million december 31 2019 remaining debt securities 933 million mature within five years december 31 2019 2018 debt securities pledged collateral fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date company uses fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets liabilities whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well assets liabilities determination fair value requires significant judgment estimation inputs used measure financial assets liabilities fall within one level described categorization based lowest level input significant fair value measurement instrument financial assets liabilities measured fair value recurring basis financial assets liabilities measured fair value recurring basis december 31 summarized 1 primarily assetbacked securities highlyrated standard poor’s rating aaa moody’s investors service rating aaa secured primarily auto loan credit card student loan receivables weightedaverage lives primarily 5 years less 2 investments included assets restricted use including payment benefits employee benefit plans 3 fair value determination derivatives includes impact credit risk counterparties derivatives company’s credit risk effects significant december 31 2019 cash equivalents 97 billion include 89 billion cash equivalents would considered level 2 fair value hierarchy contingent consideration summarized information changes liabilities contingent consideration associated business acquisitions follows 1 recorded cost sales research development expenses income expense net includes cumulative translation adjustments 2 balance december 31 2019 includes 114 million recorded current liability amounts expected paid within next 12 months 3 december 31 2019 2018 625 million 614 million respectively liabilities relate termination spmsd joint venture 2016 part termination merck recorded liability contingent future royalty payments 115 net sales merck products previously sold joint venture december 31 2024 fair value liability determined utilizing estimated amount timing projected cash flows riskadjusted discount rate 8 used present value cash flows changes estimated fair value liabilities contingent consideration 2019 2018 largely attributable increases liabilities recorded connection termination sanofi pasteur msd spmsd joint venture 2016 2018 increases partially offset reversal liability related discontinuation program obtained connection acquisition smartcells see note 8 payments contingent consideration years relate spmsd termination liabilities described payments contingent consideration 2018 also include 175 million related achievement clinical development milestone mk7264 gefapixant program obtained connection acquisition afferent pharmaceuticals fair value measurements company’s financial instruments cash equivalents receivables payables reflected balance sheet carrying value approximates fair value due shortterm nature estimated fair value loans payable longterm debt including current portion december 31 2019 288 billion compared carrying value 263 billion december 31 2018 256 billion compared carrying value 251 billion fair value estimated using recent observable market prices would considered level 2 fair value hierarchy concentrations credit risk ongoing basis company monitors concentrations credit risk associated corporate government issuers securities financial institutions conducts business credit exposure limits established limit concentration single issuer institution cash investments placed instruments meet high credit quality standards specified company’s investment policy guidelines majority company’s accounts receivable arise product sales united states europe china primarily due drug wholesalers retailers hospitals government agencies managed health care providers pharmacy benefit managers company monitors financial performance creditworthiness customers properly assess respond changes credit profile company also continues monitor global economic conditions including volatility associated international sovereign economies associated impacts financial markets business company’s customers largest accounts receivable balances mckesson corporation amerisourcebergen corporation cardinal health inc represented aggregate approximately 35 total accounts receivable december 31 2019 company monitors creditworthiness customers grants credit terms normal course business bad debts minimal company normally require collateral security support credit sales company accounts receivable factoring agreements financial institutions certain countries sell accounts receivable 2019 company expanded factoring arrangements china entered factoring agreements sell accounts receivable company’s major us distributors company factored 27 billion 11 billion accounts receivable fourth quarter 2019 2018 respectively factoring arrangements reduced outstanding accounts receivable cash received financial institutions reported within operating activities consolidated statement cash flows certain factoring arrangements ease administration company collect customer payments related factored receivables remits financial institutions december 31 2019 company collected 256 million behalf financial institutions reflected restricted cash current assets related obligation remit cash within accrued current liabilities company remitted cash financial institutions january 2020 net cash flows relating collections reported financing activities consolidated statement cash flows costs factoring accounts receivable de minimis derivative financial instruments executed international swaps derivatives association master agreements master agreements several company’s financial institution counterparties also include credit support annexes contain provisions require collateral exchanged depending value derivative assets liabilities company’s credit rating credit rating counterparty cash collateral received company various counterparties 34 million 107 million december 31 2019 2018 respectively obligation return collateral recorded accrued current liabilities cash collateral advanced company counterparties december 31 2019 2018 7 inventories december 31 consisted inventories valued lifo method comprised approximately 26 billion 25 billion december 31 2019 2018 respectively amounts recognized assets comprised almost entirely raw materials work process inventories december 31 2019 2018 amounts included 13 billion 14 billion respectively inventories expected sold within one year addition amounts included 168 million 7 million december 31 2019 2018 respectively inventories produced preparation product launches 8 goodwill intangibles following table summarizes goodwill activity segment 1 includes cumulative translation adjustments goodwill balances certain adjustments 2 accumulated goodwill impairment losses december 31 2019 2018 531 million 369 million respectively additions goodwill within animal health segment 2019 primarily relate acquisition antelliq see note 3 impairments goodwill within nonreportable segments 2019 2018 relate certain businesses within healthcare services segment intangibles december 31 consisted acquired intangibles include products product rights licenses trade names patents initially recorded fair value assigned estimated useful life amortized primarily straightline basis estimated useful lives company’s significant acquired intangibles net basis related human health marketed products included products product rights december 31 2019 include zerbaxa 24 billion implanonnexplanon 412 million gardasilgardasil 9 314 million dificid 312 million bridion 230 million sivextro 171 million simponi 163 million additionally company 24 billion acquired intangibles related animal health marketed products december 31 2019 company’s significant intangible assets included licenses december 31 2019 include lenvima 956 million lynparza 955 million result collaborations eisai astrazeneca see note 4 increase trade names 2019 reflects 27 billion intangibles acquired antelliq acquisition 2019 see note 3 company intangible asset related adempas result collaboration bayer see note 4 carrying value 883 million december 31 2019 reflected “other” table 2019 company recorded impairment charges related marketed products intangibles 705 million within cost sales amount 612 million related sivextro product treatment acute bacterial skin structure infections caused designated susceptible grampositive organisms part reorganization reprioritization internal sales force company made decision cease promotion sivextro us market end 2019 decision resulted reduced cash flow projections sivextro indicated sivextro intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related sivextro compared related carrying value resulted impairment charge noted 2017 company recorded impairment charges related marketed products intangibles 58 million amount 47 million related intron treatment certain types cancers sales intron adversely affected availability new therapeutic options 2017 sales intron united states eroded rapidly previously anticipated company led changes cash flow assumptions intron revisions cash flows indicated intron intangible asset value fully recoverable undiscounted cash flows basis company utilized market participant assumptions determine best estimate fair value intangible asset related intron compared related carrying value resulted impairment charge noted remaining charges 2017 relate impairment customer relationship tradename developed technology intangibles certain businesses healthcare services segment iprd company acquires business combinations represents fair value assigned incomplete research projects time acquisition reached technological feasibility amounts capitalized iprd accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project company make separate determination useful life asset begin amortization 2019 company recorded 172 million iprd impairment charges within research development expenses amount 155 million relates writeoff intangible asset balance programs obtained connection acquisition iomet pharma ltd following review clinical trial results conducted merck along external clinical trial results similar compounds discontinuation clinical development program resulted reversal related liability contingent consideration 11 million 2018 company recorded 152 million iprd impairment charges amount 139 million relates writeoff remaining intangible asset balance program obtained connection smartcells acquisition following decision terminate program due product development issues discontinuation clinical development program resulted reversal related liability contingent consideration 60 million see note 6 2017 company recorded 483 million iprd impairment charges amount 240 million resulted strategic decision discontinue development investigational combination regimens mk3682b grazoprevirruzasviruprifosbuvir mk3682c ruzasviruprifosbuvir treatment chronic hepatitis c virus hcv infection decision made based review available phase 2 efficacy data consideration evolving marketplace growing number treatment options available patients chronic hcv infection including zepatier marketed company treatment adult patients chronic hcv infection result decision company recorded iprd impairment charge writeoff remaining intangible asset related uprifosbuvir iprd impairment charges 2017 also include charge 226 million writeoff intangible asset related verubecestat investigational small molecule inhibitor betasite amyloid precursor protein cleaving enzyme 1 bace1 resulting decision february 2018 stop phase 3 study evaluating verubecestat people prodromal alzheimer’s disease decision stop study followed recommendation external data monitoring committee edmc assessed overall benefitrisk interim safety analysis edmc concluded unlikely positive benefitrisk could established trial continued iprd projects remain development subject inherent risks uncertainties drug development possible company able successfully develop complete iprd programs profitably commercialize underlying product candidates company may recognize additional noncash impairment charges future related marketed products pipeline programs charges could material aggregate amortization expense recorded within cost sales 20 billion 2019 31 billion 2018 32 billion 2017 estimated aggregate amortization expense next five years follows 2020 16 billion 2021 15 billion 2022 15 billion 2023 15 billion 2024 14 billion 9 loans payable longterm debt leases loans payable loans payable december 31 2019 included 19 billion notes due 2020 14 billion commercial paper 226 million longdated notes subject repayment option holders loans payable december 31 2018 included 51 billion commercial paper 149 million longdated notes subject repayment option holders weightedaverage interest rate commercial paper borrowings 223 209 years ended december 31 2019 2018 respectively longterm debt longterm debt december 31 consisted presented table includes 147 million 223 million december 31 2019 2018 respectively borrowings variable rates resulted effective interest rates 254 227 2019 2018 respectively exception 630 debentures due 2026 notes listed table redeemable whole part merck’s option time varying redemption prices march 2019 company issued 50 billion principal amount senior unsecured notes consisting 750 million 290 notes due 2024 175 billion 340 notes due 2029 10 billion 390 notes due 2039 15 billion 400 notes due 2049 company used net proceeds offering 50 billion general corporate purposes including repayment outstanding commercial paper borrowings effective november 3 2009 company executed full unconditional guarantee existing debt subsidiary merck sharp dohme corp msd executed full unconditional guarantee existing debt company excluding commercial paper including payments principal interest guarantees extend debt issued subsequent date certain company’s borrowings require merck comply covenants december 31 2019 company compliance covenants aggregate maturities longterm debt next five years follows 2020 19 billion 2021 23 billion 2022 23 billion 2023 17 billion 2024 13 billion company 60 billion credit facility matures june 2024 facility provides backup liquidity company’s commercial paper borrowing facility used general corporate purposes company drawn funding facility leases discussed note 1 january 1 2019 merck adopted new guidance accounting reporting leases company operating leases primarily manufacturing facilities research development facilities corporate offices employee housing vehicles certain equipment permitted transition guidance asc 842 company elected package practical expedients among provisions allowed company carry forward historical lease classifications company determines arrangement lease inception evaluating contracts embedded leases company exercises judgment determine explicit implicit identified asset contract merck controls use asset embedded leases primarily associated contract manufacturing organizations immaterial asc 842 transition guidance merck elected hindsight practical expedient determine lease term existing leases permits companies consider available information prior effective date new guidance actual likely exercise options extend terminate lease term includes options extend terminate lease reasonably certain merck exercise option real estate leases facilities average remaining lease term eight years include options extend leases four years applicable vehicle leases generally effect four years company made accounting policy election record shortterm leases initial term 12 months less balance sheet however merck currently shortterm leases lease expense operating lease payments recognized straightline basis term lease operating lease assets liabilities recognized based present value lease payments lease term since company’s leases readily determinable implicit discount rate company uses incremental borrowing rate calculate present value lease payments asset class quarterly basis updated incremental borrowing rate determined based average remaining lease term asset class company’s pretax cost debt term updated rates asset class applied prospectively new leases practical expedient company made accounting policy election asset classes separate lease components eg payments rent real estate taxes insurance costs nonlease components eg commonarea maintenance costs event agreement contains merck includes lease nonlease components purposes calculating rightofuse asset related lease liability nonlease components fixed vehicle leases employee housing company applies portfolio approach effectively account operating lease assets liabilities certain company’s lease agreements contain variable lease payments adjusted periodically inflation actual operating expense trueups compared estimated amounts however amounts immaterial sublease income activity related sale leaseback transactions immaterial merck’s lease agreements contain material residual value guarantees material restrictive covenants operating lease cost 339 million 2019 cash paid amounts included measurement operating lease liabilities 281 million 2019 operating lease assets obtained exchange lease obligations 129 million 2019 supplemental balance sheet information related operating leases follows 1 includes prepaid leases related lease liability maturities operating leases liabilities follows december 31 2019 company entered additional real estate operating leases yet commenced obligations associated leases total 538 million 221 million relates lease commence april 2020 lease term 10 years december 31 2018 prior adoption asc 842 minimum aggregate rental commitments noncancellable leases follows 2019 188 million 2020 198 million 2021 150 million 2022 134 million 2023 84 million thereafter 243 million 10 contingencies environmental liabilities company involved various claims legal proceedings nature considered normal business including product liability intellectual property commercial litigation well certain additional matters including governmental environmental matters opinion company unlikely resolution matters material company’s financial condition results operations cash flows given nature litigation discussed complexities involved matters company unable reasonably estimate possible loss range possible loss matters company knows among factors claims survive dispositive motion practice ii extent claims including size potential class particularly damages specified indeterminate iii discovery process affect litigation iv settlement posture parties litigation v factors may material effect litigation company records accruals contingencies probable liability incurred amount reasonably estimated accruals adjusted periodically assessments change additional information becomes available product liability claims portion overall accrual actuarially determined considers factors past experience number claims reported estimates claims incurred yet reported individually significant contingent losses accrued probable reasonably estimable legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable company’s decision obtain insurance coverage dependent market conditions including cost availability existing time decisions made company evaluated risks determined cost obtaining product liability insurance outweighs likely benefits coverage available insurance product liabilities product liability litigation fosamax previously disclosed merck defendant product liability lawsuits united states involving fosamax litigation december 31 2019 approximately 3750 cases pending merck either federal state court plaintiffs vast majority cases generally allege sustained femur fractures andor bone injuries femur fractures association use fosamax federal cases involving allegations femur fractures transferred multidistrict litigation district new jersey femur fracture mdl bellwether case tried date femur fracture mdl glynn v merck jury returned verdict merck’s favor addition june 2013 femur fracture mdl court granted merck’s motion judgment matter law glynn case held plaintiff’s failure warn claim preempted federal law august 2013 femur fracture mdl court entered order requiring plaintiffs femur fracture mdl show cause cases asserting claims femur fracture injury took place prior september 14 2010 dismissed based court’s preemption decision glynn case pursuant show cause order march 2014 femur fracture mdl court dismissed prejudice approximately 650 cases preemption grounds plaintiffs approximately 515 cases appealed decision us court appeals third circuit third circuit march 2017 third circuit issued decision reversing femur fracture mdl court’s preemption ruling remanding appealed cases back femur fracture mdl court merck filed petition writ certiorari us supreme court august 2017 seeking review third circuit’s decision supreme court granted merck’s petition june 2018 may 2019 supreme court issued opinion decided third circuit incorrectly concluded issue preemption resolved jury accordingly vacated judgment third circuit remanded proceedings back third circuit address issue manner consistent supreme court’s opinion november 15 2019 third circuit remanded cases back district court order allow court determine first instance whether plaintiffs’ state law claims preempted federal law standards described supreme court opinion december 13 2019 district court ordered merck serve opening brief february 21 2020 plaintiffs file responsive brief april 22 2020 merck may file reply may 22 2020 accordingly december 31 2019 approximately 970 cases actively pending femur fracture mdl december 31 2019 approximately 2510 cases alleging femur fractures filed new jersey state court pending judge james hyland middlesex county parties selected initial group cases reviewed fact discovery merck continued select additional cases reviewed december 31 2019 approximately 275 cases alleging femur fractures filed pending california state court femur fracture cases filed california state court coordinated single judge orange county california additionally four femur fracture cases pending state courts discovery presently stayed femur fracture mdl state court california merck intends defend lawsuits januviajanumet previously disclosed merck defendant product liability lawsuits united states involving januvia andor janumet december 31 2019 merck aware approximately 1380 product users alleging januvia andor janumet caused development pancreatic cancer injuries claims filed multidistrict litigation us district court southern district california mdl outside mdl majority claims filed coordinated proceedings superior court california county los angeles california state court november 2015 mdl california state courtin separate opinionsgranted summary judgment defendants grounds federal preemption plaintiffs appealed forums november 2017 us court appeals ninth circuit vacated judgment remanded discovery november 2018 california state appellate court reversed remanded similar grounds march 2019 parties mdl california coordinated proceeding agreed coordinate adopt schedule completing discovery general causation preemption issues renewing summary judgment daubert motions stipulated case management schedule hearings daubert summary judgment motions expected take place june 2020 december 31 2019 six product users claims pending merck state courts california including illinois june 2017 illinois trial court denied merck’s motion summary judgment based federal preemption merck appealed illinois appellate court affirmed december 2018 merck filed petition leave appeal illinois supreme court february 2019 april 2019 illinois supreme court stayed consideration pending petition appeal us supreme court issued opinion merck sharp dohme corp v albrecht relating fosamax matter discussed merck filed opinion albrecht illinois supreme court june 2019 petition leave appeal decided september 25 2019 illinois supreme court directed intermediate appellate court reconsider earlier ruling illinois appellate court issued favorable decision concluding consistent albrecht preemption presents legal question resolved court addition claims noted company agreed toll statute limitations approximately 50 additional claims company intends continue defending lawsuits vioxx previously disclosed merck defendant lawsuit brought attorney general utah alleging merck misrepresented safety vioxx lawsuit pending utah state court utah seeks damages penalties utah false claims act bench trial matter currently scheduled april 20 2020 governmental proceedings previously disclosed fall 2018 company received records subpoena us attorney’s office district vermont vt usao pursuant section 248 health insurance portability accountability act 1996 hipaa relating investigation potential health care offenses subpoena sought information relating actual