
~~N/A:~~Phase 3 Drug Candidate			Currently ~~no marketing approval.~~

	Anticipated Year of Expiration (in the U.S.)
~~Note:~~MK-7264 (gefapixant)			Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below.

	2027
⁽¹⁾ V114 (pneumoconjugate vaccine)			The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the United Kingdom (Major EU Markets). If an SPC has been granted in some but not all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.

	2031 (vaccine composition)
⁽²⁾ MK-7110 (CD24Fc)			~~Eligible for 6 months Pediatric Exclusivity.~~

	2031
⁽³⁾ MK-8591A (islatravir/doravirine)			The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may result in multiple PTE approvals for a given patent, each with its own expiration date.

	2032
⁽⁴⁾ MK-6482 (belzutifan)			~~The Company has no marketing rights in the U.S. and Japan.~~2034


⁽⁵⁾	~~Being commercialized in a worldwide collaboration with Bayer AG.~~


⁽⁶⁾	~~Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.~~


⁽⁷⁾	~~PTE application to be filed by April 2018. Expected expiry 2029.~~


⁽⁸⁾	~~SPC applications to be filed by July 2018. Expected expiry 2029. Eligible for Pediatric Exclusivity.~~


⁽⁹⁾	~~Being developed and promoted in a worldwide, except Japan, collaboration with Pfizer.~~

Unless otherwise noted, the patents in the above charts are compound patents. Each patent may be subject to a future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.

While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in

the United States and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.

Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by an increase in the number of incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.

The Company has the following key U.S. patent protection for drug candidates under review in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity.



~~Under Review (in the U.S.)~~	~~Currently Anticipated~~ ~~Year of Expiration (in the U.S.)~~
~~V419 (pediatric hexavalent combination vaccine)~~	~~2020 (method of making)~~
~~MK-1439 (doravirine)~~	~~2031~~
~~MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate)~~	~~2031~~

~~The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development:~~



~~Phase 3 Drug Candidate~~	~~Currently Anticipated~~ ~~Year of Expiration (in the U.S.)~~
~~V920 (ebola vaccine)~~	~~2023~~
~~MK-5618 (selumetinib)~~⁽¹⁾	~~2023~~
~~MK-7655A (relebactam + imipenem/cilastatin)~~	~~2030~~
~~MK-1242 (vericiguat)~~⁽²⁾	~~2031~~


⁽¹⁾	~~Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.~~


⁽²⁾	~~Being developed in a worldwide clinical development collaboration with Bayer AG.~~

Unless otherwise noted, the patents in the above charts are compound patents. Each patent is subject to any future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.

For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note ~~11.~~10. “Contingencies and Environmental Liabilities” below.

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Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.

Royalty income in ~~2017~~2020 on patent and know-how licenses and other rights amounted to ~~$158~~$185 million. Merck also incurred royalty expenses amounting to ~~$944 million~~$2.0 billion in ~~2017~~2020 under patent and know-how licenses it holds.

Research and Development

The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. At December 31, ~~2017,~~2020, approximately ~~12,650~~16,750 people were employed in the Company’s research activities. ~~Research and development expenses were $10.2 billion in 2017,~~

~~$10.1 billion in 2016 and $6.7 billion in 2015 (which included restructuring costs and acquisition and divestiture-related costs in all years).~~ The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.

The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to ensuring that externally sourced programs remain an important component of its pipeline strategy, with a focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.

The Company also reviews its pipeline to examine candidates that may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.

~~The~~ Company’s clinical pipeline includes candidates in multiple disease areas, including cancer, cardiovascular diseases, ~~diabetes,~~metabolic diseases, infectious diseases, neurosciences, ~~obesity, pain,~~ respiratory diseases, and vaccines.

In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through ~~preclinical~~pre-clinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on ~~preclinical~~pre-clinical and clinical experience are included in the New Drug Application (NDA) for a drug or the Biologics License Application (BLA) for a vaccine or biologic submitted to the FDA for the required approval.

Once the Company’s scientists discover a new small molecule compound or biologic that they believe has promise to treat a medical condition, the Company commences ~~preclinical~~pre-clinical testing with that compound. ~~Preclinical~~Pre-clinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable ~~preclinical~~pre-clinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. There can

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be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed.

Vaccine development follows the same general pathway as for drugs. ~~Preclinical~~Pre-clinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.

In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter or by issuing a Complete Response Letter (CRL) stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.

The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review. More than one of these special designations can be granted for a given application (i.e., a product designated as a Breakthrough Therapy may also be eligible for Priority Review).

~~In addition,~~Due to the COVID-19 public health crisis, the United States Secretary of Health and Human Services has exercised statutory authority to determine that a public health emergency exists, and declare these circumstances justify the emergency use of drugs and biological products as authorized by the FDA. While in effect, this declaration enables the FDA to issue Emergency Use Authorizations (EUAs) permitting distribution and use of specific medical products absent NDA/BLA submission or approval, including products to treat or prevent diseases or conditions caused by the SARS-CoV-2 virus, subject to the terms of any such EUAs. The FDA must make certain findings to grant an EUA, including that it is reasonable to believe based on the totality of evidence that the drug or biologic may be effective, and that known or potential benefits when used under the ~~Generating Antibiotic Incentives Now Act,~~terms of the EUA outweigh known or potential risks. Additionally, the FDA ~~may grant Qualified Infectious Disease Product (QIDP) status~~must find that there is no adequate, approved and available alternative to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the ~~NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.~~emergency use.

The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in

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particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA). After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other EU member states.

Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the ~~Pharmaceuticals~~Ministry of Health, Labour and ~~Medical Devices Agency~~Welfare in Japan, the National Medical Products Administration in China, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, and the Therapeutic Goods Administration in ~~Australia and China Food and Drug Administration.~~Australia. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

Research and Development Update

The Company currently has several candidates under regulatory review in the United States and ~~internationally.~~internationally or in late-stage clinical development.

~~Keytruda~~MK-7655A is combination of relebactum, a beta-lactamase inhibitor, and imipenem/cilastatin (a carbapenem antibiotic) under review in Japan for the treatment of bacterial infection. MK-7655A was approved by the FDA in 2019 and is marketed in the United States as Recarbrio.

MK-1242, vericiguat, is an orally administered soluble guanylate cyclase (sGC) stimulator under review in the EU and in Japan to reduce the risk of cardiovascular death and heart failure hospitalization following a worsening heart failure event in patients with symptomatic chronic heart failure with reduced ejection fraction, in combination with other heart failure therapies. The applications are based on results from the Phase 3 VICTORIA trial. Vericiguat was approved by the FDA in January 2021 and will be marketed in the United States as Verquvo. Vericiguat is being jointly developed with Bayer. Bayer will commercialize vericiguat in territories outside the United States, if approved.

MK-5618, selumetinib, is under review in the EU for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 (NF1) who have symptomatic, inoperable plexiform neurofibromas (PN) based on positive results from the National Cancer Institute Cancer Therapy Evaluation Program-sponsored Phase 2 SPRINT Stratum 1 trial. Selumetinib was approved by the FDA in April 2020 and is marketed in the United States as Koselugo. Selumetinib is being jointly developed and commercialized with AstraZeneca globally.

V114 is an investigational 15-valent pneumococcal conjugate vaccine under priority review by the FDA for the prevention of invasive pneumococcal disease in adults 18 years of age and older. The FDA set a PDUFA date of July 18, 2021. The EMA is also reviewing an application for licensure of V114 in adults. Additionally, the Company has several ongoing Phase 3 trials evaluating V114 in pediatric patients. V114 previously received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease in pediatric patients 6 weeks to 18 years of age and adults 18 years of age and older. The Company is involved in litigation challenging the validity of several Pfizer Inc. patents that relate to pneumococcal vaccine technology in the United States and several foreign jurisdictions.

Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that is in clinical development for expanded ~~indications~~indications. These approvals were the result of a broad clinical development program that currently consists of more than 1,400 clinical trials, including more than 1,000 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: biliary tract, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, estrogen receptor positive breast cancer, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, non-small-cell lung, small-cell lung, melanoma, mesothelioma, ovarian, prostate, renal, triple-negative breast, and urothelial, many of which are currently in ~~different~~Phase 3 clinical development. Further trials are being planned for other cancers.

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Keytruda in combination with chemotherapy is under review in the EU for the treatment of locally recurrent unresectable or metastatic triple negative breast cancer ~~types.~~(TNBC) in adults whose tumors express PD-L1 with a CPS ≥ 10 and who have not received prior chemotherapy for metastatic disease based on the results of the KEYNOTE-355 trial. Keytruda was approved for this indication under accelerated approval based on progression-free survival (PFS) by the FDA in November 2020. Keytruda in combination with chemotherapy is also under review in Japan for the treatment of patients with locally recurrent unresectable or metastatic TNBC based on data from the KEYNOTE-355 trial.

In ~~December 2017,~~July 2020, the FDA accepted for standard review a supplemental BLA for Keytruda for the treatment of patients with high-risk, early-stage TNBC in combination with chemotherapy as neoadjuvant (pre-operative) treatment, and then as a single agent as adjuvant (post-operative) treatment after surgery. The application was based on data from the first and second interim analyses of the KEYNOTE-522 trial. In February 2021, the FDA’s Oncologic Drugs Advisory Committee (ODAC), which discussed the Company’s supplemental BLA for Keytruda,voted that a regulatory decision should be deferred until further data are available from the Phase 3 KEYNOTE-522 trial. The study met one of the dual primary endpoints of pathological complete response and is continuing to evaluate event-free survival. The ODAC provides the FDA with independent, expert advice and recommendations on marketed and investigational medicines for use in the treatment of cancer. The FDA is not bound by the committee’s guidance but takes its advice into consideration. The PDUFA date for this application is March 29, 2021. The next interim analysis is calendar-driven, and data is expected in the third quarter of 2021.

In February 2021, Merck announced that the Committee for Medicinal Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending approval of an expanded label for Keytruda as monotherapy for the treatment of adult and pediatric patients aged 3 years and older with relapsed or refractory ~~primary mediastinal B-cell lymphoma (PMBCL), or~~cHL who have ~~relapsed after two or more prior lines~~failed an earlier line of therapy. This recommendation is based on results from the pivotal Phase 3 KEYNOTE-204 trial, in which Keytruda monotherapy demonstrated a significant improvement in PFS compared with brentuximab vedotin, a commonly used treatment. The recommendation is also based on supportive data from an updated analysis of the KEYNOTE-087 trial, which supported EC approval of Keytruda for the treatment of adult patients with relapsed or refractory cHL. The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in the EU. Keytruda was approved for this indication by the FDA in October 2020.

Keytruda is also under review as monotherapy for the first-line treatment of adult patients with metastatic MSI-H or dMMR colorectal cancer in Japan based on the result of the KEYNOTE-177 trial. Keytruda was approved for this indication by the FDA in June 2020 and by the EU in January 2021.

In January 2021, the FDA accepted a supplemental BLA seeking use of Keytruda for the treatment of patients with locally advanced cSCC that is not curable by surgery or radiation based on the results of the KEYNOTE-629 trial. The FDA ~~granted Priority Review status with~~set a PDUFA date of September 9, 2021.

In December 2020, the FDA accepted and granted priority review for a supplemental BLA for Keytruda in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or ~~target action,~~metastatic carcinoma of the esophagus and gastroesophageal junction. This supplemental BLA is based on data from the pivotal Phase 3 KEYNOTE-590 trial, in which Keytruda plus chemotherapy demonstrated significant improvements in the primary endpoints of overall survival (OS) and PFS versus chemotherapy in these patients regardless of PD-L1 expression status and tumor histology. These data were presented at the European Society of Medical Oncology (ESMO) Virtual Congress 2020. The FDA set a PDUFA date of April ~~3, 2018.~~13, 2021. In December 2020, the CHMP of the EMA announced the start of a procedure to extend the indication to include in combination with chemotherapy, first-line treatment of locally advanced unresectable or metastatic carcinoma of the esophagus or HER-2 negative gastroesophageal junction adenocarcinoma in adults for Keytruda, based on the results from KEYNOTE-590. Keytruda is also under review for this indication in Japan.

~~Additionally,~~ Keytruda ~~has~~ also received Breakthrough Therapy designation from the FDA in February 2020 for the combination of Keytrudawith ~~axitnib as a~~Padcev (enfortumab vedotin-ejfv), in the first-line ~~treatment for patients with advanced or metastatic renal cell carcinoma;~~setting for the treatment of high-risk early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy; and for the treatment of Merkel cell carcinoma. Also, in January 2018, Merck and Eisai Co., Ltd. (Eisai) announced receipt of Breakthrough Therapy designation from the FDA for Eisai’s multiple receptor tyrosine kinase inhibitor Lenvima (lenvatinib) in combination with ~~Keytruda~~ ~~for the potential treatment of~~ patients with unresectable locally advanced ~~and/~~or metastatic ~~renal cell carcinoma. The Lenvima and~~ ~~Keytruda~~ ~~combination therapy is being jointly developed by Eisai and Merck. This marks the 12~~^th ~~Breakthrough Therapy designation granted to~~ ~~Keytruda~~.urothelial cancer who are not eligible for cisplatin-containing chemotherapy. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.