potential business relationship arrangement merck practice fusion inc pfi cloudbased electronic health records ehr company acquired allscripts january 2018 company cooperated government responded subpoena subsequently may 21 2019 merck received second records subpoena vt usao broadened government’s information request seeking information relating merck’s relationship ehr company shortly thereafter vt usao served civil investigation demand cid upon merck similarly seeking information company’s relationships ehr vendors cid explains government conducting false claims act investigation concerning whether merck andor pfi submitted claims federal healthcare programs violate federal antikickback statute merck cooperating government’s investigation previously disclosed april 15 2019 merck received set investigative interrogatories california attorney general’s office pursuant investigation conduct agreements allegedly affected delayed competition lantus insulin market interrogatories seek information concerning merck’s development insulin glargine product subsequent termination well merck’s patent litigation sanofi sa concerning lantus resolution litigation merck cooperating california attorney general’s investigation previously disclosed company’s subsidiaries china received may continue receive inquiries regarding operations various chinese governmental agencies inquiries may related matters involving multinational pharmaceutical companies well chinese entities business companies company’s policy cooperate authorities provide responses appropriate previously disclosed time company receives inquiries subject preliminary investigation activities competition governmental authorities markets outside united states authorities may include regulators administrative authorities law enforcement similar officials preliminary investigation activities may include site visits formal informal requests demands documents materials inquiries interviews similar matters certain preliminary inquiries activities may lead commencement formal proceedings determined adversely company monetary fines andor remedial undertakings may required commercial litigation zetia antitrust litigation previously disclosed merck msd schering corporation msp singapore company llc collectively merck defendants putative class action optout lawsuits filed 2018 behalf direct indirect purchasers zetia alleging violations federal state antitrust laws well state statutory common law causes action cases consolidated pretrial purposes federal multidistrict litigation judge rebecca beach smith eastern district virginia december 2018 court denied merck defendants’ motions dismiss stay direct purchaser putative class actions pending bilateral arbitration august 9 2019 district court adopted full report recommendation magistrate judge respect merck defendants’ motions dismiss nonarbitration issues thereby granting part denying part merck defendants’ motions dismiss addition june 27 2019 representatives putative direct purchaser class filed amended complaint august 1 2019 retailer optout plaintiffs filed amended complaint merck defendants moved dismiss new allegations complaints october 15 2019 magistrate judge issued report recommendation recommending district judge grant motions entirety december 20 2019 district court adopted report recommendation part district court granted merck defendants’ motion dismiss extent motion sought dismissal claims overcharges paid entities purchased generic ezetimibe par pharmaceutical inc par pharmaceutical dismissed claims overcharges trial currently scheduled begin october 28 2020 rotavirus vaccines antitrust litigation previously disclosed msd defendant putative class action lawsuits filed 2018 behalf direct purchasers rotateq alleging violations federal antitrust laws cases consolidated eastern district pennsylvania january 23 2019 court denied msd’s motions compel arbitration dismiss consolidated complaint february 19 2019 msd appealed court’s order arbitration third circuit october 28 2019 third circuit vacated district court’s order remanded limited discovery issue arbitrability msd may file renewed motion compel arbitration sales force litigation previously disclosed may 2013 ms kelli smith filed complaint company us district court district new jersey behalf putative class female sales representatives putative subclass female sales representatives children claiming discriminatory policies practices selection promotion advancement b disparate pay c differential treatment hostile work environment e retaliation federal state discrimination laws april 2016 magistrate judge granted plaintiffs’ request amend complaint add following company subsidiary corporate defendant ii erisa claim iii individual constructive discharge claim one named plaintiffs approximately 700 individuals optedin action optin period closed august 2017 plaintiffs filed motion certify title vii pay discrimination class also sought final collective action certification plaintiffs’ equal pay act claim october 1 2018 parties entered agreement fully resolve smith sales force litigation part settlement exchange full general release individual class claims company agreed pay 85 million december 3 2019 court approved settlement qui tam litigation previously disclosed june 2012 us district court eastern district pennsylvania unsealed complaint filed company federal false claims act two former employees alleging among things company defrauded us government falsifying data connection clinical study conducted mumps component company’s mmr ii vaccine complaint alleges fraud took place 1999 2001 us government right participate take prosecution lawsuit notified court declined exercise right two former employees pursuing lawsuit without involvement us government addition previously disclosed two putative class action lawsuits behalf direct purchasers mmr ii vaccine charge company misrepresented efficacy mmr ii vaccine violation federal antitrust laws various state consumer protection laws pending eastern district pennsylvania september 2014 court denied merck’s motion dismiss false claims act suit granted part denied part motion dismiss thenpending antitrust suit result false claims act suit antitrust suits proceeded discovery complete parties filed briefed crossmotions summary judgment currently pending court company continues defend lawsuits merck kgaa litigation previously disclosed january 2016 protect longestablished brand rights united states company filed lawsuit merck kgaa darmstadt germany kgaa historically operating emd group united states alleging improperly uses name “merck” united states kgaa filed suit company france uk germany switzerland mexico india australia singapore hong kong china alleging among things unfair competition trademark infringement andor corporate name infringement uk australia singapore hong kong india kgaa also alleges breach parties’ coexistence agreement litigation ongoing united states trial date set also ongoing numerous jurisdictions outside united states company defending suits jurisdiction patent litigation time generic manufacturers pharmaceutical products file abbreviated new drug applications ndas us food drug administration fda seeking market generic forms company’s products prior expiration relevant patents owned company protect patent rights company may file patent infringement lawsuits generic companies similar lawsuits defending company’s patent rights may exist countries company intends vigorously defend patents believes valid infringement companies attempting market products prior expiration patents litigation assurance outcomes adverse could result significantly shortened periods exclusivity products respect products acquired acquisitions potentially significant intangible asset impairment charges januvia janumet xr february 2019 par pharmaceutical filed suit company us district court district new jersey seeking declaratory judgment invalidity patent owned company covering certain salt polymorphic forms sitagliptin expires 2026 response company filed patent infringement lawsuit us district court district delaware par pharmaceutical additional companies also indicated intent market generic versions januvia janumet xr following expiration key patent protection 2022 prior expiration latergranted patent owned company covering certain salt polymorphic forms sitagliptin expires 2026 later granted patent owned company covering janumet formulation expires 2028 par pharmaceutical dismissed case us district court district new jersey company litigate action us district court district delaware company filed patent infringement lawsuit mylan pharmaceuticals inc mylan inc mylan northern district west virginia judicial panel multidistrict litigation entered order transferring company’s lawsuit mylan us district court district delaware coordinated consolidated pretrial proceedings cases pending district us district court district delaware scheduled lawsuits single 3day trial invalidity issues october 2021 court schedule separate 1day trials infringement issues necessary october 2019 mylan filed petition inter partes review ipr united states patent trademark office uspto seeking invalidity 2026 patent uspto six months filing determine whether institute requested ipr proceeding litigation various pending legal proceedings involving company principally product liability intellectual property lawsuits feasible predict outcome proceedings opinion company either likelihood loss remote reasonably possible loss associated resolution proceedings expected material company’s financial condition results operations cash flows either individually aggregate legal defense reserves legal defense costs expected incurred connection loss contingency accrued probable reasonably estimable significant factors considered review legal defense reserves follows actual costs incurred company development company’s legal defense strategy structure light scope litigation number cases brought company costs outcomes completed trials current information regarding anticipated timing progression related costs pretrial activities trials associated litigation amount legal defense reserves december 31 2019 2018 approximately 240 million 245 million respectively represents company’s best estimate minimum amount defense costs incurred connection outstanding litigation however events additional trials events could arise course litigation could affect ultimate amount legal defense costs incurred company continue monitor legal defense costs review adequacy associated reserves may determine increase reserves time future based upon factors set forth believes would appropriate environmental matters company subsidiaries parties number proceedings brought comprehensive environmental response compensation liability act commonly known superfund federal state equivalents proceedings seek require operators hazardous waste disposal facilities transporters waste sites generators hazardous waste disposed sites clean sites reimburse government cleanup costs company made party proceedings alleged generator waste disposed sites case government alleges defendants jointly severally liable cleanup costs although joint several liability alleged proceedings frequently resolved allocation cleanup costs among parties nearly reflects relative contributions parties site situation company’s potential liability varies greatly site sites potential liability de minimis others final costs cleanup yet determined feasible predict outcome many proceedings brought federal state agencies private litigants opinion company proceedings ultimately result liability would material adverse effect financial condition results operations liquidity company taken active role identifying accruing costs amounts include reduction anticipated recoveries cleanup costs former site owners operators recalcitrant potentially responsible parties management’s opinion liabilities environmental matters probable reasonably estimable accrued totaled 67 million 71 million december 31 2019 2018 respectively liabilities undiscounted consider potential recoveries parties paid periods remediation applicable sites expected occur primarily next 15 years although possible predict certainty outcome matters ultimate costs remediation management believe reasonably possible expenditures may incurred excess liabilities accrued exceed 58 million aggregate management also believe expenditures result material adverse effect company’s financial condition results operations liquidity year 11 equity merck certificate incorporation authorizes 6500000000 shares common stock 20000000 shares preferred stock capital stock summary common stock treasury stock transactions shares millions follows 1 issuances primarily reflect activity sharebased compensation plans october 25 2018 company entered accelerated share repurchase asr agreements two thirdparty financial institutions dealers asr agreements merck agreed purchase 5 billion merck’s common stock total initial delivery 567 million shares merck’s common stock based thencurrent market price made dealers merck payments 5 billion made merck dealers october 29 2018 funded existing cash investments well shortterm borrowings payments dealers recorded reductions shareholders’ equity consisting 4 billion increase treasury stock reflected value initial 567 million shares received october 29 2018 1 billion decrease otherpaidin capital reflected value stock held back dealers pending final settlement upon settlement asr agreements april 2019 merck received additional 77 million shares determined average daily volume weightedaverage price merck’s common stock term asr program less negotiated discount bringing total shares received merck program 644 million 12 sharebased compensation plans company sharebased compensation plans company grants restricted stock units rsus performance share units psus certain management level employees addition employees nonemployee directors may granted options purchase shares company common stock fair market value time grant plans approved company’s shareholders december 31 2019 111 million shares collectively authorized future grants company’s sharebased compensation plans awards settled treasury shares employee stock options granted purchase shares company stock fair market value time grant awards generally vest onethird year threeyear period contractual term 710 years rsus stock awards granted employees entitle holder shares common stock awards vest fair value stock option rsu awards determined fixed grant date based company’s stock price psus stock awards ultimate number shares issued contingent company’s performance preset objective set objectives fair value psu determined date grant based company’s stock price rsus psus dividends declared vesting period payable employees upon vesting psu performance period number shares stock expected issued adjusted based probability achievement performance target final compensation expense recognized based ultimate number shares issued rsu psu distributions shares company stock end vesting performance period subject terms applicable awards psu awards generally vest three years prior 2018 rsu awards generally vested three years beginning awards granted 2018 rsu awards generally vest onethird year threeyear period total pretax sharebased compensation cost recorded 2019 2018 2017 417 million 348 million 312 million respectively related income tax benefits 57 million 55 million 57 million respectively company uses blackscholes option pricing model determining fair value option grants applying model company uses historical data current market data estimate fair value options blackscholes model requires several assumptions including expected dividend yield riskfree interest rate volatility term options expected dividend yield based historical patterns dividend payments riskfree interest rate based rate grant date zerocoupon us treasury notes term equal expected term option expected volatility estimated using blend historical implied volatility historical component based historical monthly price changes implied volatility obtained market data company’s traded options expected life represents amount time options granted expected outstanding based historical forecasted exercise behavior weighted average exercise price options granted 2019 2018 2017 8005 5815 6388 per option respectively weighted average fair value options granted 2019 2018 2017 1063 826 704 per option respectively determined using following assumptions summarized information relative stock option plan activity options thousands follows additional information pertaining stock option plans provided table summary nonvested rsu psu activity shares thousands follows december 31 2019 603 million total pretax unrecognized compensation expense related nonvested stock options rsu psu awards recognized weighted average period 19 years segment reporting sharebased compensation costs unallocated expenses 13 pension postretirement benefit plans company defined benefit pension plans covering eligible employees united states certain international subsidiaries addition company provides medical benefits principally eligible us retirees dependents postretirement benefit plans company uses december 31 yearend measurement date pension plans postretirement benefit plans net periodic benefit cost net periodic benefit cost credit pension postretirement benefit plans consisted following components changes net periodic benefit cost credit year pension plans largely attributable changes discount rate affecting net loss amortization connection restructuring actions see note 5 termination charges recorded 2019 2018 2017 pension postretirement benefit plans related expanded eligibility certain employees exiting merck also connection restructuring activities curtailments recorded pension postretirement benefit plans settlements recorded certain us international pension plans reflected table components net periodic benefit cost credit service cost component included income expense net see note 14 exception certain amounts termination benefits curtailments settlements recorded restructuring costs event giving rise termination benefits curtailment settlement related restructuring actions noted obligations funded status summarized information changes plan assets benefit obligations funded status amounts recorded december 31 follows 1 actuarial losses gains primarily reflect changes discount rates december 31 2019 2018 accumulated benefit obligation 228 billion 190 billion respectively pension plans 128 billion 104 billion respectively related us pension plans information related funded status selected pension plans december 31 follows plan assets entities required use fair value hierarchy maximizes use observable inputs minimizes use unobservable inputs measuring fair value three levels inputs used measure fair value level 1 highest priority level 3 lowest level 1 quoted prices unadjusted active markets identical assets liabilities level 2 observable inputs level 1 prices quoted prices similar assets liabilities inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity level 3 assets whose values determined using pricing models discounted cash flow methodologies similar techniques significant unobservable inputs well instruments determination fair value requires significant judgment estimation december 31 2019 2018 860 million 826 million respectively approximately 4 5 respectively company’s pension investments categorized level 3 assets inputs used measure financial assets fall within one level described categorization based lowest level input significant fair value measurement instrument fair values company’s pension plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy nav amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2019 2018 2 plans’ level 3 investments insurance contracts generally valued using crediting rate approximates market returns invest underlying securities whose market values unobservable determined using pricing models discounted cash flow methodologies similar techniques table provides summary changes fair value including transfers andor financial assets measured fair value using significant unobservable inputs level 3 company’s pension plan assets fair values company’s postretirement benefit plan assets december 31 asset category follows 1 certain investments measured net asset value nav per share equivalent classified fair value hierarchy nav amounts presented table intended permit reconciliation fair value hierarchy fair value plan assets december 31 2019 2018 company established investment guidelines us pension postretirement plans create asset allocation expected deliver rate return sufficient meet longterm obligation plan given acceptable level risk target investment portfolio company’s us pension postretirement benefit plans allocated 30 45 us equities 15 30 international equities 35 45 fixedincome investments 5 cash investments portfolio’s equity weighting consistent longterm nature plans’ benefit obligations expected annual standard deviation returns target portfolio approximates 10 reflects equity allocation diversification benefits among asset classes portfolio invests international pension plans targeted investment portfolio varies based duration pension liabilities local government rules regulations although significant percentage plan assets invested us equities concentration risk mitigated use strategies diversified within management guidelines expected contributions expected contributions 2020 approximately 100 million us pension plans approximately 150 million international pension plans approximately 15 million postretirement benefit plans expected benefit payments expected benefit payments follows expected benefit payments based assumptions used measure benefit obligations include estimated future employee service amounts recognized comprehensive income net loss amounts reflect experience differentials primarily relating differences expected actual returns plan assets well effects changes actuarial assumptions net loss amounts excess certain thresholds amortized net periodic benefit cost average remaining service life employees following amounts reflected components oci actuarial assumptions company reassesses benefit plan assumptions regular basis weighted average assumptions used determining us pension postretirement benefit plan international pension plan information follows pension postretirement benefit plans discount rate evaluated measurement dates modified reflect prevailing market rate portfolio highquality fixedincome debt instruments would provide future cash flows needed pay benefits included benefit obligation come due expected rate return pension postretirement benefit plans represents average rate return earned plan assets period benefits included benefit obligation paid determined plan basis expected rate return plan developed considering longterm historical returns data current market conditions actual returns plan assets using reference information longterm return expectations asset category weightedaverage expected return plan’s target portfolio developed according allocation among investment categories expected portfolio performance reflects contribution active management appropriate 2020 expected rate return company’s us pension postretirement benefit plans range 700 730 compared range 770 810 2019 decrease reflects lower expected asset returns modest shift asset allocation change weightedaverage expected return us pension postretirement benefit plan assets 2017 2019 due relative weighting referenced plans’ assets health care cost trend rate assumptions postretirement benefit plans follows savings plans company also maintains defined contribution savings plans united states company matches percentage employee’s contributions consistent provisions plan employee eligible total employer contributions plans 2019 2018 2017 149 million 136 million 131 million respectively 14 income expense net income expense net consisted 1 includes net realized unrealized gains losses investments equity securities either owned directly ownership interests investment funds net presented table 2019 includes 162 million goodwill impairment charges related certain businesses healthcare services segment see note 8 net 2018 includes gain 115 million related settlement certain patent litigation income 99 million related astrazeneca’s option exercise 2014 connection termination company’s relationship astrazeneca lp azlp gain 85 million resulting receipt milestone payment outlicensed migraine clinical development program net 2018 also includes 144 million goodwill impairment charges related certain businesses healthcare services segment see note 8 well 41 million charges related writedown assets held sale