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In January ~~2018,~~2021, Merck announced first-time data from the Phase 3 KEYNOTE-598 study evaluating Keytruda in combination with ipilimumab (Yervoy) compared with Keytruda monotherapy as first-line treatment for patients with metastatic NSCLC without EGFR or ALK genomic tumor aberrations and whose tumors express PD-L1 (tumor proportion score ≥50%). Results of the study showed that the addition of ipilimumab to Keytruda did not improve OS or PFS but added toxicity compared with Keytruda monotherapy in these patients. These results were presented in the Presidential Symposium at the IASLC 2020 World Conference on Lung Cancer hosted by the International Association for the Study of Lung Cancer in January 2021 and published in the Journal of Clinical Oncology. As previously announced in November 2020, the study was discontinued due to futility based on the recommendation of an independent Data Monitoring Committee (DMC), which determined the benefit/risk profile of Keytruda in combination with ipilimumab did not support continuing the trial. The DMC also advised that patients in the study discontinue treatment with ipilimumab/placebo.

In February 2021, Merck’s announced that the ~~pivotal~~ Phase 3 ~~KEYNOTE-189~~KEYNOTE-122 trial ~~investigating~~ evaluating Keytruda versus standard of care treatment (capecitabine, gemcitabine, or docetaxel) for the treatment of recurrent or metastatic nasopharyngeal cancer did not meet its primary endpoint of OS. Full results will be presented at a future medical meeting.

In May 2020, Merck and Eisai presented data from analyses of two Phase 2 trials evaluating Keytruda plus Lenvima at the 2020 American Society of Clinical Oncology (ASCO) Annual Meeting in which the Keytruda plus Lenvima combination demonstrated clinically meaningful objective response rates (ORR): the KEYNOTE-524/Study 116 trial in patients with ~~pemetrexed (Alimta)~~unresectable HCC with no prior systemic therapy; and ~~cisplatin or carboplatin,~~the KEYNOTE-146/Study 111 trial in patients with metastatic clear cell renal cell carcinoma (ccRCC) who progressed following immune checkpoint inhibitor therapy.

In July 2020, Merck and Eisai announced that the FDA issued a CRL regarding Merck’s and Eisai’s applications seeking accelerated approval for the first-line treatment of patients with unresectable HCC based on this trial, which showed clinically meaningful efficacy in the single-arm setting. These data supported a Breakthrough Therapy designation granted by the FDA in July 2019. Ahead of the PDUFA action dates of Merck’s and Eisai’s applications, another combination therapy was approved based on a randomized, controlled trial that demonstrated improvement in OS versus standard-of-care treatment. Consequently, the CRL stated that Merck’s and Eisai’s applications do not provide evidence that Keytruda in combination with Lenvima represents a meaningful advantage over available therapies for the treatment of unresectable or metastatic ~~non-squamous NSCLC,~~HCC with no prior systemic therapy for advanced disease. Since the applications for KEYNOTE-524/Study 116 no longer meet the criteria for accelerated approval, both companies plan to work with the FDA to take appropriate next steps, which include conducting a well-controlled clinical trial that demonstrates substantial evidence of effectiveness and the clinical benefit of the combination. As such, LEAP-002, the Phase 3 trial evaluating the Keytruda plus Lenvima combination as a first-line treatment for advanced HCC, is currently underway and fully enrolled. The CRL does not impact the current approved indications for Keytruda or for Lenvima.

In February 2021, Merck and Eisai announced the first presentation of new investigational data from the pivotal Phase 3 CLEAR study (KEYNOTE-581/Study 307) at the 2021 Genitourinary Cancers Symposium (ASCO GU) and published simultaneously in the New England Journal of Medicine. The trial evaluated the combinations of Keytruda plus Lenvima, and Lenvima plus everolimus versus sunitinib for the first-line treatment of patients with advanced RCC. Keytruda plus Lenvima demonstrated statistically significant and clinically meaningful improvements in PFS, OS and ORR versus sunitinib. Lenvima plus everolimus also showed significant improvements in PFS and ORR versus sunitinib. Merck and Eisai will discuss these data with regulatory authorities worldwide, with the intent to submit marketing authorization applications based on these results.

In December 2020, Merck and Eisai announced that the pivotal Phase 3 KEYNOTE-775/Study 309 trial evaluating the investigational use of Keytruda plus Lenvima met its dual primary endpoints of ~~overall survival (OS)~~OS and ~~progression-free survival (PFS).~~PFS and its secondary efficacy endpoint of ORR in patients with advanced endometrial cancer following at least one prior platinum-based regimen. These positive results were observed in the mismatch repair proficient (pMMR) subgroup and the ITT study population, which includes both patients with endometrial carcinoma that is pMMR as well as patients whose disease is MSI-H/dMMR. Based on an ~~interim~~ analysis conducted by an independent DMC, Keytruda plus Lenvima demonstrated a statistically significant and clinically meaningful improvement in OS, PFS and ORR versus chemotherapy. Merck and Eisai will discuss these data with regulatory authorities worldwide, with the ~~independent Data Monitoring Committee, treatment with~~ ~~Keytruda~~ ~~in combination with pemetrexed plus platinum chemotherapy resulted in significantly longer OS~~intent to

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submit marketing authorization applications based on these results, and ~~PFS than pemetrexed plus platinum chemotherapy alone. Results from KEYNOTE-189 will be presented~~plan to present these results at an upcoming medical ~~meeting and submitted to regulatory authorities.~~

~~In 2017,~~meeting. KEYNOTE-775/Study 309 is the ~~FDA placed a full clinical hold on KEYNOTE-183 and KEYNOTE-185 and a partial clinical hold on Cohort 1 of KEYNOTE-023, three combination studies of~~ ~~Keytruda~~ ~~with lenalidomide or pomalidomide versus lenalidomide or pomalidomide alone in the blood cancer multiple myeloma. This decision followed a review of data by the Data Monitoring Committee in~~confirmatory trial for KEYNOTE-146/Study 111, which ~~more deaths were observed in the~~ ~~Keytruda~~ ~~arms of KEYNOTE-183 and KEYNOTE-185. The FDA determined that the data available at the time indicated that the risks of~~ ~~Keytruda~~ ~~plus pomalidomide or lenalidomide outweighed any potential benefit for patients with multiple myeloma. All patients enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the~~ ~~Keytruda/lenalidomide/dexamethasone cohort in KEYNOTE-023 have discontinued investigational treatment with~~ ~~Keytruda. This clinical hold does not apply to other studies with~~ ~~Keytruda~~.

~~The~~ ~~Keytruda~~ ~~clinical development program consists of more than 700 clinical trials, including more than 400 trials that combine~~ ~~Keytruda~~ with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.

MK-8835, ertugliflozin, an investigational oral SGLT-2 inhibitor in development to help improve glycemic control in adults with type 2 diabetes, and two fixed-dose combination products (MK-8835A, ertugliflozin and ~~Januvia, and MK-8835B, ertugliflozin and metformin) are under review in the EU. In January 2018, the Committee for Medicinal Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending~~supported accelerated approval ~~of these medicines. The CHMP positive opinion will be considered by the EC. Ertugliflozin and the two fixed-dose combination products were approved~~ by the FDA in ~~December 2017.~~2019 of the Keytruda plus Lenvima combination for the treatment of patients with advanced endometrial carcinoma that is not MSI-H or dMMR, who have disease progression following prior systemic therapy and are not candidates for curative surgery or radiation.

~~MK-0431J~~Merck and Eisai are continuing to study the Keytruda plus Lenvima combination through the LEAP (LEnvatinib And Pembrolizumab) clinical program across 19 trials in 13 different tumor types (endometrial carcinoma, HCC, melanoma, NSCLC, RCC, squamous cell carcinoma of the head and neck, urothelial cancer, biliary tract cancer, colorectal cancer, gastric cancer, glioblastoma, ovarian cancer, and TNBC).

MK-6482, belzutifan, is an investigational ~~fixed-dose combination~~hypoxia-inducible factor-2α (HIF-2α) inhibitor being evaluated for the treatment of ~~sitagliptin~~patients withvon Hippel-Lindau (VHL) disease-associated RCC with nonmetastatic RCC tumors less than three centimeters in size, unless immediate surgery is required. In July 2020, the FDA granted Breakthrough Therapy designation to belzutifan and ~~ipragliflozin under review~~has also granted orphan drug designation to belzutifan for VHL disease. These designations are based on data from a Phase 2 trial evaluating belzutifan in patients with VHL-associated ccRCC, which were presented at the ~~Japan Pharmaceuticals~~2020 ASCO Annual Meeting. Additionally, Phase 2 data showing anti-tumor responses in VHL disease patients with ccRCC and ~~Medical Devices Agency. MK-0431 is being developed for commercialization in Japan~~other tumors were presented at the ESMO Virtual Congress 2020.

in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted withIn February 2021, Merck and ~~Kotobuki.~~Eisai began a Phase 3 trial examining Lenvima in combination with belzutifan in previously treated patients with metastatic RCC.

~~MK-1439, doravirine,~~MK-7119, Tukysa, is ~~an investigational, non-nucleoside reverse transcriptase~~a small molecule tyrosine kinase inhibitor, for the treatment of ~~HIV-1 infection.~~HER2-positive cancers. In ~~January 2018,~~September 2020, Seagen granted Merck an exclusive license and entered into a co-development agreement with Merck to accelerate the global reach of Tukysa. Merck and Seagen also announced ~~that the FDA accepted~~a collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in Phase 2 clinical trials for ~~review two NDAs for doravirine.~~breast cancer and other solid tumors. The ~~NDAs include data for doravirine~~collaboration will pursue a broad joint development program evaluating ladiratuzumab vedotin as ~~a once-daily tablet for use~~monotherapy and in combination with Keytruda in TNBC, hormone receptor-positive breast cancer and other antiretroviral agents, and for use of doravirine with lamivudine and tenofovir disoproxil fumarate in a once-daily fixed-dose combination single tablet as a complete regimen (MK-1439A). The PDUFA action date for both applications is October 23, 2018.

V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a joint venture between Merck and Sanofi. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by ~~Haemophilus influenzae~~ type b (Hib), and hepatitis B. In November 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are working to provide additional data requested by the FDA. V419 is being marketed as ~~Vaxelis~~ ~~in the EU.~~

~~In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the~~ ~~Keytruda~~ ~~programs discussed above.~~

MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.LIV-1-expressing solid tumors.

MK-7339, Lynparza, ~~(olaparib),~~ is an oral PARP inhibitor currently approved for certain types of advanced ovarian, breast, pancreatic and ~~breast cancer. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza~~prostate cancers being co-developed for multiple cancer ~~types.~~types as part of a collaboration with AstraZeneca.

~~MK-5618, selumetinib,~~MK-7264, gefapixant, is an ~~oral, potent,~~investigational, orally administered, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple cancer types. Additionally, in February 2018, the FDA granted Orphan Drug designation for selumetinibP2X3 receptor antagonist, for the treatment of ~~neurofibromatosis type 1. The development of selumetinib is part of the global strategic oncology collaboration between Merck and AstraZeneca reference above.~~

~~V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials.~~refractory or unexplained chronic cough. In ~~November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015,~~September 2020, Merck announced ~~that~~ the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from two ongoing pivotal Phase 3 trials (COUGH-1 and COUGH-2) evaluating the ~~WHO ring vaccination trial~~efficacy and safety of gefapixant. In these studies, adult patients treated with gefapixant 45 mg twice daily demonstrated a statistically significant reduction in 24-hour cough frequency versus placebo at 12 weeks (COUGH-1) and 24 weeks (COUGH-2). The gefapixant 15 mg twice daily treatment arms did not meet the primary efficacy endpoint in either Phase 3 study. These results were ~~reported in Lancet supporting~~presented at the ~~July 2015 interim assessment that V920 offers substantial protection against Ebola virus disease,~~Virtual European Respiratory Society International Congress 2020. Merck plans to share data from COUGH-1 and COUGH-2 with ~~no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies to be included in the first~~ regulatory ~~filing are anticipated in the first half of 2018.~~authorities worldwide.

~~MK-1242, vericiguat,~~MK-7110 (also known as CD24Fc) is an investigational treatment for ~~heart failure being studied in~~ patients ~~suffering~~hospitalized with COVID-19. Merck obtained MK-7110 through the acquisition of OncoImmune. In September 2020, OncoImmune reported topline findings from ~~chronic heart failure. The development~~an interim efficacy analysis of ~~vericiguat is part of a worldwide strategic collaboration between Merck and Bayer.~~

V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company completed a Phase 3 trial in autologous hematopoietic cell transplant patients and another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017. The study in

patients with solid tumor malignancies undergoing chemotherapy met its primary endpoints, but the primary efficacy endpoint was not met in patients with hematologic malignancies. Merck will present the results from this study at an upcoming scientific meeting. Due to the competitive environment, the development of V212 is currently on hold.

MK-7264 is a selective, non-narcotic, orally-administered P2X3-receptor agonist being developed for the treatment of refractory, chronic cough. Merck plans to initiate a Phase 3 clinical trial in the first half of 2018. MK-7264 was originally developed by Afferent Pharmaceuticals, which was acquired by the Company in 2016.

~~The Company also discontinued certain drug candidates.~~

~~In February 2018, Merck announced that it will be stopping protocol 019, also known as the APECS study,~~ a Phase 3 study evaluating ~~verubecestat, MK-8931, an investigational small molecule inhibitor~~MK-7110. An interim analysis of data from 203 participants (75% of the ~~beta-site amyloid precursor protein cleaving enzyme 1 (BACE1),~~planned enrollment) indicated that selected hospitalized patients with COVID-19 treated with a single dose of MK-7110 showed a 60% higher probability of improvement in ~~people with prodromal Alzheimer’s disease. The decision~~clinical status compared to ~~stop the study follows a recommendation~~placebo, as defined by the ~~external Data Monitoring Committee (eDMC),~~protocol. The risk of death or respiratory failure was reduced by more than 50%. Full results from this Phase 3 study, which ~~assessed overall benefit/risk during~~were consistent with the topline results, were received in February 2021 and will be submitted for publication in the future. MK-7110 is also being studied in a ~~recent interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the~~Phase 3 trial ~~continued.~~

In 2017, Merck announced that it will not submit applications for regulatory approval for MK-0859, anacetrapib, the Company’s investigational cholesteryl ester transfer protein (CETP) inhibitor. The decision followed a thorough review of the clinical profile of anacetrapib, including discussions with external experts.

Also in 2017, Merck made a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of ~~HCV infection. This decision was made based on a review of~~graft versus host disease.

Molnupiravir(also known as MK-4482) is an orally available ~~Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including~~ ~~Zepatier, which is currently marketed by the Company~~antiviral candidate for the treatment of ~~adult~~COVID-19 being developed in collaboration with Ridgeback Biotherapeutics LP. It is currently being evaluated in

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Phase 2/3 clinical trials in both the hospital and outpatient settings. The primary completion date for the Phase 2/3 studies is June 2021. The Company anticipates interim efficacy data in the first quarter of 2021.

MK-8591A is a combination of islatravir, the company’s investigational oral nucleoside reverse transcriptase translocation inhibitor (NRTTI), and doravirine (Pifeltro) being evaluated for the treatment of HIV-1 infection. In October 2020, Merck announced Week 96 data from the Phase 2b trial (NCT03272347) evaluating the efficacy and safety of MK-8591A in treatment-naïve adults with HIV-1 infection. Week 96 findings demonstrated that the combination of islatravir and doravirine maintained virologic suppression similar to Delstrigo (doravirine/lamivudine/tenofovir disoproxil fumarate), and the findings were consistent with Week 48 results. Additional Week 96 data from the study show low rates of participants meeting the definition of protocol-defined virologic failure in both the islatravir plus doravirine and the Delstrigo treatment arms, and no participants in either arm met the criteria for resistance testing. These data were presented at the virtual 2020 International Congress on Drug Therapy in HIV Infection (HIV Glasgow).

In November 2020, Merck announced a collaboration with the Bill & Melinda Gates Foundation (the foundation) where the foundation is committing to provide funding to support a pivotal Phase 3 study investigating a once-monthly oral pre-exposure prophylaxis (PrEP) option in women and adolescent girls at high risk for acquiring HIV-1 infection in sub-Saharan Africa. The study, IMPOWER 22, will evaluate the efficacy and safety of once-monthly islatravir and is anticipated to begin in early 2021. Merck will be funding the IMPOWER 22 clinical trial in the United States. Merck also plans to conduct additional studies in HIV prevention with islatravir in once-monthly oral PrEP. These studies will include IMPOWER 24, a global Phase 3 clinical trial to evaluate islatravir as a once-monthly oral agent for PrEP at sites across the world and among other key populations impacted by the epidemic, including men who have sex with men and transgender women.

In January 2021, the FDA accepted for standard review a supplemental NDA for Steglatro (ertugliflozin) to incorporate the results of the Phase 3 VERTIS cardiovascular (CV) outcomes trial in the product labeling. The VERTIS CV trial evaluated Steglatro, an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, versus placebo, added to background standard of care treatment, in patients with ~~chronic HCV infection.~~type 2 diabetes and atherosclerotic CV disease. The study met the primary endpoint of non-inferiority on major adverse CV events (MACE), which is a composite of CV death, nonfatal myocardial infarction or nonfatal stroke, compared to placebo. The key secondary endpoints of superiority for Steglatro versus placebo for time to the first occurrence of the composite of CV death or hospitalization for heart failure, time to CV death alone and time to the first occurrence of the composite of renal death, dialysis/transplant or doubling of serum creatinine from baseline were not met. While not a pre-specified hypothesis for statistical testing, a reduction in hospitalization for heart failure was observed with Steglatro. A supplemental application was also submitted to the EMA and is currently under review.

In January 2021, the Company announced the discontinuation of the clinical development programs for its COVID-19 vaccine candidates, V590 and V591, following Merck’s review of findings from Phase 1 clinical studies for the vaccines. In these studies, both V590 and V591 were generally well tolerated, but the immune responses were inferior to those seen following natural infection and those reported for other SARS-CoV-2/COVID-19 vaccines.

The chart below reflects the Company’s research pipeline as of February ~~23, 2018.~~22, 2021. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to ~~Keytruda~~)cancer) and additional claims, line extensions or formulations for in-line products are not shown.

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Phase 2	Phase 3 (Phase 3 entry date)	Under Review
Antiviral COVID-19 MK-4482 (molnupiravir)(1) Cancer ~~MK-3475~~ ~~Keytruda~~MK-1026 Hematological Malignancies MK-1308 (quavonlimab)(2) Melanoma Non-Small-Cell Lung Solid Tumors MK-1454(2) Head and Neck MK-2140 Advanced Solid Tumors ~~Ovarian~~MK-3475 Keytruda ~~Prostate~~Advanced Solid Tumors ~~Chronic Cough~~MK-4280(2) ~~MK-7264~~ Hematological Malignancies ~~Diabetes Mellitus~~ Non-Small-Cell Lung ~~MK-8521~~⁽²⁾MK-4830 ~~HIV Infection~~Non-Small-Cell Lung MK-5890(2) Non-Small-Cell Lung MK-6440 (ladiratuzumab vedotin)(1)(3) Advanced Solid Tumors Breast MK-7119 Tukysa(1) Advanced Solid Tumors Colorectal Gastric MK-7339 Lynparza(1)(3) Advanced Solid Tumors MK-7684 (vibostolimab)(2) Melanoma Non-Small-Cell Lung MK-7902 Lenvima(1)(2) Advanced Solid Tumors Biliary Tract Colorectal Glioblastoma V937 Breast Cutaneous Squamous Cell Head and Neck Melanoma Solid Tumors Chikungunya virus V184 Cytomegalovirus V160 HIV-1 Prevention MK-8591 (islatravir) ~~Pneumoconjugate~~Nonalcoholic Steatohepatitis NASH MK-3655 Overgrowth Syndrome MK-7075 (miransertib) Pneumococcal Vaccine Adult ~~V114~~V116 Respiratory Syncytial Virus MK-1654 Schizophrenia MK-8189	Cancer MK-3475 Keytruda Biliary Tract (September 2019) Cervical (October 2018) (EU) Cutaneous Squamous Cell (August 2019) (EU) Endometrial (August 2019) (EU) Gastric (May 2015) (EU) Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) Ovarian (December 2018) Prostate (May 2019) Small-Cell Lung (May 2017) (EU) MK-6482 (belzutifan) Renal Cell (February 2020) MK-7119 Tukysa(1) Breast (October 2019) MK-7339 Lynparza(1)(2) Colorectal(1) (August 2020) Non-Small-Cell Lung(2) (June 2019) Small-Cell Lung(2) (December 2020) MK-7902 Lenvima(1)(2) Bladder (May 2019) Endometrial (June 2018) (EU) Gastric (December 2020) Head and Neck (February 2020) Melanoma (March 2019) Non-Small-Cell Lung (March 2019) Cough MK-7264 (gefapixant) (March 2018) COVID-19 MK-7110 (December 2020) HIV-1 Infection MK-8591A (doravirine/islatravir) (February 2020)	New Molecular Entities/Vaccines Bacterial Infection MK-7655A (relebactam+imipenem/cilastatin) (JPN) ~~(October 2015)~~ ~~Cancer~~ ~~MK-3475~~ ~~Keytruda~~ ~~Breast (October 2015)~~ ~~Colorectal (November 2015)~~ ~~Esophageal (December 2015)~~ ~~Gastric (May 2015) (EU)~~ ~~Head and Neck (November 2014) (EU)~~ ~~Hepatocellular (May 2016)~~ ~~Nasopharyngeal (April 2016)~~ ~~Renal (October 2016)~~ ~~Small-Cell Lung (May 2017)~~ ~~MK-7339 Lynparza~~⁽¹⁾ ~~Pancreatic (December 2014)~~ ~~Prostate (April 2017)~~ ~~MK-5618 (selumetinib)~~⁽¹⁾ ~~Thyroid (June 2013)~~ ~~Ebola Vaccine~~ ~~V920 (March 2015)~~ Heart Failure MK-1242 (vericiguat) ~~(September 2016)~~⁽¹⁾ ~~Herpes Zoster~~ ~~V212 (inactivated VZV vaccine)~~ ~~(December 2010)~~⁽²⁾ ~~HIV~~ ~~MK-1439 (doravirine) (December 2014)~~ (EU) ~~MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) (June 2015) (EU)~~	~~New Molecular Entities/Vaccines~~ ~~Diabetes Mellitus~~ ~~MK-0431J (sitagliptin+ipragliflozin) (Japan)~~⁽¹⁾ ~~MK-8835 (ertugliflozin) (EU)~~⁽¹⁾ ~~MK-8835A (ertugliflozin+sitagliptin) (EU)~~⁽¹⁾ ~~MK-8835B (ertugliflozin+metformin) (EU)~~⁽¹⁾ ~~HIV~~ ~~MK-1439 (doravirine) (U.S.)~~ ~~MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) (U.S.)~~ (JPN) Pediatric ~~Hexavalent Combination Vaccine~~Neurofibromatosis Type 1 ~~V419~~MK-5618 (selumetinib)(1) (EU) Pneumococcal Infection Adult V-114 (U.S.)⁽³⁾ (EU) Certain Supplemental Filings Cancer MK-3475 Keytruda ~~Relapsed or Refractory Primary Mediastinal B‑Cell Lymphoma (PMBCL)~~• Metastatic Triple-Negative Breast Cancer (KEYNOTE-355) (EU) (JPN) • Early-Stage Triple-Negative Breast Cancer (KEYNOTE-522) (U.S.) ~~MK-7339 Lynparza~~⁽¹⁾• Refractory Classical Hodgkin Lymphoma ~~Broader Approval for Ovarian Cancer~~ (KEYNOTE-204) (EU) • Unresectable or Metastatic MSI-H or dMMR Colorectal Cancer (KEYNOTE-177) (JPN) • Cutaneous Squamous Cell Cancer (KEYNOTE-629) (U.S.) • Advanced Unresectable Metastatic Esophageal Cancer (KEYNOTE-590) (U.S.) (EU) (JPN) • First-Line Metastatic HER2+ Gastric Cancer (KEYNOTE-811) (U.S.) MK-7902 Lenvima(1) • First-Line Metastatic Hepatocellular Carcinoma (KEYNOTE-524) (U.S.)(2)(4) • Thymic Carcinoma (NCCH1508/REMORA) (JPN)
		Footnotes: ⁽¹⁾Being developed in a collaboration. ⁽²⁾ ~~Development is currently on hold.~~ Being developed in combination with Keytruda. ⁽³⁾ ~~V419 is an investigational pediatric hexavalent~~ Being developed as monotherapy and in combination ~~vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi.~~with Keytruda. (4) In ~~November 2015,~~July 2020, the FDA issued a CRL ~~with respect~~for Merck’s and Eisai’s applications. Merck and Eisai intend to ~~V419. Both companies are working to provide~~submit additional data ~~requested by~~when available to the FDA.

~~Employees~~Human Capital

As of December 31, ~~2017,~~2020, the Company had approximately ~~69,000~~74,000 employees worldwide, with approximately ~~26,700~~27,000 employed in the United States, including Puerto ~~Rico.~~Rico, and approximately 26,000 third-party contractors globally. Approximately ~~29% of worldwide employees~~73,000 of the ~~Company~~Company’s employees are full time-employees. Women and individuals with ethnically diverse backgrounds comprise approximately 50% and 31% of its workforce in the United States, respectively. Women comprise 46% of the members of the Board of Directors. Additionally, the Company’s executive team, which includes individuals up to two structural levels below the Chief Executive

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Officer, is made up of 34% women. Approximately 30% of the Company’s employees are represented by various collective bargaining groups.

~~Restructuring Activities~~The Company recognizes that its employees are critical to meet the needs of its patients and customers and that its ability to excel depends on the integrity, skill, and diversity of its employees.

Talent Acquisition

The Company ~~incurs substantial costs~~uses a comprehensive approach to ensure recruiting, retention and leadership development goals are systematically executed throughout the Company and that it hires talented leaders to achieve improved gender parity and representation across all dimensions of diversity. The Company provides training to its managers and external recruiting organizations on strategies to mitigate unconscious bias in the candidate selection and hiring process. In addition, the Company utilizes a comprehensive communications strategy, marketing outreach, social media and strategic alliance partnerships to reach a broad pool of talent in its critical business areas. In 2020, the Company hired approximately 10,000 employees across the globe through various channels including the Company’s external career site, diversity partnerships, employee referrals, universities and other external sources.