fair value anticipation dissolution company’s joint venture supera farma laboratorios sa brazil net 2017 includes income 232 million related astrazeneca’s option exercise 191 million loss extinguishment debt interest paid 841 million 2019 777 million 2018 723 million 2017 15 taxes income reconciliation effective tax rate us statutory rate follows 1 includes tax effects losses foreign subsidiaries miscellaneous items tax cuts jobs act tcja enacted december 2017 among provisions tcja reduced us federal corporate statutory tax rate 35 21 effective january 1 2018 required companies pay onetime transition tax undistributed earnings certain foreign subsidiaries created new taxes certain foreign sourced earnings company reflected impact tcja 2017 financial statements however since application certain provisions tcja remained subject interpretation certain instances company made reasonable estimates effects tcja since finalized described onetime transition tax based company’s post1986 undistributed earnings profits ep substantial portion undistributed ep company previously provided deferred taxes earnings deemed merck retained indefinitely subsidiary companies reinvestment company recorded provisional amount 2017 onetime transition tax liability 53 billion provisional amount reduced reversal 20 billion deferred taxes previously recorded connection merger scheringplough corporation 2009 certain undistributed foreign ep basis revised calculations post1986 undistributed foreign ep finalization amounts held cash specified assets company recognized measurementperiod adjustment 124 million 2018 related transition tax obligation corresponding adjustment income tax expense period resulting revised transition tax obligation 55 billion 2019 company recorded additional charges 117 million related finalization treasury regulations associated tcja permitted tcja company elected pay onetime transition tax period eight years 2025 company’s remaining transition tax liability reduced payments utilization foreign tax credits 34 billion december 31 2019 390 million included income taxes payable remainder 30 billion included noncurrent liabilities 2017 company remeasured deferred tax assets liabilities new federal statutory tax rate 21 resulted provisional deferred tax benefit 779 million basis clarifications deferred tax benefit calculation company recorded measurementperiod adjustments 2018 32 million related deferred income taxes foreign earnings tax rate differentials tax rate reconciliation primarily reflect impacts operations jurisdictions different tax rates united states particularly ireland switzerland well singapore puerto rico operate tax incentive grants begin expire 2022 earnings indefinitely reinvested thereby yielding favorable impact effective tax rate compared us statutory rate 21 2019 2018 35 2017 foreign earnings tax rate differentials include impact intangible asset impairment charges amortization purchase accounting adjustments restructuring costs items presented separately represent significant separately disclosed pretax cost charge substantial portion items relates jurisdictions lower tax rates united states therefore impact recording expense items lower tax rate jurisdictions unfavorable impact effective tax rate compared us statutory rate income taxes consisted taxes income consisted deferred income taxes december 31 consisted company net operating loss nol carryforwards several jurisdictions december 31 2019 762 million deferred taxes nol carryforwards relate foreign jurisdictions valuation allowances 11 billion established foreign nol carryforwards foreign deferred tax assets addition company 135 million deferred tax assets relating various us tax credit carryforwards nol carryforwards expected fully utilized prior expiry income taxes paid 2019 2018 2017 45 billion 15 billion 49 billion respectively tax benefits relating stock option exercises 65 million 2019 77 million 2018 73 million 2017 reconciliation beginning ending amount unrecognized tax benefits follows 1 amounts reflect settlements irs discussed 2 amount 2019 includes 78 million related divestiture merck’s consumer care business 2014 company recognize unrecognized tax benefits 12 billion december 31 2019 income tax provision would reflect favorable net impact 11 billion company examination numerous tax authorities various jurisdictions globally company believes reasonably possible total amount unrecognized tax benefits december 31 2019 could decrease approximately 40 million next 12 months result various audit closures settlements expiration statute limitations ultimate finalization company’s examinations relevant taxing authorities include formal administrative legal proceedings could significant impact timing reversal unrecognized tax benefits company believes reserves uncertain tax positions adequate cover existing risks exposures interest penalties associated uncertain tax positions amounted benefit expense 101 million 2019 51 million 2018 183 million 2017 amounts reflect beneficial impacts various tax settlements including discussed liabilities accrued interest penalties 243 million 372 million december 31 2019 2018 respectively 2019 internal revenue service irs concluded examinations merck’s 20122014 us federal income tax returns result company required make payment 107 million company’s reserves unrecognized tax benefits years examination exceeded adjustments relating examination period therefore company recorded 364 million net tax benefit 2019 net benefit reflects reductions reserves unrecognized tax benefits tax positions relating years examination partially offset additional reserves tax positions previously reserved 2017 irs concluded examinations merck’s 20062011 us federal income tax returns result company required make payment approximately 28 billion company’s reserves unrecognized tax benefits years examination exceeded adjustments relating examination period therefore company recorded net 234 million tax benefit 2017 net benefit reflects reductions reserves unrecognized tax benefits tax positions relating years examination partially offset additional reserves tax positions previously reserved well adjustments reserves unrecognized tax benefits relating years remain open examination affected settlement irs currently conducting examinations company’s tax returns years 2015 2016 addition various state foreign tax examinations progress jurisdictions company’s income tax returns open examination period 2003 2019 16 earnings per share calculations earnings per share shares millions follows 1 issuable primarily sharebased compensation plans 2019 2018 2017 2 million 6 million 5 million respectively common shares issuable sharebased compensation plans excluded computation earnings per common share assuming dilution effect would antidilutive 17 comprehensive income loss changes aoci component follows 1 relates foreign currency cash flow hedges reclassified aoci sales 2 represents net realized gains losses sales availableforsale investments reclassified aoci income expense net 2017 amounts included investments debt equity securities however result adoption asu 201601 2018 amounts relate investments availableforsale debt securities 3 includes net amortization prior service cost actuarial gains losses included net periodic benefit cost see note 13 4 includes pension plan net loss 51 billion 44 billion december 31 2019 2018 respectively postretirement benefit plan net gain 247 million 170 million december 31 2019 2018 respectively well pension plan prior service credit 263 million 314 million december 31 2019 2018 respectively postretirement benefit plan prior service credit 305 million 375 million december 31 2019 2018 respectively 18 segment reporting company’s operations principally managed products basis include four operating segments pharmaceutical animal health healthcare services alliances segments pharmaceutical animal health segments reportable segments pharmaceutical segment includes human health pharmaceutical vaccine products human health pharmaceutical products consist therapeutic preventive agents generally sold prescription treatment human disorders company sells human health pharmaceutical products primarily drug wholesalers retailers hospitals government agencies managed health care providers health maintenance organizations pharmacy benefit managers institutions human health vaccine products consist preventive pediatric adolescent adult vaccines primarily administered physician offices company sells human health vaccines primarily physicians wholesalers physician distributors government entities large component pediatric adolescent vaccine sales made us centers disease control prevention vaccines children program funded us government additionally company sells vaccines federal government placement vaccine stockpiles 2019 result changes company’s internal reporting structure certain costs previously included pharmaceutical segment included part nonsegment expenses within merck research laboratories prior period pharmaceutical segment profits recast reflect changes comparable basis animal health segment discovers develops manufactures markets wide range veterinary pharmaceutical vaccine products well health management solutions services prevention treatment control disease major livestock companion animal species company also offers extensive suite digitally connected identification traceability monitoring products company sells products veterinarians distributors animal producers healthcare services segment provides services solutions focus engagement health analytics clinical services improve value care delivered patients company recently sold certain businesses healthcare services segment process divesting remaining businesses alliances segment primarily includes activity company’s relationship astrazeneca lp related sales nexium prilosec concluded 2018 sales company’s products follows us plus international may equal total due rounding 1 alliance revenue represents merck’s share profits product sales net cost sales commercialization costs see note 4 2 pharmaceutical primarily reflects sales human health pharmaceutical products including products within franchises listed separately 3 represents nonreportable segments healthcare services alliances 4 primarily comprised miscellaneous corporate revenues including revenue hedging activities well thirdparty manufacturing sales 2019 2018 2017 also includes approximately 80 million 95 million 85 million respectively related sale marketing rights certain products consolidated sales geographic area derived follows reconciliation segment profits income taxes follows pharmaceutical segment profits comprised segment sales less standard costs well selling general administrative expenses directly incurred segment animal health segment profits comprised segment sales less cost sales well selling general administrative expenses research development costs directly incurred segment internal management reporting presented chief operating decision maker merck allocate remaining cost sales included segment profits described research development expenses incurred merck research laboratories company’s research development division focuses human healthrelated activities general administrative expenses cost financing activities separate divisions maintain responsibility monitoring managing costs including depreciation related fixed assets utilized divisions therefore included segment profits addition costs related restructuring activities well amortization purchase accounting adjustments allocated segments profits primarily comprised miscellaneous corporate profits well operating profits related thirdparty manufacturing sales unallocated net includes expenses corporate manufacturing cost centers goodwill intangible asset impairment charges gains losses sales businesses expense income related changes estimated fair value liabilities contingent consideration miscellaneous income expense items equity income loss affiliates depreciation amortization included segment profits follows property plant equipment net geographic area located follows company disaggregate assets products services basis internal management reporting therefore information presented report independent registered public accounting firm board directors stockholders merck co inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheet merck co inc subsidiaries “company” december 31 2019 2018 related consolidated statements income comprehensive income equity cash flows three years period ended december 31 2019 including related notes collectively referred “consolidated financial statements” also audited company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates customer discount accruals us medicaid managed care medicare part rebates described note 2 consolidated financial statements company records certain variable consideration including discounts estimated time sale generally using expected value method amounts accrued aggregate customer discounts december 31 2019 us 24 billion evaluated quarterly basis comparison information provided wholesalers health maintenance organizations pharmacy benefit managers federal state agencies customers amounts accrued certain discounts take form rebates amounts owed based upon definitive contractual agreements legal requirements private sector managed care public sector medicaid medicare part benefit providers final dispensing product pharmacy benefit plan participant provision rebates based expected patient usage well inventory levels distribution channel determine contractual obligation benefit providers management uses historical customer segment utilization mix sales forecasts changes product mix price inventory levels distribution channel government pricing calculations prior payment history order estimate expected provision principal considerations determination performing procedures relating customer discount accruals us medicaid managed care medicare part rebates critical audit matter significant judgment required management significant measurement uncertainty calculation rebate accruals includes assumptions related price customer segment utilization pertaining forecasted customer claims may fully paid subsequent period turn led high degree auditor judgment subjectivity effort applying procedures related assumptions addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating customer discount accruals us medicaid managed care medicare part rebates including management’s controls assumptions used estimate corresponding rebate accruals procedures also included among others developing independent estimate rebate accruals utilizing third party data customer segment utilization changes price terms specific rebate programs historical trend actual rebate claims paid independent estimate compared rebate accruals recorded management evaluate reasonableness estimate additionally procedures included testing actual rebate claims paid evaluating contractual terms company’s rebate agreements pricewaterhousecoopers llp florham park new jersey february 26 2020 served company’s auditor since 2002 b supplementary data selected quarterly financial data 2019 2018 contained condensed interim financial data table condensed interim financial data unaudited 1 amounts 2019 include charge related acquisition peloton therapeutics inc see note 3 2 amounts 2018 include charge related formation collaboration eisai see note 4 3 amounts 2019 2018 reflect acquisition divestiturerelated costs see note 8 impact restructuring actions see note 5 item 9 nannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 financial statements set forth item 8 annual report form 10k a2 financial statement schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary compensatory plan contract arrangement note information omitted exhibits 10 q 10 r 10 pursuant request confidential treatment filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended note information omitted exhibit 10u pursuant request confidential treatment filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended exhibits applicable copies exhibits furnished upon request b reports form 8k threemonth period ended december 31 2003 company filed furnished eleven current reports form 8k signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated fred hassan fred hassan chairman board chief executive officer president carl e mundy jr director robert j bertolini robert j bertolini executive vice president chief financial officer richard de j osborne director thomas h kelly thomas h kelly vice president controller principal accounting officer patricia f russo director hans w becherer director kathryn c turner director david h komansky robert f w van oordt director philip leder md arthur f weinbach director eugene r mcgrath director donald l miller director sthomas h kelly date february 26 2004 thomas h kelly attorneyinfact schedule ii scheringplough corporation subsidiaries valuation qualifying accounts years ended december 31 2003 2002 2001 dollars millions valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules reports form 8k 1 financial statements set forth item 8 10k 2 financial statement schedule schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable separate financial statements notes thereto merck scheringplough cholesterol partnership included 10k required included accordance rule 309 regulation sx pursuant rule 309b regulation sx company include separate financial statements notes thereto amendment 10k compensatory plan contract arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended copies exhibits furnished upon request signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant douglas j gingerella douglas j gingerella vice president controller duly authorized officer chief accounting officer date march 8 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date march 8 2005 scheringplough corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 2004 2003 2002 valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements financial statements set forth item 8 10k 2 financial statement schedules merckscheringplough cholesterol partnership combined financial statements schedules listed omitted applicable required 3 index exhibits unless otherwise indicated exhibits part commission file number 16571 compensatory plan contract arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended copies exhibits furnished upon request signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant douglas j gingerella douglas j gingerella vice president controller duly authorized officer chief accounting officer date february 28 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date february 28 2006 merck scheringplough cholesterol partnership combined statements net sales contractual expenses years ended december 31 accompanying notes integral part combined financial statements merck scheringplough cholesterol partnership combined balance sheets december 31 accompanying notes integral part combined financial statements merck scheringplough cholesterol partnership combined statements cash flows years ended december 31 accompanying notes integral part combined financial statements merck scheringplough cholesterol partnership combined statements partners’ capital deficit accompanying notes integral part combined financial statements merck scheringplough cholesterol partnership notes combined financial statements 1 description business basis presentation description business may 2000 merck co inc “merck” scheringplough corporation “scheringplough” collectively “management” “partners” entered agreements jointly develop market united states scheringplough’s experimental cholesterol absorption inhibitor ezetimibe marketed today united states zetia ezetrol countries “agreements” certain respiratory products cholesterol collaboration formally referred merck scheringplough cholesterol partnership “partnership” december 2001 agreements expanded include countries world except japan agreements provide ezetimibe developed marketed following forms • ezetimibe daily nonstatin cholesterolreducing medicine used alone coadministered statin drug • ezetimibe simvastatin merck’s existing zocor statin cholesterolmodifying medicine combined one tablet marketed today united states vytorin inegy countries vytorin zetia approved us fda july 2004 october 2002 respectively launched 20 60 countries respectively together products whether marketed vytorin zetia trademarks locally referred “cholesterol products” agreements partners established jointlyowned limited purpose legal entities canada puerto rico united states carry contractual activities partnership countries additional jointlyowned limited purpose legal entity established singapore rights intellectual property partnership fund oversee research development manufacturing activities partnership certain respiratory products markets except latin america subsidiaries merck scheringplough perform marketing activities cholesterol products contract partnership legal entity subsidiary operations collectively referred “combined companies” latin america partnership sells directly scheringplough merck’s latin american subsidiaries scheringplough merck compete one another cholesterol market consequently selling promotion distribution activities cholesterol products within latin america included combined companies partnership substantially reliant infrastructures merck scheringplough limited number employees legal entities partnership activities performed employees either merck scheringplough service agreements partnership profits shared partners differing arrangements countries around world defined net sales minus 1 agreed upon manufacturing costs expenses incurred partners invoiced partnership 2 direct promotion expenses incurred partners invoiced partnership 3 expenses limited specialty sales force incurred partners invoiced partnership certain amounts sales force physician detailing cholesterol products united states puerto rico canada 4 administration expenses based percentage cholesterol product net sales invoiced one partners 5 costs expenses incurred partners contemplated agreements entered subsequently agreed partners agreed upon research development expenses incurred partners invoiced partnership shared equally partners adjusting special allocations nature milestone payments due one partners merck scheringplough cholesterol partnership notes combined financial statements continued basis presentation accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratoryrelated activities combined companies respiratoryrelated activities primarily pertain clinical development work spending material income loss operations reported 2005 2004 2003 unaudited interpartnership balances profits eliminated net sales include net sales cholesterol products sold combined companies expenses include amounts merck scheringplough contractually agreed directly invoice partnership shared contractual profit sharing arrangements partners described accompanying combined financial statements prepared purpose complying certain rules regulations securities exchange commission reflect activities partnership based contractual agreements partners combined financial statements include expenses agreed partners shared included calculation profits contractual agreements partnership intended complete presentation costs expenses would incurred standalone pharmaceutical company discovery development manufacture distribution marketing pharmaceutical products agreements certain activities charged partnership partners based contractually agreed upon allocations partnerincurred expenses described opinion management allocations expenses described made basis reasonably reflects actual level support provided expenses partners accordingly reflected partner’s respective expense line items separate consolidated financial statements future results operations financial position cash flows could differ materially historical results presented herein described profit sharing arrangements agreements provide certain partnerincurred costs expenses invoiced partnership partners therefore become part profit calculation following paragraphs list typical categories costs expenses generally incurred discovery development manufacture distribution marketing cholesterol products provide description costs expenses treated accompanying combined statements net sales contractual expenses determining profits contractual agreements • manufacturing costs expenses contractually agreed upon manufacturing plant costs expenses incurred partners related manufacture partnership products included “cost sales” accompanying combined statements net sales contractual expenses including direct production costs certain production