Global Diversity and Inclusion

Diversity and inclusion are fundamental to the Company’s success and core to future innovation. The Company fosters a globally diverse and inclusive workforce for ~~restructuring~~its employees by creating an environment of belonging, engagement, equity, and empowerment. The Company is proactive and intentional about diversity hiring and development programs to advance talent. The Company creates competitive advantages by leveraging diversity and inclusion to accelerate business performance. This includes fostering global supplier diversity, integrating diversity and inclusion into the Company’s commercialization strategies and leveraging employee insights to improve performance. In addition to these efforts, the Company has ten Employee Business Resource Groups, that provide opportunities for employees to take an active part in contributing to the Company’s inclusive culture through their work in talent acquisition and development, business and customer insights and social and community outreach.


Gender and Ethnicity Performance Data(1)	2020	2019	2018
Women in the workforce	49%	49%	49%
Women in the workforce in the U.S.	50%	50%	NR
Women on the Board of Directors	46%	33%	23%
Women in executive roles(2)	34%	36%	32%
Women in management roles(3)	43%	43%	41%
Members of underrepresented ethnic groups on the Board of Directors	23%	17%	15%
Members of underrepresented ethnic groups in executive roles (U.S.)	22%	26%	21%
Members of underrepresented ethnic groups in the workforce (U.S.)	31%	29%	27%
Members of underrepresented ethnic groups in management roles (U.S.)	29%	27%	25%
New hires that were female	50%	50%	51%
New hires that were members of underrepresented ethnic groups (U.S.)	42%	33%	36%

NR: Not reported.

(1) As of 12/31.

(2) “Executive” is defined as the chief executive officer and two structural levels below.

(3) “Management role” is defined as all managers with direct reports other than executives defined in note 2.

Compensation and Benefits

The Company provides a valuable total rewards package reflecting its commitment to attract, retain and motivate its talent, and to supporting its employees and their families in every stage of life. The Company continuously monitors and adjusts its compensation and benefit programs to ensure they are competitive, contemporary, helpful and engaging, and that they support strategic imperatives such as diversity and inclusion, equity, flexibility, quality, security and affordability. For example, in 2020, the Company added a personal health care concierge service to assist U.S. employees participating in the Company medical plan with their health care

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needs. Aligned with its business and in support of its cancer care strategy, the Company also improved cancer screening benefits, added resources and provided immediate access to a leading cancer center of excellence for U.S. employees. Globally, the Company implemented a minimum standard of 12 weeks of paid parental leave, which inclusively applies to all parents. In the United States, the Company’s benefits rank in the top quartile of Fortune 100 companies under the Aon Hewitt 2019 Benefits Index. The Company has been included in the Working Mother 100 Best Companies ranking for 34 consecutive years and was named a Working Mother Best Company for Dads in 2020.

Employee Wellbeing

The Company is committed to helping its employees and their families improve their own health and wellbeing. The Company’s culture of wellbeing is referred to as “Live it”, which includes programs to support preventive health, emotional and financial wellbeing, physical fitness and nutrition. It is designed to inspire all employees to pursue, enjoy, and share healthy lifestyles. Live it was launched in the United States in 2011 and today is available in every country in which the Company has employees. In addition, many of the Company’s larger sites offer onsite health clinics that provide an array of services to help its employees stay or get well, including vaccinations, cancer and biometric screenings, travel medicine and advice, diagnosis and treatment of non-occupational illnesses or injuries, health counseling and referrals. The Company’s overall employee wellbeing program was recognized for excellence in health and wellbeing by receiving the highest-level awards from the Business Group on Health (2019 and 2020), and the American Heart Association (2018-2020).

COVID-19 Response

The Company recognizes that it has a unique responsibility to help in response to the COVID-19 pandemic and is committed to supporting and protecting its employees and their families, ensuring that its supply of medicines and vaccines reaches its patients, contributing its scientific expertise to the development of antiviral approaches and supporting its health care providers and the communities in which they serve. The Company continues to provide employees with easy and regular access to information, including details regarding the Company’s tracking process, guidance around hygiene measures and travel and best practices for working from home. Examples of pandemic support resources and programs available to the Company’s employees include pay continuation for workers who have been sick or exposed, volunteer policy adjustment to enable employees with medical backgrounds to volunteer in SARS-CoV-2-related activities, ~~related~~resources to ~~Merck’s productivity~~prioritize physical and ~~cost reduction~~mental wellness, adjustments to medical plans to cover 100% of a COVID-19-related diagnosis, testing and treatment, backup childcare and more.

Engaging Employees

The Company strives to foster employee engagement by promoting a safe, positive, diverse and inclusive work environment that provides numerous opportunities for two-way communication with employees. Some of the Company’s key programs and initiatives include promoting global employee engagement surveys, ongoing pulse checks to the organization for interim feedback on specific topics, fostering professional networking and collaboration, identifying and providing opportunities for volunteering and establishing positive, cooperative business relations with designated employee representatives.

Talent Management and Development

As the Company pursues its goal of becoming the world’s premier research-based biopharmaceutical company, it needs to continuously develop its diverse and talented people. The Company’s current talent management system supports company-wide performance management, development, talent reviews and succession planning. Annual performance reviews help further the professional development of the Company’s employees and ensure that the Company’s workforce is aligned with the Company’s objectives. The Company seeks to continuously build the skills and capabilities of its workforce to accelerate talent, improve performance and mitigate risk through relevant continuous learning experiences. This includes, but is not limited to, building leadership and management skills, as well as ~~in connection with the integration of certain acquired businesses. In 2010~~providing technical and ~~2013, the Company commenced actions under global restructuring programs designed~~functional training to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. Since inception of the programs through December 31, 2017, Merck has eliminated approximately 43,350 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company has substantially completed the actions under these programs.all employees.

Environmental Matters

environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for

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remediation and environmental liabilities were $11 million in ~~2017,~~2020 and are estimated at ~~$56~~$46 million in the aggregate for the years ~~2018~~2021 through ~~2022.~~2025. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled ~~$82 million and $83~~$67 million at both December 31, ~~2017~~2020 and ~~2016, respectively.~~2019. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed ~~$63~~approximately $65 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial ~~position,~~condition, results of operations, liquidity or capital resources for any year.

Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy usage, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.

Geographic Area Information

The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States as a percentage of total Company sales were 56% in both 2020 and 2019 and were 57% ~~of sales~~ in ~~2017, 54% of sales in 2016 and 56% of sales in 2015.~~2018.

The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions.

Merck has operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.

~~Financial information about geographic areas of the Company’s business is provided in Item 8. “Financial Statements and Supplementary Data” below.~~

Available Information

The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). The address of that website is www.sec.gov. In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to ~~Merck Shareholder Services,~~the Office of the Secretary, Merck & Co., Inc., 2000 Galloping Hill Road, ~~K1-3049,~~K1-4157, Kenilworth, NJ 07033 U.S.A.

The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s website at www.merck.com/~~about/~~company-overview/leadership and all such information is available in print to any ~~stockholder~~shareholder who requests it from the Company.

Item 1A.Risk Factors.

Summary Risk Factors

The Company is subject to a number of risks that if realized could materially adversely affect its business, results of operations, cash flow, financial condition or prospects. The following is a summary of the principal risk factors facing the Company:

•The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business could be materially adversely affected.

•As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.

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~~Item 1A.~~	~~Risk Factors.~~

•Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material adverse effect on the Company’s results of operations and financial condition.

•The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that lose patent protection.

•The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.

•The Company faces continued pricing pressure with respect to its products.

•The uncertainty in global economic conditions together with cost-reduction measures being taken by certain governments could negatively affect the Company’s operating results.

•The Company faces intense competition from lower cost generic products.

•The Company faces intense competition from competitors’ products.

•The global COVID-19 pandemic is having an adverse impact on the Company’s business, operations and financial performance. The Company is unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic or similar public health threat will adversely impact its business, operations, financial performance, results of operations, and financial condition.

•The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material adverse effect on the Company’s results of operations and financial condition.

•Failure to attract and retain highly qualified personnel could affect the Company’s ability to successfully develop and commercialize products.

•In the past, the Company has experienced difficulties and delays in manufacturing certain of its products, including vaccines.

•The Company may not be able to realize the expected benefits of its investments in emerging markets.

•The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.

•Pharmaceutical products can develop unexpected safety or efficacy concerns.

•Reliance on third-party relationships and outsourcing arrangements could materially adversely affect the Company’s business.

•Negative events in the animal health industry could have a material adverse effect on future results of operations and financial condition.

•Biologics and vaccines carry unique risks and uncertainties, which could have a material adverse effect on the Company’s future results of operations and financial condition.

•The health care industry in the United States has been, and will continue to be, subject to increasing regulation and political action.

•The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.

•Developments following regulatory approval may adversely affect sales of the Company’s products.

•The Company is subject to a variety of U.S. and international laws and regulations.

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•The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations and financial condition.

•Product liability insurance for products may be limited, cost prohibitive or unavailable.

•The Company is increasingly dependent on sophisticated software applications, computing infrastructure and cloud service providers. In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. The Company could be a target of future cyber-attacks.

•Social media platforms present risks and challenges.

•The proposed Spin-Off of Organon may not be completed on the terms or timeline currently contemplated, if at all, and may not achieve the expected results.

•The costs to complete the proposed Spin-Off will be significant. In addition, the Company may be unable to achieve some or all of the strategic and financial benefits that it expects to achieve from the Spin-Off of Organon.

•Following the Spin-Off, the price of shares of the Company’s common stock may fluctuate significantly.

•There could be significant income tax liability if the Spin-Off or certain related transactions are determined to be taxable for U.S. federal income tax purposes.

The above list is not exhaustive, and the Company faces additional challenges and risks. Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities.

Risk Factors

The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations, cash flow or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these

forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.

Risks Related to the Company’s Business

The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business ~~would~~could be materially adversely affected.

Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health and animal health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.

Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note ~~11.~~10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file abbreviated NDAs with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned or licensed by the Company. The Company normally responds by defending its patent, including by filing lawsuits alleging patent

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infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.

Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation in both the United States and certain foreign markets relating to patents, as well as regulatory initiatives may result in a more general weakening of intellectual property protection.

If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has launched commercially successful products that replace the lost sales. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively ~~impact~~affect product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those ~~products. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement~~ products.

A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates ~~under review and~~in Phase 3 ~~candidates~~clinical development is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”

As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.

The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of market exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial ~~position~~condition and prospects. For example, ~~pursuant to an agreement with a~~the patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and generic ~~manufacturer, that manufacturer launched in the United States a generic version of~~ ~~Zetia~~competition began in December ~~2016. In addition, the Company lost U.S. patent protection for~~ ~~Vytorin~~ ~~in April 2017. As a result, the~~2019. The Company experienced a ~~significant~~rapid and ~~rapid loss~~substantial decline in U.S. NuvaRing sales in 2020 as a result of ~~sales of~~ ~~Zetia~~this generic competition. In addition, Januvia and ~~Vytorin~~Janumet will lose market exclusivity in the United States in ~~2017, which~~January 2023. Januvia will lose market exclusivity in the ~~Company expects will continue~~EU in ~~2018. In addition,~~September 2022. Finally, the ~~patent~~SPC that provides ~~U.S.~~ market exclusivity for ~~NuvaRing~~ ~~will expire~~Janumet in the EU expires in April ~~2018 and the~~2023. The Company anticipates ~~a significant~~sales of Januvia and Janumet in these markets will decline ~~in U.S.~~ ~~NuvaRing~~ ~~sales thereafter.~~

substantially after the loss of market exclusivity.

Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material ~~and negative impact~~adverse effect on the Company’s results of operations and ~~cash flows.~~financial condition.

The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as ~~Januvia~~, ~~Janumet~~,Keytruda,, Gardasil/Gardasil 9,Januvia, Janumet,and ~~Isentress~~Bridion. In particular, in 2020, the Company’s oncology portfolio, led by Keytruda, represented the vast majority of the Company’s revenue growth. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on the sales of any such products.

~~For example, in 2018, the Company anticipates that sales~~

Table of ~~Zepatier~~ ~~will be materially unfavorably affected by increasing competition and declining patient volumes. The Company also anticipates that sales of~~ ~~Zostavax~~ ~~will be materially unfavorably affected due to competition.~~Content s

The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that ~~have lost~~lose patent protection.

~~Like other major pharmaceutical companies, in~~In order to remain competitive, the Company, like other major pharmaceutical companies, must continue to launch new ~~products each year.~~products. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products that it may develop through collaborations and joint ventures and products that it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new ~~drugs.~~drugs and vaccines. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.

For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its ~~goals, therefore,~~goals. Therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.

The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications ~~or brand extensions~~ for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial ~~position~~condition and prospects.

The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.

Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:

•findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;

•failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, or the anticipated labeling, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;

•failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;

•lack of economic feasibility due to manufacturing costs or other factors; and

•preclusion from commercialization by the proprietary rights of others.

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In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with ~~acquisitions.~~acquisitions or certain collaborations.

Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial ~~position~~condition and prospects.

The ~~Company’s products, including products in development, cannot be marketed unless the~~ Company ~~obtains and maintains regulatory approval.~~faces continued pricing pressure with respect to its products.