variances expenses plant services administration warehousing distribution materials management technical services quality control asset utilization “cost sales” 2005 includes certain interpartnership adjustments totaling 14 million relate prior years adjustments lowered 2005 cost sales material current year individual prior years’ results operations impact partners’ current prior year equity income amounts manufacturing costs expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements costs expenses include limited yield gains losses excess jointly agreed upon yield rates excessidle capacity manufacturing plant assets merck scheringplough cholesterol partnership notes combined financial statements continued • direct promotion expenses direct promotion represents direct identifiable outofpocket expenses incurred partners behalf partnership including limited contractually agreed upon expenses related market research detailing aids agency fees directtoconsumer advertising meetings symposia trade programs launch meetings special sales force incentive programs product samples contractually agreed upon expenses included “selling general administrative” accompanying combined statements net sales contractual expenses promotion expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements • selling expenses united states canada puerto rico general sales forces partners provide majority physician detail activity agreed upon amount included “selling general administrative” accompanying combined statements net sales contractual expenses agreed upon costs limited specialty sales force united states market calls opinion leaders field cholesterol medicine also included “selling general administrative” selling expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements expenses include total costs general sales forces partners detailing cholesterol products countries outside united states canada puerto rico • administrative expenses administrative support primarily provided one partners contractually agreed upon expenses support determined based percentage cholesterol product sales amounts included “selling general administrative” accompanying combined statements net sales contractual expenses selected contractually agreed upon direct costs employees partners support services outofpocket expenses incurred partners behalf partnership also included “selling general administrative” expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements expenses include limited certain us managed care services partners’ subsidiary management international markets indirect expenses corporate overhead interest • research development “rd” expense rd activities performed partners agreed upon costs expenses invoiced partnership agreed upon expenses generally represent allocation partner’s estimate full time equivalents devoted research development cholesterol respiratory products include grants thirdparty expenses contractually agreed upon allocated costs included “research development” accompanying combined statements net sales contractual expenses rd costs incurred partners jointly agreed upon invoiced partnership therefore excluded accompanying combined financial statements 2 summary significant accounting policies principles combination accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratoryrelated activities combined companies interpartnership balances profits eliminated merck scheringplough cholesterol partnership notes combined financial statements continued use estimates combined financial statements prepared based contractual agreements partners described include certain amounts based management’s best estimates judgments estimates used determining items provisions sales discounts returns uncertainty inherent estimates actual results may differ estimates foreign currency translation united states dollar functional currency partnership’s foreign operations cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories substantially inventories valued lower first cost market intangible assets intangible assets consist licenses trademarks trade names owned partnership intangible assets recorded partners’ historical cost date contribution nominal value revenue recognition rebates returns allowances revenues sales cholesterol products recognized title risk loss pass customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations united states sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesale purchaser known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns reliable estimates made time sale reserves chargebacks discounts returns allowances reflected direct reduction accounts receivable amounted 23 million 6 million december 31 2005 2004 respectively accruals rebates reflected “rebates payable” shown separately combined balance sheets income taxes provision made federal foreign state income taxes taxable income losses partnership allocated partners included partners’ income tax return concentrations credit risk partnership’s concentrations credit risk consist primarily accounts receivable four customers represented aggregate approximately 83 partnership’s “accounts receivable net” december 31 2005 bad debts years ended december 31 2005 2004 2003 unaudited minimal partnership normally require collateral security support credit sales 2005 2004 2003 unaudited partnership derived approximately 81 83 88 respectively combined net sales united states merck scheringplough cholesterol partnership notes combined financial statements continued 3 inventories december 31 consisted partnership entered longterm agreements partners supply active pharmaceutical ingredients api formulation packaging cholesterol products agreed upon cost connection supply agreements partnership entered capacity agreements partnership committed take specified annual minimum supply api formulated tablets pay penalty capacity agreements effect period seven years following first full year production one partners expire beginning 2011 partnership met commitments capacity agreements december 31 2005 4 related party transactions partnership purchases substantially goods services including pharmaceutical product manufacturing services sales force services administrative services rd services partners summarized information related party balances follows selling promotion administrative services provided partnership partners included “selling general administrative” accompanying combined statements net sales contractual expenses years 2005 2004 2003 amounted 463 million 290 million 180 million unaudited respectively selling expense includes reimbursements made scheringplough merck physician details 194 million 178 million respectively 2005 121 million 99 million respectively 2004 70 million partner 2003 unaudited administrative expense includes reimbursements made merck pursuant administrative services partnership agreements 13 million 2005 2 million 2004 9 million 2003 unaudited latin america partners compete one another cholesterol market thereby sell products separately partnership sells cholesterol products partners purpose sales included “net sales” invoiced price accompanying combined statements net sales contractual expenses net sales merck scheringplough’s latin american subsidiaries 36 million 42 million 9 million unaudited 2005 2004 2003 respectively 5 insurance coverage partnership maintains insurance coverage deductibles selfinsurance management believes cost beneficial partnership selfinsures risk relates product liability accrues estimate product liability claims incurred reported independent auditors’ report partners merck scheringplough cholesterol partnership audited accompanying combined balance sheets merck scheringplough cholesterol partnership december 31 2005 2004 described note 1 related combined statements net sales contractual expenses partners’ capital deficit cash flows described note 1 years ended financial statements responsibility management merck co inc scheringplough corporation collectively “management” “the partners” responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness partnership’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying statements prepared purpose complying certain rules regulations securities exchange commission described note 1 intended complete presentation financial position results operations cash flows activities standalone pharmaceutical company involved discovery development manufacture distribution marketing pharmaceutical products opinion financial statements referred present fairly material respects combined financial position merck scheringplough cholesterol partnership described note 1 december 31 2005 2004 combined results net sales contractual expenses combined cash flows described note 1 years ended conformity accounting principles generally accepted united states america deloitte touche llp parsippany new jersey february 28 2006 scheringplough corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 2005 2004 2003 valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements financial statements set forth item 8 10k 2 financial statement schedules merckscheringplough cholesterol partnership combined financial statements schedules listed omitted applicable required 3 index exhibits unless otherwise indicated exhibits part commission file number 16571 compensatory plan contract arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended copies exhibits furnished upon request signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant steven h koehler steven h koehler vice president controller duly authorized officer chief accounting officer date february 29 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date february 29 2008 merckscheringplough cholesterol partnership combined statements net sales contractual expenses accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined balance sheets accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements cash flows accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements partners’ capital deficit accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership notes combined financial statements 1 description business basis presentation description business may 2000 merck co inc “merck” scheringplough corporation “scheringplough” collectively “management” “partners” entered agreements “agreements” jointly develop market united states scheringplough’s investigational cholesterol absorption inhibitor “cai” ezetimibe marketed today united states zetia ezetrol countries “cholesterol collaboration” fixedcombination tablet containing active ingredients montelukast sodium loratadine “respiratory collaboration” montelukast sodium leukotriene receptor antagonist sold merck singulair loratadine antihistamine sold scheringplough claritin indicated relief symptoms allergic rhinitis cholesterol collaboration formally referred merckscheringplough cholesterol partnership “partnership” december 2001 cholesterol collaboration agreements expanded include countries world except japan cholesterol collaboration agreements provide ezetimibe developed marketed following forms • ezetimibe daily cai nonstatin cholesterol reducing medicine used alone coadministered statin drug • ezetimibe simvastatin merck’s existing zocor statin cholesterol modifying medicine combined one tablet marketed today united states vytorin inegy countries vytorin zetia approved us food drug administration july 2004 october 2002 respectively together products whether marketed vytorin zetia trademarks locally referred “cholesterol products” cholesterol collaboration agreements partners established jointlyowned limited purpose legal entities based canada puerto rico united states carry contractual activities partnership countries additional jointlyowned limited purpose legal entity based singapore established rights intellectual property fund oversee research development manufacturing activities cholesterol respiratory collaborations markets except latin america subsidiaries merck scheringplough perform marketing activities cholesterol products contract partnership legal entity subsidiary operations collectively referred “combined companies” latin america partnership sells directly scheringplough merck’s latin american subsidiaries scheringplough merck compete one another cholesterol market consequently selling promotion distribution activities cholesterol products within latin america included combined companies partnership substantially reliant infrastructures merck scheringplough limited number employees legal entities partnership activities performed employees either merck scheringplough service agreements partnership profits shared partners differing arrangements countries around world generally defined net sales minus 1 agreed upon manufacturing costs expenses incurred partners invoiced partnership 2 direct promotion expenses incurred partners invoiced partnership 3 expenses limited specialty sales force united states incurred partners invoiced partnership certain amounts sales force physician detailing cholesterol products united states puerto rico canada italy 4 administration expenses based percentage cholesterol product net sales invoiced one partners 5 costs expenses incurred partners contemplated cholesterol collaboration agreements entered subsequently agreed partners agreed upon research development expenses incurred merckscheringplough cholesterol partnership notes combined financial statements continued partners invoiced partnership shared equally partners adjusting special allocations nature milestones due one partners partnership’s future results operations financial position cash flows may differ materially historical results presented herein risks uncertainties related partnership’s business partnership’s future operating results cash flows dependent cholesterol products events adversely affect market products could significant impact partnership’s results operations cash flows events could include loss patent protection increased costs associated manufacturing increased competition introduction new effective treatments exclusion government reimbursement programs discontinuation removal market product safety reason results future clinical outcomes studies note 5 basis presentation accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies respiratory collaboration activities primarily pertain clinical development work prelaunch marketing activities spending respiratoryrelated activities material income operations years presented august 2007 partners announced new drug application filing montelukast sodiumloratadine accepted us food drug administration standard review partners seeking us marketing approval medicine treatment allergic rhinitis symptoms patients want relief nasal congestion net sales include net sales cholesterol products sold combined companies expenses include amounts merck scheringplough contractually agreed directly invoice partnership shared contractual profit sharing arrangements partners described accompanying combined financial statements prepared purpose complying certain rules regulations securities exchange commission reflect activities partnership based contractual agreements partners combined financial statements include expenses agreed partners shared included calculation profits contractual agreements partnership intended complete presentation costs expenses would incurred standalone pharmaceutical company discovery development manufacture distribution marketing pharmaceutical products cholesterol collaboration agreements certain activities charged partnership partners based contractually agreed upon allocations partnerincurred expenses described opinion management allocations expenses described made basis reasonably reflects actual level support provided expenses partners accordingly reflected partner’s respective expense line items separate consolidated financial statements described profit sharing arrangements cholesterol collaboration agreements provide certain partnerincurred costs expenses invoiced partnership partners therefore become part profit sharing calculation following paragraphs list typical categories costs expenses generally incurred discovery development manufacture distribution marketing cholesterol products provide description costs expenses treated accompanying combined statements net sales contractual expenses determining profits contractual agreements • manufacturing costs expenses contractually agreed upon manufacturing plant costs expenses incurred partners related manufacture partnership products included “cost sales” accompanying combined statements net sales contractual expenses merckscheringplough cholesterol partnership notes combined financial statements continued including direct production costs certain production variances expenses plant services administration warehousing distribution materials management technical services quality control asset utilization manufacturing costs expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements costs expenses include limited yield gains losses excess jointly agreed upon yield rates excessidle capacity manufacturing plant assets • direct promotion expenses direct promotion represents direct identifiable outofpocket expenses incurred partners behalf partnership including limited contractually agreed upon expenses related market research detailing aids agency fees directtoconsumer advertising meetings symposia trade programs launch meetings special sales force incentive programs product samples contractually agreed upon expenses included “selling general administrative” accompanying combined statements net sales contractual expenses promotion expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements • selling expenses united states canada puerto rico markets outside united states primarily italy general sales forces partners provide majority physician detail activity agreed upon cost included “selling general administrative” accompanying combined statements net sales contractual expenses addition agreed upon costs limited specialty sales force united states market calls opinion leaders field cholesterol medicine also included “selling general administrative” selling expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include total costs general sales forces partners detailing cholesterol products countries united states canada puerto rico italy • administrative expenses administrative support primarily provided one partners contractually agreed upon expenses support determined based percentage cholesterol product net sales amounts included “selling general administrative” accompanying combined statements net sales contractual expenses selected contractually agreed upon direct costs employees partners support services outofpocket expenses incurred partners behalf partnership also included “selling general administrative” expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include limited certain us managed care services partners’ subsidiary management international markets indirect expenses corporate overhead interest • research development “rd” expenses rd activities performed partners agreed upon costs expenses invoiced partnership agreed upon expenses generally represent allocation partner’s estimate full time equivalents devoted research development cholesterol respiratory products include grants thirdparty expenses contractually agreed upon allocated costs included “research development” accompanying combined statements net sales contractual expenses rd costs incurred partners jointly agreed upon excluded accompanying combined financial statements merckscheringplough cholesterol partnership notes combined financial statements continued 2 summary significant accounting policies principles combination accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies interpartnership balances profits eliminated use estimates combined financial statements prepared based contractual agreements partners described include certain amounts based management’s best estimates judgments estimates used determining items provisions sales discounts returns government managed care rebates uncertainty inherent estimates actual results may differ estimates foreign currency translation net assets partnership’s foreign operations translated us dollars current exchange rates us dollar effects arising translating net assets operations included partners’ capital deficit significant cash equivalents cash equivalents primarily consist highly liquid money market instruments original maturities less three months 2007 partnership changed certain cash management practices increasing amount cash held partnership’s cash primarily invested highly liquid money market instruments used fund trade obligations coming due month distributions partners interest income earned cash equivalents reported “selling general administrative” accompanying combined statements net sales contractual expenses amounted 8 million 5 million 2 million 2007 2006 2005 respectively inventories substantially inventories valued lower first cost market intangible assets intangible assets consist licenses trademarks trade names owned partnership intangible assets recorded partners’ historical cost date contribution nominal value revenue recognition rebates returns allowances revenue sales cholesterol products recognized title risk loss pass customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations net sales vytorininegy 2779 million 1955 million 1028 million 2007 2006 2005 respectively net sales zetiaezetrol 2407 million 1929 million 1397 million 2007 2006 2005 respectively united states sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesale purchaser known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns reliable estimates made time sale reserves chargebacks discounts returns allowances reflected merckscheringplough cholesterol partnership notes combined financial statements continued direct reduction accounts receivable amounted 44 million 37 million december 31 2007 2006 respectively accruals rebates reflected “rebates payable” shown separately combined balance sheets income taxes generally taxable income losses partnership allocated partners included partner’s income tax return state jurisdictions partnership subject income tax included combined financial statements shared partners except state income taxes significant combined financial statements provision made federal foreign state income taxes january 2007 partnership adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes fin 48 adoption fin 48 impact partnership’s financial statements concentrations credit risk partnership’s concentrations credit risk consist primarily accounts receivable december 31 2007 three customers represented 28 27 15 “accounts receivable net” three customers accounted 70 net sales 2007 bad debts years ended december 31 2007 2006 2005 minimal partnership normally require collateral security support credit sales 2007 2006 2005 partnership derived approximately 75 80 81 respectively combined net sales united states 3 inventories december 31 consisted partnership entered longterm agreements partners supply active pharmaceutical ingredients api formulation packaging cholesterol products agreed upon cost connection supply agreements partnership entered capacity agreements partnership committed take specified annual minimum supply api formulated tablets pay penalty capacity agreements effect period seven years following first full year production one partners expire beginning 2011 partnership met commitments capacity agreements december 31 2007 merckscheringplough cholesterol partnership notes combined financial statements continued 4 related party transactions partnership receives substantially goods services including pharmaceutical product manufacturing services sales force services administrative services rd services partners summarized information related party balances follows selling general administrative expense includes contractually defined costs physician detailing provided scheringplough merck 242 million 197 million respectively 2007 204 million 203 million respectively 2006 196 million 181 million respectively 2005 expenses necessarily reflective actual cost partners’ sales efforts countries amounts contractually defined included 2007 2006 amounts 60 million 52 million respectively relating contractually defined costs physician detailing italy amounts paid partnership partners component profit sharing calculation cost sales selling general administrative expense also includes contractually defined costs distribution administrative services provided merck scheringplough 34 million 27 million 21 million 2007 2006 2005 respectively amounts necessarily reflective actual costs distribution administrative services partnership sells cholesterol products directly partners principally merck scheringplough affiliates latin america latin america partners compete one another cholesterol market merck scheringplough purchase cholesterol products partnership sell directly third parties sales partners included “net sales” invoiced price accompanying combined statements net sales contractual expenses 82 million 61 million 36 million 2007 2006 2005 respectively 5 legal matters partnership may become party claims legal proceedings nature considered normal business including product liability intellectual property partnership records liability connection matters probable liability incurred amount reasonably estimated legal costs associated litigation investigation activities expensed incurred february 2007 scheringplough received notice glenmark pharmaceuticals generic company indicating filed abbreviated new drug application generic form zetia challenging us patents listed zetia scheringplough partnership intend vigorously defend patents believe valid infringement generic companies attempting market products prior expiration dates patents litigation assurances outcomes adverse could result significantly shortened periods exclusivity january 14 2008 partnership announced primary endpoint results enhance trial effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia enhance surrogate endpoint trial conducted 720 patients heterozygous familial hypercholesterolemia rare condition affects approximately 02 population primary endpoint mean change intima merckscheringplough cholesterol partnership notes combined financial statements continued media thickness measured three sites carotid arteries right left common carotid internal carotid bulb patients treated ezetimibesimvastatin 1080 mg versus patients treated simvastatin 80 mg alone two year period statistically significant difference treatment groups primary endpoint also statistically significant difference treatment groups components primary endpoint including common carotid artery partnership closely monitoring sales cholesterol products following release enhance clinical trial results date 2008 net sales cholesterol products partnership’s prior expectations december 2007 february 26 2008 merck scheringplough received joint letters house committee energy commerce house subcommittee oversight investigations one letter senate finance committee collectively seeking combination witness interviews documents information variety issues related enhance clinical trial sale promotion vytorin well sales stock corporate officers merck scheringplough january 25 2008 merck scheringplough partnership received two subpoenas new york state attorney general’s office seeking similar information documents merck scheringplough also received letter office connecticut attorney general dated february 1 2008 requesting documents related marketing sale cholesterol products timing disclosures results enhance partners partnership cooperating investigations working respond inquiries addition since midjanuary 2008 partners partnership become aware served approximately 85 civil class action lawsuits alleging common law state consumer fraud claims connection sale promotion cholesterol products feasible predict outcome investigations lawsuits arising enhance trial unfavorable outcomes could significant adverse effect partnership’s financial position results operations cash flows partnership maintains insurance coverage deductibles selfinsurance management believes cost beneficial partnership selfinsures risk relates product liability accrues estimate product liability claims incurred reported independent auditors’ report partners merckscheringplough cholesterol partnership audited accompanying combined balance sheets merckscheringplough cholesterol partnership “partnership” december 31 2007 2006 described note 1 related combined statements net sales contractual expenses partners’ capital deficit cash flows described note 1 three years period ended december 31 2007 financial statements responsibility management partnership merck co inc scheringplough corporation responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards established auditing standards board united states accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement partnership required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness partnership’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying statements prepared purpose complying certain rules regulations securities exchange commission described note 1 intended complete presentation financial position results operations cash flows activities standalone pharmaceutical company involved discovery development manufacture distribution marketing pharmaceutical products opinion financial statements referred present fairly material respects combined financial position merckscheringplough cholesterol partnership described note 1 december 31 2007 2006 combined results net sales contractual expenses combined cash flows described note 1 three years period ended december 31 2007 conformity accounting principles generally accepted united states america deloitte touche llp parsippany new jersey february 27 2008 scheringplough corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 2007 2006 2005 valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements financial statements set forth item 8 10k 2 financial statement schedules merckscheringplough cholesterol partnership combined financial statements schedules listed omitted applicable required 3 index exhibits unless otherwise indicated exhibits part commission file number 16571 compensatory plan contract arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended copies exhibits furnished upon request signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant steven h koehler steven h koehler vice president controller duly authorized officer chief accounting officer date february 27 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date february 27 2009 merckscheringplough cholesterol partnership combined statements net sales contractual expenses accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined balance sheets accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements cash flows accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements partners’ capital deficit accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership notes combined financial statements 1 description business basis presentation description business may 2000 merck co inc “merck” scheringplough corporation “scheringplough” collectively “partners” entered agreements “agreements” jointly develop market united states scheringplough’s investigational cholesterol absorption inhibitor “cai” ezetimibe marketed today united states zetia ezetrol countries “cholesterol collaboration” fixedcombination tablet containing active ingredients montelukast sodium loratadine “respiratory collaboration” montelukast sodium leukotriene receptor antagonist sold merck singulair loratadine antihistamine sold scheringplough claritin indicated relief symptoms allergic rhinitis respiratory collaboration terminated 2008 accordance applicable agreements following receipt notapprovable letter us food drug administration “fda” fixedcombination tablet cholesterol collaboration formally referred merckscheringplough cholesterol partnership “partnership” december 2001 cholesterol collaboration agreements expanded include countries world except japan cholesterol collaboration agreements provide ezetimibe developed marketed following forms • ezetimibe daily cai nonstatin cholesterol reducing medicine used alone coadministered statin drug • ezetimibe simvastatin merck’s existing zocor statin cholesterol modifying medicine combined one tablet marketed today united states vytorin inegy countries vytorin zetia approved fda july 2004 october 2002 respectively together products whether marketed vytorin zetia trademarks locally referred “cholesterol products” cholesterol collaboration agreements partners established jointlyowned limited purpose legal entities based canada united states carry contractual activities partnership countries additional jointlyowned limited purpose legal entity based singapore established rights intellectual property fund oversee research development manufacturing activities cholesterol collaboration markets except latin america subsidiaries merck scheringplough perform marketing activities cholesterol products contract partnership legal entity subsidiary operations collectively referred “combined companies” latin america partnership sells directly scheringplough merck’s latin american subsidiaries scheringplough merck compete one another cholesterol market consequently selling promotion distribution activities cholesterol products within latin america included combined companies partnership substantially reliant infrastructures merck scheringplough limited number employees legal entities partnership activities performed employees either merck scheringplough service agreements partnership profits shared partners differing arrangements countries around world generally defined net sales minus 1 agreed upon manufacturing costs expenses incurred partners invoiced partnership 2 direct promotion expenses incurred partners invoiced partnership 3 expenses limited specialty sales force united states incurred partners invoiced partnership certain amounts sales force physician detailing cholesterol products united states puerto rico canada italy 4 administration expenses based percentage cholesterol product net sales invoiced one partners 5 costs expenses incurred merckscheringplough cholesterol partnership notes combined financial statements continued partners contemplated cholesterol collaboration agreements entered subsequently agreed partners agreed upon research development expenses incurred partners invoiced partnership shared equally partners adjusting special allocations nature milestones due one partners partnership’s future results operations financial position cash flows may differ materially historical results presented herein risks uncertainties related partnership’s business partnership’s future operating results cash flows dependent cholesterol products events adversely affect market products could significant impact partnership’s results operations cash flows events could include loss patent protection increased costs associated manufacturing increased competition introduction new effective treatments exclusion government reimbursement programs discontinuation removal market product safety reason results future clinical outcomes studies note 5 basis presentation accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies respiratory collaboration activities primarily pertained clinical development work prelaunch marketing activities spending respiratoryrelated activities ceased 2008 following termination collaboration material income operations years presented net sales include net sales cholesterol products sold combined companies expenses include amounts merck scheringplough contractually agreed directly invoice partnership shared contractual profit sharing arrangements partners described accompanying combined financial statements prepared purpose complying certain rules regulations securities exchange commission reflect activities partnership based contractual agreements partners combined financial statements include expenses agreed partners shared included calculation profits contractual agreements partnership intended complete presentation costs expenses would incurred standalone pharmaceutical company discovery development manufacture distribution marketing pharmaceutical products cholesterol collaboration agreements certain activities charged partnership partners based contractually agreed upon allocations partnerincurred expenses described opinion management allocations expenses described made basis reasonably reflects actual level support provided expenses partners reflected separate consolidated financial statements described profit sharing arrangements cholesterol collaboration agreements provide certain partnerincurred costs expenses invoiced partnership partners therefore become part profit sharing calculation following paragraphs list typical categories costs expenses generally incurred discovery development manufacture distribution marketing cholesterol products provide description costs expenses treated accompanying combined statements net sales contractual expenses determining profits contractual agreements • manufacturing costs expenses contractually agreed upon manufacturing plant costs expenses incurred partners related manufacture cholesterol products included cost sales accompanying combined statements net sales contractual expenses including merckscheringplough cholesterol partnership notes combined financial statements continued direct production costs certain production variances expenses plant services administration warehousing distribution materials management technical services quality control asset utilization manufacturing costs expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements costs expenses include limited yield gains losses excess jointly agreed upon yield rates excessidle capacity manufacturing plant assets • direct promotion expenses direct promotion represents direct identifiable outofpocket expenses incurred partners behalf partnership including limited contractually agreed upon expenses related market research detailing aids agency fees directtoconsumer advertising meetings symposia trade programs launch meetings special sales force incentive programs product samples contractually agreed upon expenses included selling general administrative accompanying combined statements net sales contractual expenses promotion expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements • selling expenses united states canada puerto rico markets outside united states primarily italy general sales forces partners provide majority physician detail activity agreed upon cost included selling general administrative accompanying combined statements net sales contractual expenses addition agreed upon costs limited specialty sales force united states market calls opinion leaders field cholesterol medicine also included selling general administrative selling expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include total costs general sales forces partners detailing cholesterol products countries united states canada puerto rico italy • administrative expenses administrative support primarily provided one partners contractually agreed upon expenses support determined based percentage net sales cholesterol products amounts included selling general administrative accompanying combined statements net sales contractual expenses selected contractually agreed upon direct costs employees partners support services outofpocket expenses incurred partners behalf partnership also included selling general administrative expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include limited certain us managed care services partners’ subsidiary management international markets indirect expenses corporate overhead interest • research development “rd” expenses rd activities performed partners agreed upon costs expenses invoiced partnership agreed upon expenses generally represent allocation partner’s estimate full time equivalents devoted preclinical postmarketing clinical development regulatory activities include grants thirdparty expenses contractually agreed upon allocated costs included research development accompanying combined statements net sales contractual expenses rd costs incurred partners jointly agreed upon excluded accompanying combined financial statements merckscheringplough cholesterol partnership notes combined financial statements continued 2 summary significant accounting policies principles combination accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies interpartnership balances profits eliminated use estimates combined financial statements prepared based contractual agreements partners described include certain amounts based management’s best estimates judgments estimates used determining items provisions sales discounts returns government managed care rebates uncertainty inherent estimates actual results may differ estimates foreign currency translation net assets partnership’s foreign operations translated us dollars current exchange rates us dollar effects arising translating net assets operations included partners’ capital significant cash equivalents cash equivalents primarily consist highly liquid money market instruments original maturities less three months 2007 partnership changed certain cash management practices increasing amount cash held partnership’s cash primarily invested highly liquid money market instruments used fund trade obligations coming due month distributions partners interest income earned cash equivalents reported reduction selling general administrative accompanying combined statements net sales contractual expenses amounted 10 million 8 million 5 million 2008 2007 2006 respectively inventories substantially inventories valued lower first cost market intangible assets intangible assets consist licenses trademarks trade names owned partnership intangible assets recorded partners’ historical cost date contribution nominal value revenue recognition rebates returns allowances revenues sales cholesterol products recognized title risk loss pass customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations net sales vytorininegy zetiaezetrol years ended december 31 follows united states sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesale purchaser known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions sales recorded net provisions merckscheringplough cholesterol partnership notes combined financial statements continued sales discounts returns reliable estimates made time sale reserves chargebacks discounts returns allowances reflected direct reduction accounts receivable amounted 34 million 44 million december 31 2008 2007 respectively accruals rebates reflected rebates payable shown separately combined balance sheets income taxes generally taxable income losses partnership allocated partners included partner’s income tax return states jurisdictions partnership subject income tax included combined financial statements shared partners except income taxes significant combined financial statements provision made federal foreign state income taxes december 31 2008 partnership 49 million deferred tax assets comprised solely net operating loss carryforwards “nols” generated branch legal entity partnership nols expire 2009 2015 carry full valuation allowance january 2007 partnership adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes fin 48 adoption fin 48 impact partnership’s financial statements concentrations credit risk segment information partnership’s concentrations credit risk consist primarily accounts receivable partnership normally require collateral security support credit sales bad debts years ended december 31 2008 2007 2006 minimal december 31 2008 three customers represented 25 19 17 accounts receivable net three customers accounted 10 net sales shown table partnership derived approximately 65 75 80 combined net sales united states 2008 2007 2006 respectively termination respiratory collaboration respiratory collaboration terminated 2008 accordance applicable agreements following receipt notapprovable letter fda proposed montelukastloratadine combination tablet result termination scheringplough received 105 million incremental allocations partnership profits 2008 except allocation certain profits termination impact cholesterol collaboration 3 inventories december 31 consisted partnership entered longterm agreements partners supply active pharmaceutical ingredients api formulation packaging cholesterol products merckscheringplough cholesterol partnership notes combined financial statements continued agreed upon cost connection supply agreements partnership entered capacity agreements partnership committed take specified annual minimum supply api formulated tablets pay penalty capacity agreements effect period seven years following first full year production one partners expire beginning 2009 partnership payment obligation capacity agreements december 31 2008 4 related party transactions partnership receives substantially goods services including pharmaceutical product manufacturing services sales force services administrative services rd services partners partnership net payable merck scheringplough services 81 million 100 million respectively december 31 2008 119 million 115 million respectively december 31 2007 selling general administrative expense includes contractually defined costs physician detailing provided scheringplough merck 223 million 201 million respectively 2008 242 million 197 million respectively 2007 204 million 203 million respectively 2006 expenses necessarily reflective actual cost partners’ sales efforts countries amounts contractually defined included amounts 68 million 60 million 52 million 2008 2007 2006 respectively relating contractually defined costs physician detailing italy amounts invoiced paid partnership partners component profit sharing calculation cost sales selling general administrative expense also include contractually defined costs distribution administrative services provided merck scheringplough 39 million 34 million 27 million 2008 2007 2006 respectively amounts necessarily reflective actual costs distribution administrative services partnership also sells cholesterol products directly partners principally merck scheringplough affiliates latin america latin america partners compete one another cholesterol market merck scheringplough purchase cholesterol products partnership sell directly third parties sales partners included net sales invoiced price accompanying combined statements net sales contractual expenses totaled 74 million 82 million 61 million 2008 2007 2006 respectively 5 legal matters partnership may become party claims legal proceedings nature considered normal business including product liability intellectual property partnership records liability connection matters probable liability incurred amount reasonably estimated legal costs associated litigation investigation activities expensed incurred partnership maintains insurance coverage deductibles selfinsurance management believes cost beneficial partnership selfinsures risk relates product liability accrues estimate product liability claims incurred reported february 2007 scheringplough received notice glenmark pharmaceuticals inc usa “glenmark” generic pharmaceutical company indicating filed abbreviated new drug application “anda” generic form zetia challenging us patents listed zetia march 2007 scheringplough partnership filed patent infringement suit glenmark parent company lawsuit automatically stays fda approval glenmark’s anda earlier october 2010 adverse court decision scheringplough partnership intend vigorously defend patents believe valid infringement generic companies attempting merckscheringplough cholesterol partnership notes combined financial statements continued market products prior expiration dates patents litigation assurances outcomes adverse could result significantly shortened periods exclusivity january 2008 partners announced results effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia “enhance” clinical trial imaging trial 720 patients heterozygous familial hypercholesterolemia rare genetic condition causes high levels ldl “bad” cholesterol greatly increases risk premature coronary artery disease despite fact ezetimibesimvastatin 1080 mg vytorin significantly lowered ldl “bad” cholesterol simvastatin 80 mg alone significant difference treatment ezetimibesimvastatin simvastatin alone prespecified primary end point change thickness carotid artery walls two years measured ultrasound also significant differences treatment ezetimibesimvastatin simvastatin four prespecified key secondary end points percent patients manifesting regression average carotid artery intimamedia thickness “ca imt” proportion patients developing new carotid artery plaques 13 mm changes average maximum ca imt changes average ca imt plus average common femoral artery imt enhance compared simvastatin alone ezetimibesimvastatin significantly lowered ldl “bad” cholesterol well triglycerides creactive protein “crp” ezetimibesimvastatin indicated reduction crp enhance study overall safety profile ezetimibesimvastatin generally consistent product label enhance study designed powered evaluate cardiovascular clinical events improved reduction highrisk subjects