The Company faces continued pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA, and (iii) state activities aimed at increasing price transparency, including ~~research, preclinical testing, clinical trials~~new laws as noted above in Item 1. “Competition and ~~manufacturing and marketing its products, are subject~~the Health Care Environment.” Changes to ~~extensive regulation by numerous federal, state and local governmental authorities~~the health care system enacted as part of health care reform in the United States, ~~including the FDA,~~as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and ~~by foreign regulatory authorities, including~~private sector beneficiaries, could result in ~~the EU and Japan.~~further pricing pressures. In addition, in the United States, larger customers have received higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the ~~FDA is of particular importance~~managed care organization.

In order to provide information about the Company’s pricing practices, the Company as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market inannually posts on its website its Pricing Transparency Report for the United States. ~~Regulation outside~~The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010. In 2020, the Company’s gross U.S. sales were reduced by 45.5% as a result of rebates, discounts and returns.

Outside the United States, ~~also is primarily focused on drug safety~~numerous major markets, including the EU, Japan and ~~effectiveness~~China have pervasive government involvement in funding health care and, in ~~many cases, cost reduction. The FDA~~that regard, fix the pricing and ~~foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration~~reimbursement of pharmaceutical and ~~marketing approval and to otherwise preclude distribution and sale of a product.~~

~~Even if~~vaccine products. Consequently, in those markets, the Company is ~~successful~~subject to government decision making and budgetary actions with respect to its products. In Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines. Furthermore, the government can order re-pricing for specific products if it determines that use of such product will exceed certain thresholds defined under applicable re-pricing rules. The next government-mandated price reduction will occur in ~~developing new products, it will not~~April 2021 and is expected to impact many Company products.

The Company expects pricing pressures to continue in the future.

The uncertainty in global economic conditions together with cost-reduction measures being taken by certain governments could negatively affect the Company’s operating results.

Uncertainty in global economic and geopolitical conditions may result in a slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenuespay for ~~those new products in any jurisdiction where it does not have approval.~~

~~Developments following regulatory approval may adversely affect sales of~~ the Company’s ~~products.~~

~~Even after a product reaches market, certain developments following regulatory approval, including results in post-approval Phase 4 trials~~products or ~~other studies, may decrease~~by reducing the demand for the Company’s products, ~~including~~which could in turn negatively impact the ~~following:~~Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

As discussed above in “Competition and the ~~re-review of products that are already marketed;~~

~~the recall or loss of marketing approval of products that are already marketed;~~

~~changing government standards or public expectations regarding safety, efficacy or labeling changes;~~Health Care Environment,” global efforts toward health care cost containment continue to exert pressure on product pricing and

~~greater scrutiny in advertising and promotion.~~

In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating market access worldwide. Changes to the ~~safety or efficacy~~U.S. health care system as part of ~~pharmaceutical products~~health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s revenue performance in ~~general that have~~2020 was negatively affected ~~the sales~~by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of ~~such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further,~~ these ~~matters often attract litigation~~actions, and ~~even where the basis for the litigation is groundless, considerable resources may be needed to respond.~~

~~In addition, following~~additional actions in the ~~wake~~future, will continue to negatively affect revenue performance.

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If credit and ~~other significant safety issues, health authorities such as~~economic conditions worsen, the ~~FDA, the EMA~~resulting economic and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertaintiescurrency impacts in the ~~regulatory processes. There is also greater regulatory scrutiny, especially in the United States,~~affected markets and globally could have a material adverse effect on ~~advertising and promotion and, in particular, direct-to-consumer advertising.~~

~~If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of~~ the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.results.

The Company faces intense competition from lower cost generic products.

In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures that encourage the use of generic and biosimilar products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.

Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial ~~position~~condition and prospects.

The Company faces intense competition from competitors’ ~~products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.~~products.

The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use, have better insurance coverage or reimbursement levels or be more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial ~~position~~condition and prospects. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

The ~~Company faces continued pricing pressure with respect to its products.~~

The Company faces continued pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA, and (iii) state activities aimed at increasing price transparency. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. In addition, in the U.S., larger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.

In order to provide information about the Company’s pricing practices, the Company recently posted on its website its Pricing Action Transparency Report for the United States for the years 2010 - 2017. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010. The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits from 2010 - 2016. In 2017, the average net price across the Company’s portfolio declined by 1.9%, reflecting specific in-year dynamics, including theglobal COVID-19 pandemic is having an adverse impact of loss of patent protection for three major Merck medicines. Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2017, the Company’s gross U.S. sales were reduced by 45.1% as a result of rebates, discounts and returns.

Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.

~~The Company expects pricing pressures to continue in the future.~~

~~The health care industry in the United States will continue to be subject to increasing regulation and political action.~~

The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by the Executive branch, Congress and state legislatures.

In 2010, the United States enacted major health care reform legislation in the form of the ACA. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.

The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). In 2017, the Company’s revenue was reduced by $385 million due to this requirement. Beginning in 2019, the 50% point of service discount will increase to a 70% point of service discount in the coverage gap, as a result of the Balanced Budget Act of 2018. In addition, the 70% point of service discount will be extended to biosimilar products. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $4.0 billion in 2017 and will be $4.1 billion in 2018. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. In 2017, the Company recorded $210 million of costs for this annual fee.

On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug

manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck, at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.

~~The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have~~ on the Company’s ~~results of operations, financial condition or business.~~

The Company is increasingly dependent on sophisticated software applications and computing infrastructure. In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. The Company could be a target of future cyber-attacks.

The Company is increasingly dependent on sophisticated software applications and complex information technology systems and computing infrastructure (collectively, “IT systems”) to conduct critical operations. Disruption, degradation, or manipulation of these IT systems through intentional or accidental means could impact key business, processes. Cyber-attacks against the Company’s IT systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of these IT systems could result in the disclosure of sensitive personal information or the theft of trade secrets, intellectual property, or other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks.

On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. All of the Company’s manufacturing sites are now operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging and shipping product. The Company’s external manufacturing was not impacted. Throughout this time, Merck continued to fulfill orders and ship product.

Due to the cyber-attack, as anticipated, the Company was unable to fulfill orders for certain products in certain markets, which had an unfavorable effect on sales in 2017 of approximately $260 million. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in ~~Materials and Production~~ ~~costs, as well as expenses related to remediation efforts in~~ ~~Marketing and Administrative~~ ~~expenses and~~ ~~Research and Development~~ expenses, which aggregated $285 million in 2017, net of insurance recoveries of approximately $45 million. Due to a residual backlog of orders, the Company anticipates that in 2018 sales will be unfavorably affected in certain markets by approximately $200 million from the cyber-attack. Merck does not expect a significant impairment to the value of intangible assets related to marketed products or inventories as a result of the cyber-attack.

The Company has insurance coverage insuring against costs resulting from cyber-attacks and has received proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims related to this incident.

~~Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s inability to meet higher than expected demand for~~ ~~Gardasil~~ ~~9, which resulted in Merck’s decision to borrow doses of~~ ~~Gardasil~~ 9 from the U.S. Centers for Disease Control and Prevention Pediatric Vaccine Stockpile. The Company subsequently replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed doses in the second half of 2018.

The Company has implemented a variety of measures to further enhance its systems to guard against similar attacks in the future, and also is pursuing an enterprise-wide effort to enhance the Company's resiliency against future cyber-attacks, including incidents similar to the June 2017 attack. The objective of these efforts is not only to protect against future cyber-attacks, but also to improve the speed of the Company’s recovery from such attacks and enable continued business operations to the greatest extent possible during any recovery period.

~~Although the aggregate impact of cyber-attacks and network disruptions, including the June 2017 cyber-attack, on the Company’s~~ operations and financial ~~condition has not been material to date, the Company continues to be a~~

target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company IT systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and IT systems will be successful in preventing disruptions to its operations, including its manufacturing, research and sales operations. Any such disruption could result in loss of revenue, or the loss of critical or sensitive information from the Company’s or the Company’s third party providers’ databases or IT systems and could also result in financial, legal, business or reputational harm to the Company and potentially substantial remediation costs.

~~Changes in laws and regulations could materially adversely affect the Company’s business.~~

All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.

In particular, there is significant uncertainty about the future of the ACA and health care laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business.performance. The Company is unable to predict the ~~likelihood~~full extent to which the COVID-19 pandemic or any future pandemic, epidemic or similar public health threat will adversely impact its business, operations, financial performance, results of ~~changes to~~operations, and financial condition.

The Company’s business and financial results were negatively impacted by the ~~ACA. Depending on the nature~~outbreak of ~~any repeal~~COVID-19 in 2020. The continued duration and ~~replacement~~severity of the ~~ACA, such actions could have a material adverse effect on~~COVID-19 pandemic is uncertain, rapidly changing and difficult to predict. The degree to which COVID-19 impacts the Company’s results ~~of operations, financial condition or business.~~

~~The uncertainty~~ in ~~global economic conditions together with austerity measures being taken by certain governments could negatively affect~~2021 will depend on future developments, beyond the Company’s ~~operating results.~~

~~Uncertainty in global~~knowledge or control, including, but not limited to, the duration of the outbreak, its severity, the success of actions taken to contain or prevent the virus or treat its impact, and how quickly and to what extent normal economic and ~~geopolitical~~operating conditions ~~may result in a slowdown to~~can resume.

In 2020, the ~~global economy that could affect~~COVID-19 pandemic impacted the Company’s business in numerous ways. As expected, within the Company’s human health business, revenue was negatively impacted by ~~reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed~~reduced access to health care providers ~~may be able or willing~~given social distancing measures, which negatively affected vaccine and oncology sales in particular. The estimated overall negative impact of the COVID-19 pandemic to ~~pay~~Merck’s revenue for the full year 2020 was approximately $2.5 billion, largely attributable to the Pharmaceutical segment, with approximately $50 million attributable to the Animal Health segment.

Roughly two-thirds of Merck’s Pharmaceutical segment revenue is comprised of physician-administered products, which, despite strong underlying demand, have been affected by social distancing measures, fewer well visits and delays in elective surgeries due to the COVID-19 pandemic. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in reduced administration of many of the Company’s human health products, ~~or by reducing~~in particular for its vaccines, including Gardasil 9, as well as for Keytruda and Implanon/

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Nexplanon. In addition, declines in elective surgeries negatively affected the demand for Bridion. However, sales of Pneumovax 23 have increased due to heightened awareness of pneumococcal vaccination.

Merck believes that global health systems and patients have largely adapted to the impacts of COVID-19, but the Company’s ~~products,~~assumption is that ongoing residual negative impacts will persist, particularly during the first half of 2021 and most notably with respect to vaccine sales, with the impact expected to be more acute in the United States. For the full year of 2021, Merck assumes an unfavorable impact to revenue of approximately 2% due to the COVID-19 pandemic, all of which ~~could~~relates to Pharmaceutical segment sales. In addition, for the full year of 2021, with respect to the COVID-19 pandemic, Merck expects a net negative impact to operating expenses, as spending on the development of its COVID-19 antiviral programs is expected to exceed the favorable impact of lower spending in ~~turn negatively impact~~other areas due to the COVID-19 pandemic. Despite the Company’s ~~sales~~efforts to manage these impacts, their ultimate impact will also depend on factors beyond the Company’s knowledge or control, including the duration of the COVID-19 virus as well as governmental and ~~result in a material adverse effect on~~third-party actions taken to contain or prevent its spread, treat the virus and mitigate its public health and economic effects. In addition, any future pandemic, epidemic or similar public health threat could present similar risks to the Company’s business, cash flow, results of operations, financial ~~position~~condition and prospects.

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, pricing pressures continue on many of the Company’s products and, in several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2017. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and other austerity measures will continue to negatively affect revenue performance in 2018.

~~If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.~~

The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material ~~negative impact~~adverse effect on the Company’s results of ~~operations.~~operations and financial condition.

The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:

•changes in medical reimbursement policies and programs and pricing restrictions in key markets;

•multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;

•trade protection measures and import or export licensing requirements, including the imposition of trade sanctions or similar restrictions by the United States or other governments;

•foreign exchange fluctuations;

•diminished protection of intellectual property in some countries; and

•possible nationalization and expropriation.

In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. ~~For example, in 2017, the Company’s lone manufacturing plant in Puerto Rico was negatively affected by Hurricane Maria.~~

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit”. As a result of the referendum, the British government has begun negotiating the terms of the UK’s future relationship with the EU. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries, increased regulatory complexities, and cross boarder labor issues that could adversely impact the Company’s business operations in the UK.

Failure to attract and retain highly qualified personnel could affect ~~its~~the Company’s ability to successfully develop and commercialize products.

The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing so will not materially increase.

In the past, the Company has experienced difficulties and delays in manufacturing certain of its products, including vaccines.

Merck has, in the past, experienced difficulties in manufacturing certain of its products, including vaccines. ~~In addition, the network cyber-attack experienced by~~For example, in 2020 the Company ~~in June 2017 led to~~issued a ~~disruption~~product recall for Zerbaxa following the identification of ~~the Company’s operations, including its manufacturing operations.~~product sterility issues. The Company may, in the future, experience other difficulties and delays ~~inherent~~ in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to

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manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) ~~construction~~ delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. In addition, the Company could experience difficulties or delays in manufacturing its products caused by natural disasters, such as hurricanes. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.

The Company may not be able to realize the expected benefits of its investments in emerging markets.

The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and, if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.

The Company’s business in China has grown rapidly in the past few years, and the importance of China to the Company’s overall pharmaceutical and vaccines business outside the United States has increased accordingly. Continued growth of the Company’s business in China is dependent upon ongoing development of a favorable environment for innovative pharmaceutical products and vaccines, sustained access for the Company’s currently marketed products, and the absence of trade impediments or adverse pricing controls. As noted above in “Competition and the Health Care Environment,” pricing pressure in China has increased as the Chinese government has been taking steps to reduce costs, including implementing health care reform that has led to the acceleration of generic substitution, where available. In 2017, the Chinese government updated the NRDL for the first time in eight years. While the mechanism for drugs being added to the list evolves, inclusion may require a price negotiation which could impact the outlook in the market for selected brands. In 2020, drugs were added to the NRDL through double-digit price reductions. While pricing pressure has always existed in China, health care reform has increased this pressure in part due to the acceleration of generic substitution through the government’s VBP program. In 2019, the government implemented the VBP program through a tendering process for mature products which have generic substitutes with a Generic Quality Consistency Evaluation approval. Mature products that have entered into the first three rounds of VBP had, on average, a price reduction of 50%. The Company expects VBP to be a semi-annual process that will have a significant impact on mature products moving forward. In addition, ~~in China, commercial and economic conditions may adversely affect~~ the Company’s growth prospects in that market. While the Company continues to believe that China represents an important growth opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.

For all these reasons, sales within emerging markets carry significant risks. However, aat the same time macro-economic growth of selected emerging markets is expected to outpace Europe and even the United States, leading to significant increased headcount spending in those countries and access to innovative medicines for patients. A failure to maintain the Company’s presence in emerging markets could therefore have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition ~~or results of the Company’s operations.~~and prospects.

The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.

The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into ~~acquisition, licensing,~~business development transactions, borrowings or other financial transactions that may give rise to currency and interest rate exposure.

Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates, ~~and~~ interest rates and inflation could negatively affect the Company’s business, cash flow, results of operations, financial ~~position~~condition and ~~cash flows as occurred with respect to Venezuela in 2015 and 2016.~~prospects.

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In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.

~~The Company~~Certain of the Company’s interest rate derivatives and investments are based on the London Interbank Offered Rate (LIBOR), and a portion of Merck’s indebtedness bears interest at variable interest rates, primarily based on LIBOR. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform, which will cause LIBOR to ~~evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.~~

~~The Company is subject~~cease to ~~evolving and complex tax laws~~exist entirely in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.

~~In addition,~~future. While the Company ~~may~~expects that reasonable alternatives to LIBOR will be ~~affected by changes in tax laws, such as tax rate changes, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.~~

~~Further, on December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (TCJA) became law. The final impact of the TCJA on~~implemented prior to its termination, the Company cannot predict the consequences and timing of these developments, which could include an increase in interest expense and may ~~differ from~~also require the ~~estimates reported, possibly materially, due to such factors as changes in interpretations and assumptions made, additional guidance~~amendment of contracts that ~~may be issued, and actions taken by the Company as a result of the TCJA, among others.~~reference LIBOR.

Pharmaceutical products can develop unexpected safety or efficacy concerns.

Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.

Reliance on ~~third party~~third-party relationships and outsourcing arrangements could materially adversely affect the Company’s business.

The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and ~~third party~~third-party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology (IT) systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.

Negative events in the animal health industry could have a ~~negative impact~~material adverse effect on future results of ~~operations.~~operations and financial condition.

Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as ~~Bovine Spongiform Encephalopathy or mad cow disease,~~African Swine Fever, could lead to their widespread death and precautionary

destruction as well as the reduced consumption and demand for animals, which could adversely ~~impact~~affect the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt ~~production~~the manufacture of ~~vaccines~~its animal health products at such sites or force the Company to incur substantial expenses in procuring raw materials or ~~vaccines~~products elsewhere. Other risks specific to animal health include epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.

Biologics and vaccines carry unique risks and uncertainties, which could have a ~~negative impact~~material adverse effect on the Company’s future results of ~~operations.~~operations and financial condition.

The successful development, testing, manufacturing and commercialization of biologics and vaccines, particularly human and animal health vaccines, is a long, complex, expensive and uncertain process. There are unique risks and uncertainties ~~with~~related to biologics and vaccines, including:

•There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.

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•The development, manufacturing and marketing of biologics and vaccines are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both ~~preclinical~~pre-clinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates, and FDA approval is generally required for the release of each manufactured commercial lot.

•Manufacturing biologics and vaccines, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic and vaccine must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.

•Biologics and vaccines are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics and vaccines cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.

•The use of biologically derived ingredients can lead to variability in the manufacturing process and could lead to allegations of harm, including infections or allergic reactions, which allegations would be reviewed through a standard investigation process that could lead to closure of product facilities due to possible contamination. Any of these events could result in substantial costs.

Risks Relating to Government Regulation and Legal Proceedings

The health care industry in the United States has been, and will continue to be, subject to increasing regulation and political action.

As discussed above “Competition and the Health Care Environment,” the Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by the Executive branch, Congress and state legislatures.

In 2010, the United States enacted major health care reform legislation in the form of the ACA. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. The ACA increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.

The ACA also requires pharmaceutical manufacturers to pay 70% of the cost of medicine, including biosimilar products, when Medicare Part D beneficiaries are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). In 2020, the Company’s revenue was reduced by approximately $700 million due to this requirement. Also, pharmaceutical manufacturers are required to pay an annual non-tax deductible health care reform fee. In 2020, the Company recorded $85 million of costs for this annual fee.

In February 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implemented provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. More recently, although CMS previously declined to define what constitutes a product “line extension” (beyond the statutory definition), CMS issued a new rule on December 21, 2020 that will significantly expand the definition of the term “line extension” as of January 1, 2022 to include a broad range of products, including products reflecting new strengths, dosage forms, release mechanisms, and routes of administration. This expanded definition will increase the number of drugs subject to a higher Medicaid rebate. Effective January 1, 2023, this final rule also changes the way that manufacturers must calculate Best Price, in relation to certain patient support programs, including coupons, which also may result in an increase in

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the Company’s Medicaid rebates. The impact of these and other provisions in this final rule could adversely impact the Company’s business, cash flow, results of operations, financial condition and prospects.

As discussed above in “Competition and the Health Care Environment,” in November 2020, the Department of Health and Human Services Office of Inspector General (OIG) issued a Final Rule that would, effective January 1, 2023, eliminate the Anti-Kickback Statute safe harbor for rebates paid to Medicare Part D plans or to PBMs on behalf of such plans. While the Company cannot anticipate the effects of this change to the way it currently contracts, this new framework could significantly alter the way it does business with Part D Plan Sponsors and PBMs on behalf of such plans.

On November 20, 2020, CMS also issued the MFN Rule, which was intended to be effective January 1, 2021, to institute a new pricing system for certain prescription drugs and biologic products covered by Medicare Part B in which Medicare would reimburse no more than the “most favored nation price,” meaning the lowest price after adjusting for volume and differences in gross domestic product, for the top fifty Part B reimbursed products, which includes Keytruda, sold in 22 member countries of the OECD, rather than use the current Average Sales Price (“ASP”)-based payment framework for certain physician-administered drugs. Implementation of the MFN Rule could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

The FDA also recently issued rulemaking allowing the commercial importation of certain prescription drugs from Canada through FDA-authorized, time-limited programs sponsored by states or Native American tribes recognized under the rule, and, in certain future circumstances, pharmacists and wholesalers. The FDA also recently released a final guidance for industry detailing procedures for drug manufacturers to import FDA-approved prescription drug, biological, and combination products that were manufactured abroad and authorized and intended for sale in a foreign country. These changes, if they become effective, could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

Several organizations, including two trade groups of which Merck is a member, have filed suit challenging the MFN Rule. Those lawsuits remain pending with a preliminary injunction having been entered in one of the cases. A trade organization in which Merck is a member brought suit, which is pending, in federal district court challenging the commercial importation rule.

The Company cannot predict the likelihood of these regulations becoming effective or what additional future changes in the health care industry in general, or the pharmaceutical industry in particular, will occur, however, these changes could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.

The Company’s activities, including research, pre-clinical testing, clinical trials and the manufacturing and marketing of its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU, Japan and China. In the United States, the FDA administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, reduction in the cost of drugs. The FDA and foreign regulatory authorities, including in Japan and China, have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.

Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the products in that jurisdiction. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.

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Developments following regulatory approval may adversely affect sales of the Company’s products.

Even after a product reaches the market, certain developments following regulatory approval may decrease demand for the Company’s products, including the following:

•results in post-approval Phase 4 trials or other studies;

•the re-review of products that are already marketed;

•the recall or loss of marketing approval of products that are already marketed;

•changing government standards or public expectations regarding safety, efficacy, quality or labeling changes; and

•scrutiny of advertising and promotion.

In the past, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.

In addition, following in the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA, Japan’s PMDA and China’s NMPA have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications.

If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities. In addition, dissemination of promotional materials through evolving digital channels serves to increase visibility and scrutiny in the marketplace.

The Company is subject to a variety of U.S. and international laws and regulations.

The Company is currently subject to a number of government laws and regulations and, in the future, could become subject to new government laws and regulations. The costs of compliance with such laws and regulations, or the negative results of non-compliance, could adversely affect the business, cash flow, results of operations, financial condition and prospects of the Company; these laws and regulations include (i) additional health care reform initiatives in the United States or in other countries, including additional mandatory discounts or fees; (ii) the U.S. Foreign Corrupt Practices Act or other anti-bribery and corruption laws; (iii) new laws, regulations and judicial or other governmental decisions affecting pricing, drug reimbursement, and access or marketing within or across jurisdictions; (iv) changes in intellectual property laws; (v) changes in accounting standards; (vi) new and increasing data privacy regulations and enforcement, particularly in the EU and the United States; (vii) legislative mandates or preferences for local manufacturing of pharmaceutical or vaccine products; (viii) emerging and new global regulatory requirements for reporting payments and other value transfers to health care professionals; (ix) environmental regulations; and (x) the potential impact of importation restrictions, embargoes, trade sanctions and legislative and/or other regulatory changes.

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The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations and financial condition.

The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. In addition, the Company may be negatively affected by changes in tax laws, or new tax laws, affecting, for example, tax rates, and/or revised tax law interpretations in domestic or foreign jurisdictions.

Product liability insurance for products may be limited, cost prohibitive or unavailable.

As a result of a number of factors, product liability insurance has become less available while the cost of such insurance has increased significantly. The Company is subject to a substantial number of product liability claims. See Item 8. “Financial Statements and Supplementary Data,” Note ~~11.~~10. “Contingencies and Environmental Liabilities” below for more information on the Company’s current product liability litigation. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely

benefits of the coverage that is available and, as such, has no insurance for ~~certain~~most product ~~liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date.~~liabilities. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.

Risks Related to Technology

The Company is increasingly dependent on sophisticated software applications, complex information technology systems, computing infrastructure, and cloud service providers (collectively, IT systems) to conduct critical operations. Certain of these systems are managed, hosted, provided or used by third parties to assist in conducting the Company’s business. Disruption, degradation, or manipulation of these IT systems through intentional or accidental means by the Company’s employees, third parties with authorized access or unauthorized third parties could adversely affect key business processes. Cyber-attacks against the Company’s IT systems or third-party providers’ IT systems, such as cloud-based systems, could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of any of these IT systems could result in the disclosure of sensitive personal information or the theft of trade secrets, intellectual property, or other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks.

In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations, and resulting losses.

The Company has implemented a variety of measures to further enhance and modernize its systems to guard against similar attacks in the future, and also is pursuing an enterprise-wide effort to enhance the Company's resiliency against future cyber-attacks, including incidents similar to the 2017 attack. The objective of these efforts is not only to protect against future cyber-attacks, but also to improve the speed of the Company’s recovery from such attacks and enable continued business operations to the greatest extent possible during any recovery period.

Although the aggregate impact of cyber-attacks and network disruptions, including the 2017 cyber-attack, on the Company’s operations and financial condition has not been material to date, the Company continues to be a target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company IT systems to reduce these risks and continues to do so on an ongoing

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basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and IT systems or the efforts of third-party providers to protect their IT systems will be successful in preventing disruptions to the Company’s operations, including its manufacturing, research and sales operations. Such disruptions have in the past and could in the future result in loss of revenue, or the loss of critical or sensitive information from the Company’s or the Company’s third-party providers’ databases or IT systems and have in the past and could in the future also result in financial, legal, business or reputational harm to the Company and substantial remediation costs.

Social media platforms present risks and challenges.

The inappropriate and/or unauthorized use of certain social media ~~vehicles~~channels could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company or its products on any social networking ~~web site~~platforms could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.

Risks Related to the Proposed Spin-Off of Organon

The proposed Spin-Off of Organon may not be completed on the terms or timeline currently contemplated, if at all, and may not achieve the expected results.

In February 2020, the Company announced its intention to Spin-Off products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company, which has been named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The transaction is expected to be completed late in the second quarter of 2021. Completion of the Spin-Off will be subject to a number of factors and conditions, and there can be no assurances that the Company will be able to complete the Spin-Off on the terms or on the timeline that was announced, if at all. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed Spin-Off, including but not limited to disruptions in general or financial market conditions or potential problems or delays in obtaining various regulatory and tax approvals or clearances. In addition, consummation of the proposed Spin-Off will require final approval from the Company’s Board of Directors.