presenting acute coronary syndrome “improveit” trial underway designed provide cardiovascular outcomes data ezetimibesimvastatin patients acute coronary syndrome incremental benefit ezetimibesimvastatin cardiovascular morbidity mortality demonstrated simvastatin established march 2008 results enhance reported annual scientific session american college cardiology january 2009 fda announced completed review final clinical study report enhance fda stated results enhance change position elevated ldl cholesterol risk factor cardiovascular disease lowering ldl cholesterol reduces risk cardiovascular disease fda also stated based current available data patients stop taking vytorin cholesterol lowering medications talk doctor questions vytorin zetia enhance trial july 21 2008 efficacy safety results simvastatin ezetimibe aortic stenosis “seas” study announced seas designed evaluate whether intensive lipid lowering vytorin 1040 mg would reduce need aortic valve replacement risk cardiovascular morbidity mortality versus placebo patients asymptomatic mild moderate aortic stenosis indication statin therapy vytorin failed meet primary end point reduction major cardiovascular events also significant difference key secondary end point aortic valve events however reduction group patients taking vytorin compared placebo key secondary end point ischemic cardiovascular events vytorin indicated treatment aortic stenosis incremental benefit vytorin cardiovascular morbidity mortality demonstrated simvastatin established study patients group took vytorin 1040 mg higher incidence cancer group took placebo also nonsignificant increase deaths cancer patients group took vytorin versus took placebo cancer deaths distributed across major organ systems partners partnership believe cancer finding seas likely anomaly taken light available data support association vytorin august 2008 fda announced investigating results seas trial announcement fda also cited interim data two large ongoing cardiovascular trials vytorin study heart renal protection “sharp” improveit clinical trials increased risk cancer combination merckscheringplough cholesterol partnership notes combined financial statements continued simvastatin plus ezetimibe sharp trial expected completed 2010 improveit trial scheduled completion around 2012 fda determined time findings seas trial plus interim data ongoing trials prompt patients stop taking vytorin cholesterol lowering drug partners partnership committed working regulatory agencies evaluate available data interpretations data believe changes clinical use vytorin warranted previously disclosed since december 2007 merck scheringplough received several letters addressed companies house committee energy commerce subcommittee oversight investigations “oi” ranking minority member senate finance committee collectively seeking combination witness interviews documents information variety issues related enhance clinical trial sale promotion vytorin well sales stock corporate officers merck scheringplough addition since august 2008 partners received three additional letters oi including one dated february 19 2009 seeking certain information documents related seas clinical trial also previously disclosed partners partnership received subpoenas new york new jersey state attorneys general offices letter connecticut attorney general seeking similar information documents addition partners partnership received five civil investigative demands “cids” multistate group 35 state attorneys general jointly investigating whether violations state consumer protection laws occurred marketing vytorin finally september 2008 merck scheringplough received letter civil division us department justice “doj” informing doj investigating whether companies’ conduct relating promotion vytorin caused false claims submitted federal health care programs partners partnership cooperating investigations responding inquiries addition partners partnership become aware served approximately 145 civil class action lawsuits alleging common law state consumer fraud claims connection partnership’s sale promotion vytorin zetia certain lawsuits allege personal injuries andor seek medical monitoring actions filed transferred federal court coordinated multidistrict litigation us district court district court new jersey district judge dennis cavanaugh parties presently engaged motions practice briefing feasible predict outcome investigations lawsuits arising enhance seas clinical trials unfavorable outcomes could significant adverse effect partnership’s financial position results operations cash flows independent auditors’ report partners merckscheringplough cholesterol partnership audited accompanying combined balance sheets merckscheringplough cholesterol partnership “partnership” december 31 2008 2007 described note 1 related combined statements net sales contractual expenses partners’ capital deficit cash flows described note 1 three years period ended december 31 2008 financial statements responsibility management partnership merck co inc scheringplough corporation responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards established auditing standards board united states accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement partnership required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness partnership’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying statements prepared purpose complying certain rules regulations securities exchange commission described note 1 intended complete presentation financial position results operations cash flows activities standalone pharmaceutical company involved discovery development manufacture distribution marketing pharmaceutical products opinion financial statements referred present fairly material respects combined financial position merckscheringplough cholesterol partnership described note 1 december 31 2008 2007 combined results net sales contractual expenses combined cash flows described note 1 three years period ended december 31 2008 conformity accounting principles generally accepted united states america deloitte touche llp parsippany new jersey february 26 2009 scheringplough corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 2008 2007 2006 valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2009 2008 2007 consolidated statement retained earnings years ended december 31 2009 2008 2007 consolidated statement comprehensive income years ended december 31 2009 2008 2007 consolidated balance sheet december 31 2009 2008 consolidated statement cash flows years ended december 31 2009 2008 2007 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm partnership combined financial statements 2 financial statement schedules merckscheringplough cholesterol partnership combined financial statements merckscheringplough cholesterol partnership combined statements net sales contractual expenses years ended december 31 millions merckscheringplough cholesterol partnership combined balance sheet december 31 millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements cash flows years ended december 31 millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements partners’ capital deficit millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership notes combined financial statements 1 description business basis presentation description business may 2000 merck co inc “merck” scheringplough corporation “scheringplough” collectively “partners” entered agreements “agreements” jointly develop market united states scheringplough’s investigational cholesterol absorption inhibitor “cai” ezetimibe marketed today united states zetia ezetrol countries “cholesterol collaboration” fixedcombination tablet containing active ingredients montelukast sodium loratadine “respiratory collaboration” montelukast sodium leukotriene receptor antagonist sold merck singulair loratadine antihistamine sold scheringplough claritin indicated relief symptoms allergic rhinitis respiratory collaboration terminated 2008 accordance applicable agreements following receipt notapprovable letter us food drug administration “fda” fixedcombination tablet cholesterol collaboration formally referred merckscheringplough cholesterol partnership “partnership” december 2001 cholesterol collaboration agreements expanded include countries world except japan cholesterol collaboration agreements provide ezetimibe developed marketed following forms • ezetimibe daily cai nonstatin cholesterol reducing medicine used alone coadministered statin drug • ezetimibe simvastatin merck’s existing zocor statin cholesterol modifying medicine combined one tablet marketed today united states vytorin inegy countries vytorin zetia approved fda july 2004 october 2002 respectively together products whether marketed vytorin zetia trademarks locally referred “cholesterol products” cholesterol collaboration agreements partners established jointlyowned limited purpose legal entities based canada united states carry contractual activities partnership countries additional jointlyowned limited purpose legal entity based singapore established rights intellectual property fund oversee research development manufacturing activities cholesterol collaboration markets except latin america subsidiaries merck scheringplough perform marketing activities cholesterol products contract partnership legal entity subsidiary operations collectively referred “combined companies” latin america partnership sells directly scheringplough merck’s latin american subsidiaries scheringplough merck compete one another cholesterol market consequently selling promotion distribution activities cholesterol products within latin america included combined companies partnership substantially reliant infrastructures merck scheringplough limited number employees legal entities partnership activities performed employees either merck scheringplough service agreements partnership profits shared partners differing arrangements countries around world generally defined net sales minus 1 agreed upon manufacturing costs expenses incurred partners invoiced partnership 2 direct promotion expenses incurred partners invoiced partnership 3 expenses limited specialty sales force united states incurred partners invoiced partnership certain amounts sales force physician detailing cholesterol products united states puerto rico canada italy 4 administration expenses based percentage cholesterol product net sales invoiced one partners 5 costs expenses incurred partners contemplated cholesterol collaboration agreements entered subsequently agreed partners agreed upon research development expenses incurred partners invoiced partnership shared equally partners adjusting special allocations nature milestones due one partners partnership’s future results operations financial position cash flows may differ materially historical results presented herein risks uncertainties related partnership’s business partnership’s future operating results cash flows dependent cholesterol products events adversely affect market products could significant impact partnership’s results operations cash flows events could include loss patent protection increased costs associated manufacturing increased competition introduction new effective treatments exclusion government reimbursement programs discontinuation removal market product safety reason results future clinical outcomes studies note 5 basis presentation accompanying combined balance sheet combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies respiratory collaboration activities primarily pertained clinical development work prelaunch marketing activities spending respiratoryrelated activities ceased 2008 following termination collaboration material income operations years presented net sales include net sales cholesterol products sold combined companies expenses include amounts merck scheringplough contractually agreed directly invoice partnership shared contractual profit sharing arrangements partners described accompanying combined financial statements prepared purpose complying certain rules regulations securities exchange commission reflect activities partnership based contractual agreements partners combined financial statements include expenses agreed partners shared included calculation profits contractual agreements partnership intended complete presentation costs expenses would incurred standalone pharmaceutical company discovery development manufacture distribution marketing pharmaceutical products cholesterol collaboration agreements certain activities charged partnership partners based contractually agreed upon allocations partnerincurred expenses described opinion management allocations expenses described made basis reasonably reflects actual level support provided expenses partners reflected separate consolidated financial statements described profit sharing arrangements cholesterol collaboration agreements provide certain partnerincurred costs expenses invoiced partnership partners therefore become part profit sharing calculation following paragraphs list typical categories costs expenses generally incurred discovery development manufacture distribution marketing cholesterol products provide description costs expenses treated accompanying combined statements net sales contractual expenses determining profits contractual agreements • manufacturing costs expenses contractually agreed upon manufacturing plant costs expenses incurred partners related manufacture cholesterol products included cost sales accompanying combined statements net sales contractual expenses including direct production costs certain production variances expenses plant services administration warehousing distribution materials management technical services quality control asset utilization manufacturing costs expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements costs expenses include limited yield gains losses excess jointly agreed upon yield rates excessidle capacity manufacturing plant assets • direct promotion expenses direct promotion represents direct identifiable outofpocket expenses incurred partners behalf partnership including limited contractually agreed upon expenses related market research detailing aids agency fees directtoconsumer advertising meetings symposia trade programs launch meetings special sales force incentive programs product samples contractually agreed upon expenses included selling general administrative accompanying combined statements net sales contractual expenses promotion expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements • selling expenses united states canada puerto rico markets outside united states primarily italy general sales forces partners provide majority physician detail activity agreed upon cost included selling general administrative accompanying combined statements net sales contractual expenses addition agreed upon costs limited specialty sales force united states market calls opinion leaders field cholesterol medicine also included selling general administrative selling expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include total costs general sales forces partners detailing cholesterol products countries united states canada puerto rico italy • administrative expenses administrative support primarily provided one partners contractually agreed upon expenses support determined based percentage net sales cholesterol products amounts included selling general administrative accompanying combined statements net sales contractual expenses selected contractually agreed upon direct costs employees partners support services outofpocket expenses incurred partners behalf partnership also included selling general administrative expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include limited certain us managed care services partners’ subsidiary management international markets indirect expenses corporate overhead interest • research development “rd” expenses rd activities performed partners agreed upon costs expenses invoiced partnership agreed upon expenses generally represent allocation partner’s estimate full time equivalents devoted preclinical postmarketing clinical development regulatory activities include grants thirdparty expenses contractually agreed upon allocated costs included research development accompanying combined statements net sales contractual expenses rd costs incurred partners jointly agreed upon excluded accompanying combined financial statements 2 summary significant accounting policies principles combination accompanying combined balance sheet combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratory collaboration activities combined companies interpartnership balances profits eliminated use estimates combined financial statements prepared based contractual agreements partners described include certain amounts based management’s best estimates judgments estimates used determining items provisions sales discounts returns government managed care rebates uncertainty inherent estimates actual results may differ estimates foreign currency translation net assets partnership’s foreign operations translated us dollars current exchange rates us dollar effects arising translating net assets operations included partners’ capital significant cash equivalents cash equivalents primarily consist highly liquid money market instruments original maturities less three months 2007 partnership changed certain cash management practices increasing amount cash held partnership’s cash primarily invested highly liquid money market instruments used fund trade obligations coming due month distributions partners interest income earned cash equivalents reported reduction selling general administrative accompanying combined statements net sales contractual expenses amounted 10 million 8 million 2008 2007 respectively inventories substantially inventories valued lower first cost market intangible assets intangible assets consist licenses trademarks trade names owned partnership intangible assets recorded partners’ historical cost date contribution nominal value revenue recognition rebates returns allowances revenues sales cholesterol products recognized title risk loss pass customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations net sales vytorininegy zetiaezetrol years ended december 31 follows united states sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesale purchaser known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions sales recorded net provisions sales discounts returns reliable estimates made time sale reserves chargebacks discounts returns allowances reflected direct reduction accounts receivable amounted 34 million december 31 2008 accruals rebates reflected rebates payable shown separately combined balance sheet income taxes generally taxable income losses partnership allocated partners included partner’s income tax return states jurisdictions partnership subject income tax included combined financial statements shared partners except income taxes significant combined financial statements provision made federal foreign state income taxes december 31 2008 partnership 49 million deferred tax assets comprised solely net operating loss carryforwards “nols” generated branch legal entity partnership nols expire 2009 2015 carry full valuation allowance january 2007 partnership adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes fin 48 adoption fin 48 impact partnership’s financial statements concentrations credit risk segment information partnership’s concentrations credit risk consist primarily accounts receivable partnership normally require collateral security support credit sales bad debts years ended december 31 2008 2007 minimal december 31 2008 three customers represented 25 19 17 accounts receivable net three customers accounted 10 net sales shown table partnership derived approximately 65 75 combined net sales united states 2008 2007 respectively termination respiratory collaboration respiratory collaboration terminated 2008 accordance applicable agreements following receipt notapprovable letter fda proposed montelukastloratadine combination tablet result termination scheringplough received 105 million incremental allocations partnership profits 2008 except allocation certain profits termination impact cholesterol collaboration 3 inventories december 31 consisted partnership entered longterm agreements partners supply active pharmaceutical ingredients api formulation packaging cholesterol products agreed upon cost connection supply agreements partnership entered capacity agreements partnership committed take specified annual minimum supply api formulated tablets pay penalty capacity agreements effect period seven years following first full year production one partners expire beginning 2009 partnership payment obligation capacity agreements december 31 2008 4 related party transactions partnership receives substantially goods services including pharmaceutical product manufacturing services sales force services administrative services rd services partners partnership net payable merck scheringplough services 81 million 100 million respectively december 31 2008 selling general administrative expense includes contractually defined costs physician detailing provided scheringplough merck 223 million 201 million respectively 2008 242 million 197 million respectively 2007 expenses necessarily reflective actual cost partners’ sales efforts countries amounts contractually defined included amounts 68 million 60 million 2008 2007 respectively relating contractually defined costs physician detailing italy amounts invoiced paid partnership partners component profit sharing calculation cost sales selling general administrative expense also include contractually defined costs distribution administrative services provided merck scheringplough 39 million 34 million 2008 2007 respectively amounts necessarily reflective actual costs distribution administrative services partnership also sells cholesterol products directly partners principally merck scheringplough affiliates latin america latin america partners compete one another cholesterol market merck scheringplough purchase cholesterol products partnership sell directly third parties sales partners included net sales invoiced price accompanying combined statements net sales contractual expenses totaled 74 million 82 million 2008 2007 respectively 5 legal matters partnership may become party claims legal proceedings nature considered normal business including product liability intellectual property partnership records liability connection matters probable liability incurred amount reasonably estimated legal costs associated litigation investigation activities expensed incurred partnership maintains insurance coverage deductibles selfinsurance management believes cost beneficial partnership selfinsures risk relates product liability accrues estimate product liability claims incurred reported february 2007 scheringplough received notice glenmark pharmaceuticals inc usa “glenmark” generic pharmaceutical company indicating filed abbreviated new drug application “anda” generic form zetia challenging us patents listed zetia march 2007 scheringplough partnership filed patent infringement suit glenmark parent company lawsuit automatically stays fda approval glenmark’s anda earlier october 2010 adverse court decision scheringplough partnership intend vigorously defend patents believe valid infringement generic companies attempting market products prior expiration dates patents litigation assurances outcomes adverse could result significantly shortened periods exclusivity january 2008 partners announced results effect combination ezetimibe highdose simvastatin vs simvastatin alone atherosclerotic process patients heterozygous familial hypercholesterolemia “enhance” clinical trial imaging trial 720 patients heterozygous familial hypercholesterolemia rare genetic condition causes high levels ldl “bad” cholesterol greatly increases risk premature coronary artery disease despite fact ezetimibesimvastatin 1080 mg vytorin significantly lowered ldl “bad” cholesterol simvastatin 80 mg alone significant difference treatment ezetimibesimvastatin simvastatin alone prespecified primary endpoint change thickness carotid artery walls two years measured ultrasound also significant differences treatment ezetimibesimvastatin simvastatin four prespecified key secondary endpoints percent patients manifesting regression average carotid artery intimamedia thickness “ca imt” proportion patients developing new carotid artery plaques 13 mm changes average maximum ca imt changes average ca imt plus average common femoral artery imt enhance compared simvastatin alone ezetimibesimvastatin significantly lowered ldl “bad” cholesterol well triglycerides creactive protein “crp” ezetimibesimvastatin indicated reduction crp enhance study overall safety profile ezetimibesimvastatin generally consistent product label enhance study designed powered evaluate cardiovascular clinical events improved reduction highrisk subjects presenting acute coronary syndrome “improveit” trial underway designed provide cardiovascular outcomes data ezetimibesimvastatin patients acute coronary syndrome incremental benefit ezetimibesimvastatin cardiovascular morbidity mortality demonstrated simvastatin established march 2008 results enhance reported annual scientific session american college cardiology january 2009 fda announced completed review final clinical study report enhance fda stated results enhance change position elevated ldl cholesterol risk factor cardiovascular disease lowering ldl cholesterol reduces risk cardiovascular disease fda also stated based current available data patients stop taking vytorin cholesterol lowering medications talk doctor questions vytorin zetia enhance trial july 21 2008 efficacy safety results simvastatin ezetimibe aortic stenosis “seas” study announced seas designed evaluate whether intensive lipid lowering vytorin 1040 mg would reduce need aortic valve replacement risk cardiovascular morbidity mortality versus placebo patients asymptomatic mild moderate aortic stenosis indication statin therapy vytorin failed meet primary end point reduction major cardiovascular events also significant difference key secondary end point aortic valve events however reduction group patients taking vytorin compared placebo key secondary end point ischemic cardiovascular events vytorin indicated treatment aortic stenosis incremental benefit vytorin cardiovascular morbidity mortality demonstrated simvastatin established study patients group took vytorin 1040 mg higher incidence cancer group took placebo also nonsignificant increase deaths cancer patients group took vytorin versus took placebo cancer deaths distributed across major organ systems partners partnership believe cancer finding seas likely anomaly taken light available data support association vytorin august 2008 fda announced investigating results seas trial announcement fda also cited interim data two large ongoing cardiovascular trials vytorin study heart renal protection “sharp” improveit clinical trials increased risk cancer combination simvastatin plus ezetimibe sharp trial expected completed 2010 improveit trial scheduled completion around 2012 fda determined time findings seas trial plus interim data ongoing trials prompt patients stop taking vytorin cholesterol lowering drug partners partnership committed working regulatory agencies evaluate available data interpretations data believe changes clinical use vytorin warranted previously disclosed since december 2007 merck scheringplough received several letters addressed companies house committee energy commerce subcommittee oversight investigations “oi” ranking minority member senate finance committee collectively seeking combination witness interviews documents information variety issues related enhance clinical trial sale promotion vytorin well sales stock corporate officers merck scheringplough addition since august 2008 partners received three additional letters oi including one dated february 19 2009 seeking certain information documents related seas clinical trial also previously disclosed partners partnership received subpoenas new york new jersey state attorneys general offices letter connecticut attorney general seeking similar information documents addition partners partnership received five civil investigative demands “cids” multistate group 35 state attorneys general jointly investigating whether violations state consumer protection laws occurred marketing vytorin finally september 2008 merck scheringplough received letter civil division us department justice “doj” informing doj investigating whether companies’ conduct relating promotion vytorin caused false claims submitted federal health care programs partners partnership cooperating investigations responding inquiries addition partners partnership become aware served approximately 145 civil class action lawsuits alleging common law state consumer fraud claims connection partnership’s sale promotion vytorin zetia certain lawsuits allege personal injuries andor seek medical monitoring actions filed transferred federal court coordinated multidistrict litigation us district court district court new jersey district judge dennis cavanaugh parties presently engaged motions practice briefing feasible predict outcome investigations lawsuits arising enhance seas clinical trials unfavorable outcomes could significant adverse effect partnership’s financial position results operations cash flows independent auditors’ report partners merckscheringplough cholesterol partnership audited accompanying combined balance sheet merckscheringplough cholesterol partnership “partnership” december 31 2008 described note 1 related combined statements net sales contractual expenses partners’ capital deficit cash flows described note 1 two years period ended december 31 2008 financial statements responsibility management partnership merck co inc scheringplough corporation responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards established auditing standards board united states accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement partnership required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness partnership’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying statements prepared purpose complying certain rules regulations securities exchange commission described note 1 intended complete presentation financial position results operations cash flows activities standalone pharmaceutical company involved discovery development manufacture distribution marketing pharmaceutical products opinion financial statements referred present fairly material respects combined financial position merckscheringplough cholesterol partnership described note 1 december 31 2008 combined results net sales contractual expenses combined cash flows described note 1 two years period ended december 31 2008 conformity accounting principles generally accepted united states america deloitte touche llp parsippany new jersey february 26 2009 schedules listed omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated march 1 2010 merck co inc richard clark richard clark chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit 231 consent independent registered public accounting firm hereby consent incorporation reference registration statements form s3 nos 333164482 333163546 333163858 form s8 nos 333162882 333162883 333162884 333162885 333162886 03357111 333112421 333134281 333121089 33330331 33387077 333153542 333162007 33391440 333105567 merck co inc report dated february 26 2010 relating financial statements effectiveness internal control financial reporting appears form 10k pricewaterhousecoopers llp florham park new jersey february 26 2010 exhibit 232 independent auditors’ consent incorporation reference registration statement nos 333164482 333163546 333163858 333145055 33312909 33330355 form s3 registration statement nos 333162882 333162883 333162884 333162885 333162886 03357111 333112421 333134281 333121089 33330331 33387077 333153542 333162007 33391440 333105567 284723 283963 333105568 333104714 3350606 form s8 merck co inc report dated february 26 2009 relating combined financial statements merckscheringplough cholesterol partnership appearing annual report form 10k merck co inc year ended december 31 2009 deloitte touche llp parsippany new jersey february 26 2010 exhibit index management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2010 2009 2008 consolidated balance sheet december 31 2010 2009 consolidated statement equity years ended december 31 2010 2009 2008 consolidated statement cash flows years ended december 31 2010 2009 2008 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2011 merck co inc kenneth c frazier kenneth c frazier president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit 231 consent independent registered public accounting firm hereby consent incorporation reference registration statements form s3 nos 333164482 333163858 333163546 form s8 nos 333162882 333162883 333162884 333162885 333162886 03357111 333112421 333134281 333121089 33330331 33387077 333153542 333162007 33391440 333105567 merck co inc report dated february 25 2011 relating financial statements effectiveness internal control financial reporting appears form 10k pricewaterhousecoopers llp florham park new jersey february 25 2011 exhibit index management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2012 2011 2010 consolidated statement comprehensive income years ended december 31 2012 2011 2010 consolidated balance sheet december 31 2012 2011 consolidated statement equity years ended december 31 2012 2011 2010 consolidated statement cash flows years ended december 31 2012 2011 2010 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2013 merck co inc kenneth c frazier chairman president chief executive officer geralyn ritter geralyn ritter attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated geralyn ritter signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company geralyn ritter geralyn ritter attorneyinfact exhibit 231 consent independent registered public accounting firm hereby consent incorporation reference registration statements form s3 nos 333185248 333185245 333164482 333163858 333163546 form s8 nos 333173025 333173024 333162882 333162883 333162884 333162885 333162886 03357111 333112421 333134281 333121089 33330331 33387077 333153542 333162007 33391440 333105567 merck co inc report dated february 26 2013 relating financial statements effectiveness internal control financial reporting appears form 10k pricewaterhousecoopers llp florham park new jersey february 26 2013 exhibit index management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2013 2012 2011 consolidated statement comprehensive income years ended december 31 2013 2012 2011 consolidated balance sheet december 31 2013 2012 consolidated statement equity years ended december 31 2013 2012 2011 consolidated statement cash flows years ended december 31 2013 2012 2011 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 27 2014 merck co inc kenneth c frazier chairman president chief executive officer geralyn ritter geralyn ritter attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated geralyn ritter signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company geralyn ritter geralyn ritter attorneyinfact exhibit index management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2014 2013 2012 consolidated statement comprehensive income years ended december 31 2014 2013 2012 consolidated balance sheet december 31 2014 2013 consolidated statement equity years ended december 31 2014 2013 2012 consolidated statement cash flows years ended december 31 2014 2013 2012 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 27 2015 merck co inc kenneth c frazier chairman president chief executive officer geralyn ritter geralyn ritter attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated geralyn ritter signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company geralyn ritter geralyn ritter attorneyinfact exhibit index management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2015 2014 2013 consolidated statement comprehensive income years ended december 31 2015 2014 2013 consolidated balance sheet december 31 2015 2014 consolidated statement equity years ended december 31 2015 2014 2013 consolidated statement cash flows years ended december 31 2015 2014 2013 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits exhibit number description 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer following materials merck co inc’s annual report form 10k fiscal year ended december 31 2015 formatted xbrl extensible business reporting language consolidated statement income ii consolidated statement comprehensive income iii consolidated balance sheet iv consolidated statement equity v consolidated statement cash flows vi notes consolidated financial statements management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 26 2016 merck co inc kenneth c frazier chairman president chief executive officer michael j holston michael j holston attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated michael j holston signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company michael j holston michael j holston attorneyinfact exhibit index exhibit number description 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer following materials merck co inc’s annual report form 10k fiscal year ended december 31 2015 formatted xbrl extensible business reporting language consolidated statement income ii consolidated statement comprehensive income iii consolidated balance sheet iv consolidated statement equity v consolidated statement cash flows vi notes consolidated financial statements management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2016 2015 2014 consolidated statement comprehensive income years ended december 31 2016 2015 2014 consolidated balance sheet december 31 2016 2015 consolidated statement equity years ended december 31 2016 2015 2014 consolidated statement cash flows years ended december 31 2016 2015 2014 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2017 merck co inc kenneth c frazier chairman president chief executive officer michael j holston michael j holston attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated michael j holston signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company michael j holston michael j holston attorneyinfact exhibit index management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2017 2016 2015 consolidated statement comprehensive income years ended december 31 2017 2016 2015 consolidated balance sheet december 31 2017 2016 consolidated statement equity years ended december 31 2017 2016 2015 consolidated statement cash flows years ended december 31 2017 2016 2015 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 27 2018 merck co inc kenneth c frazier chairman president chief executive officer michael j holston michael j holston attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated michael j holston signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company michael j holston michael j holston attorneyinfact exhibit index management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2018 2017 2016 consolidated statement comprehensive income years ended december 31 2018 2017 2016 consolidated balance sheet december 31 2018 2017 consolidated statement equity years ended december 31 2018 2017 2016 consolidated statement cash flows years ended december 31 2018 2017 2016 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 27 2019 merck co inc kenneth c frazier chairman president chief executive officer jennifer zachary jennifer zachary attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jennifer zachary signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company jennifer zachary jennifer zachary attorneyinfact exhibit index management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2020 2019 2018 consolidated statement comprehensive income years ended december 31 2020 2019 2018 consolidated balance sheet december 31 2020 2019 consolidated statement equity years ended december 31 2020 2019 2018 consolidated statement cash flows years ended december 31 2020 2019 2018 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement †certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended longterm debt instruments total amount securities authorized exceed 10 merck co inc’s total consolidated assets filed exhibits report merck co inc furnish copy agreements securities exchange commission request item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 25 2021 merck co inc bykenneth c frazier chairman president chief executive officer bys jennifer zachary jennifer zachary attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jennifer zachary signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company bys jennifer zachary jennifer zachary attorneyinfactnanitem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2011 2010 2009 consolidated balance sheet december 31 2011 2010 consolidated statement equity years ended december 31 2011 2010 2009 consolidated statement cash flows years ended december 31 2011 2010 2009 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 28 2012 merck co inc kenneth c frazier chairman president chief executive officer celia colbert celia colbert attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated celia colbert signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company celia colbert celia colbert attorneyinfact exhibit 231 consent independent registered public accounting firm hereby consent incorporation reference registration statements form s3 nos 333164482 333163858 333163546 form s8 nos 333173025 333173024 333162882 333162883 333162884 333162885 333162886 03357111 333112421 333134281 333121089 33330331 33387077 333153542 333162007 33391440 333105567 merck co inc report dated february 27 2012 relating financial statements effectiveness internal control financial reporting appears form 10k pricewaterhousecoopers llp florham park new jersey february 27 2012 exhibit index management contract compensatory plan arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amendeditem 15 exhibits financial statement schedules reports form 8k 1 financial statements following consolidated financial statements independent auditors report included companys 2002 annual report shareholders pages 24 46 incorporated herein reference statements consolidated income years ended december 31 2002 2001 2000 statements consolidated cash flows years ended december 31 2002 2001 2000 consolidated balance sheets december 31 2002 2001 statements consolidated shareholders equity years ended december 31 2002 2001 2000 notes consolidated financial statements independent auditors report 2 financial statement schedules page form 10k independent auditors report schedule ii valuation qualifying accounts schedules included omitted applicable required information set forth financial statements notes thereto columns omitted schedules filed omitted information applicable financial statements fifty percent less owned companies accounted equity method omitted considered individually aggregate constitute significant subsidiary exhibit number description 10 companys executive incentive plan amended trust related thereto plan incorporated reference exhibit 10 companys quarterly report period ended march 31 1994 form 10q executive incentive plan amended restated october 1 2000 incorporated reference exhibit 10a companys annual report 2000 form 10k file 16571 10 ii trust agreement incorporated reference exhibit 10a companys annual report 1988 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q amended restated defined contribution trust incorporated reference exhibit 10aii companys annual report 2000 form 10k file 16571 10 b companys 1992 stock incentive plan amended incorporated reference exhibit 10d companys annual report 1992 form 10k file 16571 amendment december 11 1995 incorporated reference exhibit 10d companys annual report 1995 form 10k file 16571 amendment february 25 2003 filed document 10 c companys 1997 stock incentive plan amended incorporated reference exhibit 10 companys quarterly report period ended september 30 1997 form 10q amendment 1997 stock incentive plan incorporated reference exhibit 10a companys quarterly report period ended march 31 1999 form 10q file 16571 amendment february 25 2003 filed document 10 companys 2002 stock incentive plan incorporated reference companys proxy statement annual meeting shareholders april 23 2002 amendment february 25 2003 filed document 10 e retirement agreement company richard jay kogan incorporated reference exhibit 992 form 8k filed november 13 2002 file 16571 exhibit number description 10 e employment agreement company richard jay kogan amended incorporated reference exhibit 10eii companys annual report 1989 form 10k first amendment incorporated reference exhibit 10b companys quarterly report period ended june 30 1994 form 10q second amendment incorporated reference exhibit 10eii companys annual report 1994 form 10k third amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1995 form 10q fourth amendment incorporated reference exhibit 10b companys quarterly report period ended march 31 1998 form 10q fifth amendment incorporated reference exhibit 10eii companys annual report 1998 form 10k sixth amendment incorporated reference exhibit 10a companys quarterly report period ended june 30 2002 form 10q file 16571 10 e ii form employment agreement company executive officers effective upon change control incorporated reference exhibit 10eiv companys annual report 1994 form 10k form amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1999 form 10q forms amendment effective january 1 2002 incorporated reference exhibits 10e ii b companys annual report 2001 form 10k form employment agreement company executive officers effective upon change control incorporating prior amendments january 1 2002 new agreements effective beginning january 1 2002 incorporated reference exhibit 10eiic companys annual report 2001 form 10k file 16571 exhibit number description 10eiii supplement employment agreement effective upon change control described exhibit 10eii document index company joseph c connors incorporated reference exhibit 10evi companys annual report 2001 form 10k file 16571 10eiv supplement employment agreement effective upon change control described exhibit 10eii document index company jack wyszomierski incorporated reference exhibit 10evii companys annual report 2001 form 10k file 16571 10ev supplement employment agreement effective upon change control described exhibit 10eii document index company richard w zahn incorporated reference exhibit 10eviii companys annual report 2001 form 10k file 16571 10 f amended restated directors deferred compensation plan trust related thereto incorporated reference exhibit 10b companys quarterly report period ended september 30 1999 form 10q trust agreement incorporated reference exhibit 10a companys annual report 1998 form 10k amendment trust agreement incorporated reference exhibit 10b companys quarterly report period ended march 31 1997 form 10q amended restated defined contribution trust incorporated reference exhibit 10aii companys annual report 2000 form 10k file 16571 exhibit number description 10 g supplemental executive retirement plan trust related thereto incorporated reference exhibit 10e companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10a companys quarterly report period ended september 30 1998 form 10q second amendment supplemental executive retirement plan effective october 1 2000 incorporated reference exhibit 10g companys annual report 2000 form 10k amended restated trust agreement incorporated reference exhibit 10g companys annual report 1998 form 10k file 16571 10 h amended restated directors stock award plan filed document 10 deferred compensation plan incorporated reference exhibit 10b companys quarterly report period ended september 30 1995 form 10q deferred compensation plan amended restated october 1 2000 incorporated reference exhibit 10h companys annual report 2000 form 10k file 16571 10 j amended restated directors deferred stock equivalency program incorporated reference exhibit 10d companys quarterly report period ended september 30 1999 form 10q file 16571 10 k companys form split dollar agreement related collateral assignment company executive officers incorporated reference exhibit 10l companys annual report 1997 form 10k amendments incorporated reference exhibit 10g companys quarterly report period ended march 31 1998 form 10q file 16571 exhibit number description 10 l companys retirement benefits equalization plan second amendment effective october 1 2000 incorporated reference exhibit 10l companys annual report 2000 form 10k incorporated reference exhibit 10f companys quarterly report period ended march 31 1998 form 10q amendment incorporated reference exhibit 10b companys quarterly report period ended september 30 1998 form 10q file 16571 10 cholesterol governance agreement dated may 22 2000 among company merck co inc parties signatory thereto incorporated reference exhibit 992 companys current report form 8k dated october 21 2002 10 n first amendment cholesterol governance agreement dated december 18 2001 among company merck co inc parties signatory