The costs to complete the proposed Spin-Off will be significant. In addition, the Company may be unable to achieve some or all of the strategic and financial benefits that it expects to achieve from the Spin-Off of Organon.

The Company will incur significant expenses in connection with the Spin-Off. In addition, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the Spin-Off. The anticipated benefits of the Spin-Off are based on a number of assumptions, some of which may prove incorrect.

Following the Spin-Off, the price of shares of the Company’s common stock may fluctuate significantly.

The Company cannot predict the effect of the Spin-Off on the trading price of shares of its common stock, and the market value of shares of its common stock may be less than, equal to or greater than the market value of shares of its common stock prior to the Spin-Off. In addition, the price of Merck’s common stock may be more volatile around the time of the Spin-Off.

There could be significant income tax liability if the Spin-Off or certain related transactions are determined to be taxable for U.S. federal income tax purposes.

The Company expects that prior to completion of the Spin-Off it will receive an opinion from its U.S. tax counsel that concludes, among other things, that the Spin-Off of all of the outstanding Organon shares to Merck

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shareholders and certain related transactions will qualify as tax-free to Merck and its shareholders under Sections 355 and 368 of the U.S. Internal Revenue Code, except to the extent of any cash received in lieu of fractional shares of Organon common stock. Any such opinion is not binding on the Internal Revenue Service (IRS). Accordingly, while the Company believes the risk is low, the IRS may reach conclusions with respect to the Spin-Off that are different from the conclusions reached in the opinion. The opinion will rely on certain facts, assumptions, representations and undertakings from Merck and Organon regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion.

If the proposed Spin-Off ultimately is determined to be taxable, which the Company believes is unlikely, the Spin-Off could be treated as a taxable dividend to Merck’s shareholders for U.S. federal income tax purposes, and Merck’s shareholders could incur significant U.S. federal income tax liabilities. In addition, Merck would recognize a taxable gain to the extent that the fair market value of Organon common stock exceeds Merck’s tax basis in such stock on the date of the Spin-Off.

Cautionary Factors that May Affect Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning, or negative variations of any of the foregoing. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product ~~development, product~~ approvals, product potential, development programs and ~~development programs.~~include statements related to the expected impact of the COVID-19 pandemic. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:

•Competition from generic and/or biosimilar products as the Company’s products lose patent protection.

•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.

•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.

•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.

•The impact of the global COVID-19 pandemic and any future pandemic, epidemic, or similar public health threat, on the Company’s business, operations and financial performance.

•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.

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•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.

•Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.

•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.

•Cyber-attacks on the Company’s or third-party providers’ information technology systems, which could disrupt the Company’s operations.

•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.

•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.

•Changes in tax laws including changes related to the taxation of foreign earnings.

•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.

•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.

•The proposed Spin-Off might be delayed or the costs to complete the Spin-Off might be more significant than expected.

This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.


~~Item 1B.~~	~~Unresolved Staff Comments.~~

Item 1B.Unresolved Staff Comments.

None.


~~Item 2.~~	~~Properties.~~

Item 2.Properties.

The Company’s corporate headquarters is currently located in Kenilworth, New Jersey. The ~~Company’s U.S. commercial operations are headquartered~~Company has previously announced that it intends to consolidate its New Jersey campuses into a single corporate headquarters location in Rahway, New Jersey by the end of 2023. The Company also maintains operational or divisional headquarters in Kenilworth, New Jersey; Madison, New Jersey and Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania. Merck’s Animal Health global headquarters is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New ~~Jersey,~~Jersey; West Point, ~~Pennsylvania, Palo Alto, California,~~Pennsylvania; Boston, ~~Massachusetts,~~Massachusetts; South San Francisco, California; and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in the United Kingdom, Switzerland and China. Merck’s manufacturing operations are currently headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia. A number of properties will be transferred to Organon in the Spin-Off.

Capital expenditures were ~~$1.9~~$4.7 billion in ~~2017, $1.6~~2020, $3.5 billion in ~~2016~~2019 and ~~$1.3~~$2.6 billion in ~~2015.~~2018. In the United States, these amounted to ~~$1.2~~$2.7 billion in ~~2017, $1.0~~2020, $1.9 billion in ~~2016~~2019 and ~~$879 million~~$1.5 billion in ~~2015.~~2018. Abroad, such expenditures amounted to ~~$728 million~~$2.0 billion in ~~2017, $594 million~~2020, $1.6 billion in ~~2016~~2019, and ~~$404 million~~$1.1 billion in ~~2015.~~2018.

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The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. ~~Plants~~The Company believes that its plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities, including previously-disclosed capital expansion projects, that will be adequate for current and projected needs for existing

Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.


~~Item 3.~~	~~Legal Proceedings.~~

Item 3.Legal Proceedings.

The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note ~~11.~~10. “Contingencies and Environmental Liabilities”.


~~Item 4.~~	~~Mine Safety Disclosures.~~

Item 4.Mine Safety Disclosures.

Not Applicable.

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Executive Officers of the Registrant (ages as of February 1, ~~2018)~~2021)

All officers listed below serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and any other person(s).



Name			Age		Offices and Business Experience
Kenneth C. Frazier			6366		Chairman, President and Chief Executive Officer (since December 2011)
Sanat Chattopadhyay			5861		Executive Vice President and President, Merck Manufacturing Division (since March 2016)~~; Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)~~
~~Robert M. Davis~~Frank Clyburn			5156		Executive Vice President, Chief Commercial Officer (since January 2019); President, Global Oncology Business Unit (October 2013-December 2018)
Robert M. Davis			54		Executive Vice President, Global Services, and Chief Financial Officer ~~& Global Services~~ (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016)~~; Corporate Vice President and President, Medical Products, Baxter International, Inc. (2010-March 2014)~~
Richard R. DeLuca, Jr.			5558		Executive Vice President and President, Merck Animal Health (since September 2011)
Michael W. Fleming			62		Senior Vice President, Chief Ethics and Compliance Officer (since March 2019); Senior Vice President, International Legal and Compliance (January 2017-March 2019); Vice President, International Legal and Compliance (July 2008-January 2017)
Julie L. Gerberding			6265		Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016)~~; President, Merck Vaccines (January 2010-January 2015)~~
~~Mirian M. Graddick-Weir~~			63	~~Executive Vice President, Human Resources (since November 2009)~~
Michael J. Holston*	55	~~Executive Vice President and General Counsel (since July 2015); Executive Vice President and Chief Ethics and Compliance Officer (June 2012-July 2015)~~
Rita A. Karachun	5457			Senior Vice President Finance - Global Controller (since March 2014)~~; Assistant Controller (November 2009-March 2014)~~
~~Roger M. Perlmutter, M.D., Ph.D.~~Dean Li			6558		~~Executive Vice President and~~ President, Merck Research Laboratories (since ~~April 2013)~~January 2021); Senior Vice President, Discovery Sciences and Translational Medicine, Merck Research Laboratories (November 2017-January 2020); Vice President, Translational Medicine (March 2017-November 2017); Prior to that, Chief Scientific Officer and Associate Vice President, University of Utah Health Sciences
~~Adam H. Schechter~~Steven C. Mizell			5360		Executive Vice President, ~~and~~Chief Human Resources Officer (since December 2016); Executive Vice President, Human Resources, Monsanto Company (August 2011-December 2016)
Michael T. Nally			45		Executive Vice President, Chief Marketing Officer (since January 2019); President, Global Vaccines, Global Human Health ~~(since May 2010)~~(September 2016-January 2019); Managing Director, United Kingdom and Ireland, Global Human Health (January 2014-September 2016)
~~Ashley Watson~~Jennifer Zachary			4943		~~Senior~~Executive Vice President, ~~Chief Ethics and Compliance Officer (since March 2015); Senior Vice President, Deputy~~ General Counsel and ~~Chief Ethics~~Corporate Secretary (since January 2020); Executive Vice President and General Counsel (April 2018-January 2020); Partner, Covington & ~~Compliance Officer, Hewlett-Packard Company~~Burling LLP (January ~~2011 - March 2015)~~2013-March 2018)

In February 2021, Merck announced that Kenneth C. Frazier, chairman and chief executive officer, will retire as chief executive officer, effective June 30, 2021. Mr. Frazier will continue to serve on Merck’s Board of Directors as executive chairman, for a transition period to be determined by the board. The Merck Board of Directors has unanimously elected Robert M. Davis, Merck’s current executive vice president, global services and chief financial officer, as chief executive officer, as well as a member of the board, effective July 1, 2021. Mr. Davis will become president of Merck, effective April 1, 2021, at which time the Company’s operating divisions—Human Health, Animal Health, Manufacturing, and Merck Research Laboratories—will begin reporting to Mr. Davis.


^* 44 Table of Content s	~~On February 21, 2018, Mr. Holston notified the Company that he will resign from his position with the Company, effective April 1, 2018.~~

PART II


~~Item 5.~~	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.~~

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (NYSE) under the symbol MRK. ~~The Common Stock market price information set forth in the table below is based on historical NYSE market prices.~~

The following table also sets forth, for the calendar periods indicated, the cash dividends paid per common share and the high and low sales prices of the Company’s Common Stock as reported by the NYSE.

Cash Dividends Paid per Common Share
Year
4th Q
3rd Q
2nd Q
1st Q
2017 $ 1.88
$ 0.47
$ 0.47
$ 0.47
$ 0.47
2016 $ 1.84
$ 0.46
$ 0.46
$ 0.46
$ 0.46
Common Stock Market Prices

2017 4th Q
3rd Q
2nd Q
1st Q
High 64.90
66.41
66.40
66.80
Low 53.63
61.16
61.87
59.05
2016
High $ 65.46
$ 64.00
$ 57.87
$ 53.60
Low $ 58.29
$ 57.18
$ 52.44
$ 47.97

As of January 31, ~~2018,~~2021, there were approximately ~~121,125~~104,900 shareholders of record of the Company’s Common Stock.

Issuer purchases of equity securities for the three months ended December 31, ~~2017~~2020 were as follows:

Issuer Purchases of Equity Securities


			($ in millions)
Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1)
October 1 — October 31	—	$0.00	$5,888
November 1 — November 30	—	$0.00	$5,888
December 1 — December 31	—	$0.00	$5,888
Total	—	$0.00	$5,888

(1)The Company did not purchase any shares during the three months ended December 31, 2020 under the plan approved by the Board of Directors in October 2018 to purchase up to $10 billion in Merck shares for its treasury.

($ in millions)
Period
Total Number
of Shares
Purchased⁽¹⁾

Average Price
Paid Per
Share

Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs⁽¹⁾
October 1 — October 31 2,172,335 $63.38 $2,605
November 1 — November 30 11,850,338 $55.03 $1,953
December 1 — December 31 16,285,000 $56.05 $11,040
Total 30,307,673 $56.17 $11,040

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⁽¹⁾	All shares purchased during the period were made as part of a plan approved by the Board of Directors in March 2015 to purchase up to $10 billion in Merck shares. In November 2017, the Board of Directors authorized additional purchases of up to $10 billion of Merck’s common stock for its treasury. Shares are approximated.

Performance Graph

The following graph assumes a $100 investment on December 31, ~~2012,~~2015, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of major U.S. and European-based pharmaceutical companies, which are: AbbVie Inc., Amgen Inc., AstraZeneca plc, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, GlaxoSmithKline plc, Novartis AG, Pfizer Inc., Roche Holding AG, and Sanofi SA.

Comparison of Five-Year Cumulative Total Return*

Merck & Co., Inc., Composite Peer Group and S&P 500 Index


	End of Period Value	2020/2015 CAGR*
MERCK	$180	12%
PEER GRP.**	157	9%
S&P 500	203	15%

End of
Period Value

2017/2012
CAGR**
MERCK $162 10%
PEER GRP.** 185 13%
S&P 500 208 16%


	2015	2016	2017	2018	2019	2020
MERCK	100.0	115.1	113.4	158.9	194.3	180.1
PEER GRP.	100.0	96.9	116.1	124.1	147.2	157.2
S&P 500	100.0	112.0	136.4	130.4	171.4	203.0

* Compound Annual Growth Rate

** Peer group average was calculated on a market cap weighted basis.

2012 2013 2014 2015 2016 2017
MERCK 100.00 126.90 148.70 142.70 164.30 161.80
PEER GRP. 100.00 134.60 150.20 154.70 151.60 184.70
S&P 500 100.00 132.40 150.50 152.50 170.80 208.10


*	~~Compound Annual Growth Rate~~


**	~~Peer group average was calculated on a market cap weighted basis.~~

This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. In addition, the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.


~~Item 6.~~	~~Selected Financial Data.~~

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following ~~selected financial data should~~section of this Form 10-K generally discusses 2020 and 2019 results and year-to-year comparisons between 2020 and 2019. Discussion of 2018 results and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be ~~read~~found in ~~conjunction with Item 7.~~ “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~and consolidated financial statements and notes thereto contained~~ in Part II, Item ~~8. “Financial Statements and Supplementary Data”~~7 of ~~this report.~~the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on February 26, 2020.