thereto incorporated reference exhibit 993 companys current report form 8k dated october 21 2002 10 master agreement dated december 18 2001 among company merck co inc parties signatory thereto incorporated reference exhibit 994 companys current report form 8k dated october 21 2002 10 p consent decree permanent injunction dated may 16 2002 among company parties thereto incorporated reference exhibit 991 companys current report form 8k dated may 20 2002 computation ratio earnings fixed charges filed document financial section companys 2002 annual report shareholders exception portions said annual report specifically incorporated reference form 10k filed document report shall deemed filed part form 10k subsidiaries registrant filed document consents experts counsel filed document power attorney filed document compensatory plan contract arrangement note information omitted exhibits 10 n 10 pursuant request confidential treatment filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended exhibits applicable copies exhibits furnished upon request b reports form 8k threemonth period ended december 31 2002 company furnished three current reports form 8k 1 report filed october 21 2002 item 5 events regulation fd disclosure item 7 financial statements exhibits 2 report filed october 24 2002 item 7 financial statements exhibits item 9 regulation fd disclosure 3 report filed november 13 2002 item 5 events regulation fd disclosure item 7 financial statements exhibits signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant date march 10 2003 thomas h kelly thomas h kelly vice president controller pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated richard jay kogan richard jay kogan carl e mundy jr chief executive officer director president director jack l wyszomierski jack l wyszomierski richard de j osborne executive vice president chairman board director chief financial officer thomas h kelly thomas h kelly patricia f russo vice president controller director principal accounting officer hans w becherer kathryn c turner director david h komansky robert f w van oordt director eugene r mcgrath arthur f weinbach director donald l miller director sthomas h kelly date march 10 2003 thomas h kelly attorneyinfact certification jack l wyszomierski executive vice president chief financial officer certify 1 reviewed annual report form 10k scheringplough corporation registrant 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 10 2003 jack l wyszomierski jack l wyszomierski executive vice president chief financial officer certification richard jay kogan chief executive officer president certify 1 reviewed annual report form 10k scheringplough corporation registrant 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 10 2003 richard jay kogan richard jay kogan chief executive officer president certification jack l wyszomierski executive vice president chief financial officer scheringplough corporation certify pursuant section 906 sarbanesoxley act 2002 1 annual report form 10k year ended december 31 2002 annual report statement accompanies fully complies requirements section 13a securities exchange act 1934 15 usc 78m 2 information contained annual report fairly presents material respects financial condition results operations scheringplough corporation certificate furnished solely purposes section 906 filed part annual report dated march 10 2003 jack l wyszomierski jack l wyszomierski executive vice president chief financial officer certification richard jay kogan chief executive officer president scheringplough corporation certify pursuant section 906 sarbanesoxley act 2002 1 annual report form 10k year ended december 31 2002 annual report statement accompanies fully complies requirements section 13a securities exchange act 1934 15 usc 78m 2 information contained annual report fairly presents material respects financial condition results operations scheringplough corporation certificate furnished solely purposes section 906 filed part annual report dated march 10 2003 richard jay kogan richard jay kogan chief executive officer president independent auditors report scheringplough corporation directors shareholders audited consolidated financial statements scheringplough corporation subsidiaries december 31 2002 2001 three years period ended december 31 2002 issued report thereon dated february 25 2003 financial statements report included 2002 annual report shareholders incorporated herein reference audits also included financial statement schedule scheringplough corporation subsidiaries listed item 15 financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein sdeloitte touche llp parsippany new jersey february 25 2003 schedule ii scheringplough corporation subsidiaries valuation qualifying accounts years ended december 31 2002 2001 2000 dollars millions valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements financial statements set forth item 8 10k 2 financial statement schedules merckscheringplough cholesterol partnership combined financial statements schedules listed omitted applicable required 3 index exhibits unless otherwise indicated exhibits part commission file number 16571 compensatory plan contract arrangement  certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended copies exhibits furnished upon request signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized scheringplough corporation registrant steven h koehler steven h koehler vice president controller duly authorized officer chief accounting officer date february 27 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date february 27 2007 merckscheringplough cholesterol partnership combined statements net sales contractual expenses years ended december 31 dollars millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined balance sheets december 31 dollars millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements cash flows years ended december 31 dollars millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership combined statements partners’ capital deficit dollars millions accompanying notes integral part combined financial statements merckscheringplough cholesterol partnership notes combined financial statements 1 description business basis presentation description business may 2000 merck co inc “merck” scheringplough corporation “scheringplough” collectively “management” “partners” entered agreements jointly develop market united states scheringplough’s investigational cholesterol absorption inhibitor “cai” ezetimibe marketed today united states zetia ezetrol countries “cholesterol agreements” fixedcombination tablet containing active ingredients montelukast loratadine montelukast sold merck singulair loratadine sold scheringplough claritin montelukast loratadine combination tablet approval country phase iii clinical development ongoing cholesterol collaboration formally referred merckscheringplough cholesterol partnership “partnership” december 2001 cholesterol agreements expanded include countries world except japan cholesterol agreements provide ezetimibe developed marketed following forms • ezetimibe daily cai nonstatin cholesterol reducing medicine used alone coadministered statin drug • ezetimibe simvastatin merck’s existing zocor statin cholesterol modifying medicine combined one tablet marketed today united states vytorin inegy countries vytorin zetia approved us fda july 2004 october 2002 respectively together products whether marketed vytorin zetia trademarks locally referred “cholesterol products” cholesterol agreements partners established jointlyowned limited purpose legal entities based canada puerto rico united states carry contractual activities partnership countries additional jointlyowned limited purpose legal entity based singapore established rights intellectual property partnership fund oversee research development manufacturing activities partnership certain respiratory products markets except latin america subsidiaries merck scheringplough perform marketing activities cholesterol products contract partnership legal entity subsidiary operations collectively referred “combined companies” latin america partnership sells directly scheringplough merck’s latin american subsidiaries scheringplough merck compete one another cholesterol market consequently selling promotion distribution activities cholesterol products within latin america included combined companies partnership substantially reliant infrastructures merck scheringplough limited number employees legal entities partnership activities performed employees either merck scheringplough service agreements partnership profits shared partners differing arrangements countries around world generally defined net sales minus 1 agreed upon manufacturing costs expenses incurred partners invoiced partnership 2 direct promotion expenses incurred partners invoiced partnership 3 expenses limited specialty sales force united states incurred partners invoiced partnership certain amounts sales force physician detailing cholesterol products united states puerto rico canada italy 4 administration expenses based percentage cholesterol product net sales invoiced one partners 5 costs expenses incurred partners contemplated cholesterol agreements entered subsequently agreed partners agreed upon research development expenses incurred partners invoiced partnership shared equally partners adjusting special allocations nature milestones due one partners notes combined financial statements continued basis presentation accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratoryrelated activities combined companies respiratoryrelated activities primarily pertain clinical development work montelukast loratadine combination tablet approval country phase iii clinical development ongoing spending respiratoryrelated activities material income operations years presented interpartnership balances profits eliminated net sales include net sales cholesterol products sold combined companies expenses include amounts merck scheringplough contractually agreed directly invoice partnership shared contractual profit sharing arrangements partners described accompanying combined financial statements prepared purpose complying certain rules regulations securities exchange commission reflect activities partnership based contractual agreements partners combined financial statements include expenses agreed partners shared included calculation profits contractual agreements partnership intended complete presentation costs expenses would incurred standalone pharmaceutical company discovery development manufacture distribution marketing pharmaceutical products cholesterol agreements certain activities charged partnership partners based contractually agreed upon allocations partnerincurred expenses described opinion management allocations expenses described made basis reasonably reflects actual level support provided expenses partners accordingly reflected partner’s respective expense line items separate consolidated financial statements future results operations financial position cash flows could differ materially historical results presented herein described profit sharing arrangements cholesterol agreements provide certain partnerincurred costs expenses invoiced partnership partners therefore become part profit calculation following paragraphs list typical categories costs expenses generally incurred discovery development manufacture distribution marketing cholesterol products provide description costs expenses treated accompanying combined statements net sales contractual expenses determining profits contractual agreements • manufacturing costs expenses contractually agreed upon manufacturing plant costs expenses incurred partners related manufacture partnership products included “cost sales” accompanying combined statements net sales contractual expenses including direct production costs certain production variances expenses plant services administration warehousing distribution materials management technical services quality control asset utilization “cost sales” 2005 includes certain interpartnership adjustments totaling 14 million relate prior years adjustments lowered 2005 cost sales material results operations 2005 individual prior years impact partners’ equity income amounts manufacturing costs expenses incurred partners agreed included determination profits contractual agreements invoiced partnership therefore excluded accompanying combined financial statements costs expenses include limited yield gains losses excess jointly agreed upon yield rates excessidle capacity manufacturing plant assets notes combined financial statements continued • direct promotion expenses direct promotion represents direct identifiable outofpocket expenses incurred partners behalf partnership including limited contractually agreed upon expenses related market research detailing aids agency fees directtoconsumer advertising meetings symposia trade programs launch meetings special sales force incentive programs product samples contractually agreed upon expenses included “selling general administrative” accompanying combined statements net sales contractual expenses promotion expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements • selling expenses united states canada puerto rico italy general sales forces partners provide majority physician detail activity agreed upon amount included “selling general administrative” accompanying combined statements net sales contractual expenses addition agreed upon costs limited specialty sales force united states market calls opinion leaders field cholesterol medicine also included “selling general administrative” selling expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include total costs general sales forces partners detailing cholesterol products countries outside united states canada puerto rico italy • administrative expenses administrative support primarily provided one partners contractually agreed upon expenses support determined based percentage cholesterol product sales amounts included “selling general administrative” accompanying combined statements net sales contractual expenses selected contractually agreed upon direct costs employees partners support services outofpocket expenses incurred partners behalf partnership also included “selling general administrative” expenses incurred partners agreed included determination profits contractual agreements excluded accompanying combined financial statements expenses include limited certain us managed care services partners’ subsidiary management international markets indirect expenses corporate overhead interest • research development “rd” expense rd activities performed partners agreed upon costs expenses invoiced partnership agreed upon expenses generally represent allocation partner’s estimate full time equivalents devoted research development cholesterol respiratory products include grants thirdparty expenses contractually agreed upon allocated costs included “research development” accompanying combined statements net sales contractual expenses rd costs incurred partners jointly agreed upon excluded accompanying combined financial statements 2 summary significant accounting policies principles combination accompanying combined balance sheets combined statements net sales contractual expenses cash flows partners’ capital deficit include cholesterol respiratoryrelated activities combined companies interpartnership balances profits eliminated certain prior year amounts reclassified conform current year presentation use estimates combined financial statements prepared based contractual agreements partners described include certain amounts based management’s best estimates judgments notes combined financial statements continued estimates used determining items provisions sales discounts returns government managed care rebates uncertainty inherent estimates actual results may differ estimates foreign currency translation net assets partnership’s foreign operations translated us dollars current exchange rates us dollar effects arising translating net assets operations included partners’ capital deficit significant cash equivalents cash equivalents comprised certain highly liquid investments original maturities less three months inventories substantially inventories valued lower first cost market intangible assets intangible assets consist licenses trademarks trade names owned partnership intangible assets recorded partners’ historical cost date contribution nominal value revenue recognition rebates returns allowances revenues sales cholesterol products recognized title risk loss pass customer recognition revenue also requires reasonable assurance collection sales proceeds completion performance obligations united states sales discounts issued customers direct discounts pointofsale indirectly intermediary wholesale purchaser known chargebacks indirectly form rebates additionally sales generally made limited right return certain conditions revenues recorded net provisions sales discounts returns reliable estimates made time sale reserves chargebacks discounts returns allowances reflected direct reduction accounts receivable amounted 37 million 23 million december 31 2006 2005 respectively accruals rebates reflected “rebates payable” shown separately combined balance sheets income taxes generally taxable income losses partnership allocated partners included partner’s income tax return state jurisdictions partnership subject income tax included combined financial statements shared partners except state income taxes significant combined financial statements provision made federal foreign state income taxes concentrations credit risk partnership’s concentrations credit risk consist primarily accounts receivable december 31 2006 three customers represented 17 28 38 “accounts receivable net” three customers accounted 10 net sales 2006 bad debts years ended december 31 2006 2005 2004 minimal partnership normally require collateral security notes combined financial statements continued support credit sales 2006 2005 2004 partnership derived approximately 80 81 83 respectively combined net sales united states 3 inventories december 31 consisted partnership entered longterm agreements partners supply active pharmaceutical ingredients api formulation packaging cholesterol products agreed upon cost connection supply agreements partnership entered capacity agreements partnership committed take specified annual minimum supply api formulated tablets pay penalty capacity agreements effect period seven years following first full year production one partners expire beginning 2011 partnership met commitments capacity agreements december 31 2006 4 related party transactions partnership receives substantially goods services including pharmaceutical product manufacturing services sales force services administrative services rd services partners summarized information related party balances follows selling general administrative expense includes contractually defined costs physician detailing provided scheringplough merck 204 million 203 million respectively 2006 196 million 181 million respectively 2005 121 million 99 million respectively 2004 expenses necessarily reflective actual cost partners’ sales efforts countries amounts contractually defined included 2006 amount 52 million contractual amounts included profit sharing calculation italy relating physician detailing amounts paid partnership partners component profit sharing calculation cost sales selling general administrative expense also includes contractually defined costs distribution administrative services provided merck scheringplough 27 million 21 million 3 million 2006 2005 2004 respectively amounts necessarily reflective actual costs distribution administrative services partnership sells cholesterol products directly partners principally merck scheringplough affiliates latin america latin america partners compete one another cholesterol market merck scheringplough purchase cholesterol products partnership sell directly third notes combined financial statements continued parties sales partners included “net sales” invoiced price accompanying combined statements net sales contractual expenses 61 million 36 million 42 million 2006 2005 2004 respectively 5 legal matters partnership may become party claims legal proceedings nature considered normal business including product liability intellectual property partnership records liability connection matters probable liability incurred amount reasonably estimated february 2007 scheringplough received notice generic company indicating filed abbreviated new drug application zetia challenging us patents listed zetia partners considering appropriate response partnership maintains insurance coverage deductibles selfinsurance management believes cost beneficial partnership selfinsures risk relates product liability accrues estimate product liability claims incurred reported independent auditors’ report partners merckscheringplough cholesterol partnership audited accompanying combined balance sheets merckscheringplough cholesterol partnership december 31 2006 2005 described note 1 related combined statements net sales contractual expenses partners’ capital deficit cash flows described note 1 three years period ended december 31 2006 financial statements responsibility management merck co inc scheringplough corporation collectively “management” “the partners” responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards established auditing standards board united states accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement partnership required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness partnership’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying statements prepared purpose complying certain rules regulations securities exchange commission described note 1 intended complete presentation financial position results operations cash flows activities standalone pharmaceutical company involved discovery development manufacture distribution marketing pharmaceutical products opinion financial statements referred present fairly material respects combined financial position merckscheringplough cholesterol partnership described note 1 december 31 2006 2005 combined results net sales contractual expenses combined cash flows described note 1 three years period ended december 31 2006 conformity accounting principles generally accepted united states america deloitte touche llp parsippany new jersey february 27 2007 scheringplough corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 2006 2005 valuation qualifying accounts deducted assets apply allowances accounts receivableitem 15 exhibits financial statement schedules following documents filed part form 10k 1 financial statements consolidated statement income years ended december 31 2019 2018 2017 consolidated statement comprehensive income years ended december 31 2019 2018 2017 consolidated balance sheet december 31 2019 2018 consolidated statement equity years ended december 31 2019 2018 2017 consolidated statement cash flows years ended december 31 2019 2018 2017 notes consolidated financial statements report pricewaterhousecoopers llp independent registered public accounting firm 2 financial statement schedules omitted either required applicable financial statements affiliates carried equity basis omitted considered individually aggregate affiliates constitute significant subsidiary 3 exhibits exhibit number description 101ins xbrl instance document instance document appear interactive data file xbrl tags embedded within inline xbrl document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document cover page interactive data file formatted inline xbrl contained exhibit 101 management contract compensatory plan arrangement † certain portions exhibit omitted pursuant request confidential treatment nonpublic information filed separately securities exchange commission pursuant rule 24b2 securities exchange act 1934 amended longterm debt instruments total amount securities authorized exceed 10 merck co inc’s total consolidated assets filed exhibits report merck co inc furnish copy agreements securities exchange commission request item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 26 2020 merck co inc kenneth c frazier chairman president chief executive officer jennifer zachary jennifer zachary attorneyinfact pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jennifer zachary signing name hereto hereby sign document pursuant powers attorney duly executed persons named filed securities exchange commission exhibit document behalf persons capacities date stated persons including majority directors company jennifer zachary jennifer zachary attorneyinfact