~~Merck & Co., Inc. and Subsidiaries~~

~~($ in millions except per share amounts)~~

2017 ⁽¹⁾

2016⁽²⁾

2015⁽³⁾

2014 ⁽⁴⁾
2013
Results for Year:
Sales $ 40,122
$ 39,807
$ 39,498
$ 42,237
$ 44,033
Materials and production 12,775
13,891
14,934
16,768
16,954
Marketing and administrative 9,830
9,762
10,313
11,606
11,911
Research and development 10,208
10,124
6,704
7,180
7,503
Restructuring costs 776
651
619
1,013
1,709
Other (income) expense, net 12
720
1,527
(11,613 ) 411
Income before taxes 6,521
4,659
5,401
17,283
5,545
Taxes on income 4,103
718
942
5,349
1,028
Net income 2,418
3,941
4,459
11,934
4,517
Less: Net income attributable to noncontrolling interests 24
21
17
14
113
Net income attributable to Merck & Co., Inc. 2,394
3,920
4,442
11,920
4,404
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders $ 0.88
$ 1.42
$ 1.58
$ 4.12
$ 1.49
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders $ 0.87
$ 1.41
$ 1.56
$ 4.07
$ 1.47
Cash dividends declared 5,177
5,135
5,115
5,156
5,132
Cash dividends declared per common share $ 1.89
$ 1.85
$ 1.81
$ 1.77
$ 1.73
Capital expenditures 1,888
1,614
1,283
1,317
1,548
Depreciation 1,455
1,611
1,593
2,471
2,225
Average common shares outstanding (millions) 2,730
2,766
2,816
2,894
2,963
Average common shares outstanding assuming dilution (millions) 2,748
2,787
2,841
2,928
2,996
Year-End Position:
Working capital $ 6,152
$ 13,410
$ 10,550
$ 14,198
$ 17,461
Property, plant and equipment, net 12,439
12,026
12,507
13,136
14,973
Total assets 87,872
95,377
101,677
98,096
105,370
Long-term debt 21,353
24,274
23,829
18,629
20,472
Total equity 34,569
40,308
44,767
48,791
52,326
Year-End Statistics:
Number of stockholders of record 121,700
129,500
135,500
142,000
149,400
Number of employees 69,000
68,000
68,000
70,000
77,000


⁽¹⁾	~~Amounts for 2017 include a provisional net tax charge related to the enactment of U.S. tax legislation and a charge related to the formation of a collaboration with AstraZeneca.~~


⁽²⁾	~~Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to~~ ~~Keytruda~~.


⁽³⁾	~~Amounts for 2015 include a net charge related to the settlement of~~ ~~Vioxx~~ ~~shareholder class action litigation, foreign exchange losses related to Venezuela, gains on the dispositions of businesses and other assets and the favorable benefit of certain tax items.~~


⁽⁴⁾	Amounts for 2014 reflect the divestiture of Merck’s Consumer Care business on October 1, 2014, including a gain on the sale, as well as a gain recognized on an option exercise by AstraZeneca, gains on the dispositions of other businesses and assets, and a loss on extinguishment of debt.


~~Item 7.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

Description of Merck’s Business

Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include ~~four~~two operating segments, which are the Pharmaceutical and Animal Health ~~Healthcare Services and Alliances~~segments, both of which are reportable segments. ~~The Pharmaceutical segment is the only reportable segment.~~

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. ~~Vaccine~~Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. On December 31, 2016, Merck and Sanofi Pasteur S.A. (Sanofi) terminated their equally-owned joint venture, Sanofi Pasteur MSD (SPMSD), which developed and marketed vaccines in Europe. Beginning in 2017, Merck is recording vaccine sales and incurring costs as a result of operating its vaccines business in the European markets that were previously part of the SPMSD joint venture, which was accounted for as an equity method affiliate.

The ~~Company also has an~~ Animal Health segment ~~that~~ discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal ~~health products, including vaccines, which the~~species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors and animal producers.

The ~~Company’s~~Company previously had a Healthcare Services segment ~~provides~~that provided services and solutions ~~that focus~~focused on engagement, health analytics and clinical services to improve the value of care delivered to patients. The Company divested the remaining businesses in this segment in the first quarter of 2020.

The Company previously had an Alliances segment that primarily included activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.

Planned Spin-Off of Women’s Health, Biosimilars and Established Brands into a New Company

In February 2020, Merck announced its intention to spin-off products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The established brands included in the transaction consist of dermatology, non-opioid pain management, respiratory, and select cardiovascular products including Zetia and Vytorin, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs will continue to be owned and developed within Merck as planned. Organon will have development capabilities initially focused on late-stage development and life-cycle management and is expected over time to develop research capabilities in selected therapeutic areas. The spin-off is expected to be completed late in the second quarter of 2021, subject to market and certain other conditions.

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Overview

~~During 2017, Merck continued~~Financial Highlights


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019
Sales	$	47,994	2	%	4	%	$	46,840

Net Income Attributable to Merck & Co., Inc.	7,067		(28)	%	(25)	%	9,843
Non-GAAP Net Income Attributable to Merck & Co., Inc. (1)	15,082		13	%	16	%	13,382

Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$2.78		(27)	%	(24)	%	$3.81
Non-GAAP Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders (1)	$5.94		14	%	17	%	$5.19

(1) Non-GAAP net income and non-GAAP earnings per share (EPS) exclude acquisition and divestiture-related costs, restructuring costs and certain other items. For further discussion and a reconciliation of GAAP to ~~bring innovation to patients~~non-GAAP net income and ~~physicians, expanding its focus in oncology~~EPS (see “Non-GAAP Income and ~~advancing other programs in its late-stage pipeline. Throughout 2017,~~ ~~Keytruda~~, the Company’s anti-PD-1 (programmed death receptor-1) therapy, received approval for several additional indications globally, including U.S. Food and Drug Administration (FDA) approval in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous non-small-cell lung cancer (NSCLC), irrespective of PD-L1 expression. ~~Keytruda~~ is the only anti-PD-1 treatment approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In addition, Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor, which is being developed in a collaboration, received FDA approval for the treatment of patients with germline BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy. Additionally, in November 2017, the FDA approved ~~Prevymis~~ ~~for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease, and in December 2017, the FDA approved~~ ~~Steglatro,Steglujan~~ ~~and~~ ~~Segluromet~~ ~~for the treatment of type 2 diabetes. In January 2018,~~ ~~Prevymis~~ ~~was also approved in the European Union (EU)~~Non-GAAP EPS” below).

Executive Summary

Worldwide sales were ~~$40.1~~$48.0 billion in ~~2017,~~2020, an increase of 1%2% compared with ~~2016. Sales growth~~2019, or 4% excluding the unfavorable effect from foreign exchange. The sales increase was driven primarily by ~~the launches of~~ ~~Keytruda~~, ~~Zepatier~~oncology, certain hospital acute care products and ~~Bridion~~, as well as positive performance from Merck’s Animal Health business. In addition, revenue in 2017 benefited from the sale of vaccines in the markets that were previously part of the now-terminated SPMSD vaccines joint venture.animal health. Growth in these areas was largely offset by the negative effects of the coronavirus disease 2019 (COVID-19) pandemic as discussed below, the effects of generic competition, particularly in the diversified brands and ~~biosimilar competition that resulted~~women’s health franchises, competitive pressure in the virology franchise and pricing pressure in the diabetes franchise.

During 2020, Merck continued executing on its strategic priorities reporting year-over-year sales ~~declines for~~growth despite the business challenges posed by the COVID-19 pandemic. Roughly two-thirds of Merck’s Pharmaceutical segment revenue is comprised of physician-administered products, ~~including~~ ~~Zetia~~, ~~Vytorin~~, ~~Cubicin~~sales of which were negatively affected in 2020 by patients’ inability to access health care providers, fewer well visits, and ~~Remicade~~.

~~Augmenting Merck’s portfolio and pipeline with external innovation remains an important component of~~social distancing measures. However, in the Company’s overall strategy. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an oral PARP inhibitor currently approved for certain types of ovarian and breast cancer. The companies will develop and commercialize Lynparza both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD‑L1 medicines. The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK,latter part of the ~~mitogen-activated protein kinase (MAPK) pathway, currently being~~year, the Company experienced a partial recovery in the underlying demand for products across its key growth pillars. Despite the pandemic, Merck employees across the organization continued their important work, enrolling and maintaining clinical studies, progressing the pipeline and ensuring the supply of and patient access to the Company’s portfolio of medically important medicines and vaccines. The Company also executed on Merck’s capital allocation priorities by completing business development transactions and investing in its pipeline. Additionally, the Company remains on track to complete the spin-off of Organon late in the second quarter of 2021 thereby creating two companies, each focused on their strengths and portfolios allowing them to pursue their respective market opportunities and business strategies. In 2020, the products that will comprise Organon had total sales of $6.5 billion.

~~developed~~Merck actively monitors the business development landscape for ~~multiple indications including thyroid cancer. In addition, in October 2017,~~growth opportunities that meet the Company’s strategic criteria. To expand its oncology presence, Merck ~~acquired Rigontec GmbH (Rigontec)~~completed the acquisitions of ArQule, Inc. (ArQule), a ~~leader in accessing the retinoic acid-inducible gene I pathway, part of the innate immune system, as a novel~~biopharmaceutical company focused on kinase inhibitor discovery and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity. Also, in March 2017, Merck acquired a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil.

~~Merck continues to prioritize resources to maximize opportunities for ongoing and upcoming product launches.~~ ~~Keytruda~~ ~~is launching around the world in multiple indications. In 2017, Merck achieved multiple additional regulatory milestones for~~ ~~Keytruda, including approval from the FDA as combination therapy for appropriate patients with metastatic NSCLC as noted above, as well as monotherapy approval~~development for the treatment of ~~certain patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma;~~cancer and other diseases; and VelosBio Inc. (VelosBio), a clinical-stage biopharmaceutical company committed to developing first-in-class cancer therapies targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1) currently being evaluated for the treatment of ~~certain~~ patients with ~~locally advanced or metastatic urothelial carcinoma,~~hematologic malignancies and solid tumors. Additionally, Merck entered into strategic collaboration agreements with Seagen to gain access to ladiratuzumab vedotin, an investigational antibody-drug conjugate targeting LIV-1, and Tukysa (tucatinib), a ~~type of bladder cancer;~~small molecule tyrosine kinase inhibitor for the treatment of ~~adult~~human epidermal growth factor receptor 2 (HER2)-positive cancers. To augment Merck’s animal health business, the Company acquired the U.S. rights to Sentinel Flavor Tabs and ~~pediatric patients with classical Hodgkin lymphoma (cHL); and~~Sentinel Spectrum Chews.

As part of industry-wide efforts to develop solutions to the pandemic, the Company acquired OncoImmune, a company developing a therapeutic candidate for the treatment of ~~adult~~patients hospitalized with COVID-19; and ~~pediatric~~Themis Bioscience GmbH (Themis), a company focused on vaccines and immune-modulation therapies for infectious diseases, including a COVID-19 vaccine candidate. Additionally, Merck entered into

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strategic collaborations with Ridgeback Biotherapeutics LP (Ridgeback Bio) to develop an orally available antiviral candidate in clinical development for the treatment of patients with ~~unresectable or~~COVID-19; and with the International AIDS Vaccine Initiative, Inc. (IAVI) to develop an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. In January 2021, the Company announced it was discontinuing development of the COVID-19 vaccine candidates (see Note 3 to the consolidated financial statements).

During 2020, the Company received numerous regulatory approvals within oncology. Keytruda received approval in the United States as monotherapy in the therapeutic areas of cutaneous squamous cell carcinoma (cSCC), metastatic microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) colorectal cancer, non-muscle invasive bladder cancer (NMIBC) and tumor mutational burden-high (TMB-H) solid ~~tumors. During 2017,~~ ~~Keytruda~~tumors, as well as in combination with chemotherapy for the treatment of triple-negative breast cancer (TNBC). Merck also received approval in the EUUnited States for an every six weeks (Q6W) dosing regimen across all adult indications. Additionally, Keytruda received approval in China for the treatment of certain patients with ~~cHL~~head and ~~urothelial carcinoma.~~neck squamous cell carcinoma (HNSCC) and in both China and Japan for the treatment of certain patients with esophageal squamous cell carcinoma (ESCC). Lynparza, which is being developed in collaboration with AstraZeneca PLC (AstraZeneca), received approval in the United States: in combination with bevacizumab as a first-line maintenance treatment of certain adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy; and for the treatment of certain adult patients with metastatic castration-resistant prostate cancer (mCRPC) following progression on prior treatment. Additionally, Lynparza was approved in the European Union (EU): as monotherapy for the treatment of adult patients with mCRPC and BRCA1/2 mutations who have progressed following a prior therapy; and for the maintenance treatment of certain adult patients with metastatic adenocarcinoma of the pancreas. Lynparza was also approved in Japan for the treatment of three types of advanced cancer: ovarian, prostate and pancreatic cancer. Lenvima, which is being developed in collaboration with Eisai Co., Ltd. (Eisai), received approval in China as monotherapy for the treatment of differentiated thyroid cancer.

~~Merck continues~~Also in 2020, Gardasil 9 was approved for use in women and girls in Japan where it is marketed as Silgard 9. Additionally, in 2020, the U.S. Food and Drug and Administration (FDA) granted accelerated approval for an expanded indication for Gardasil 9 for the prevention of oropharyngeal and other head and neck cancers caused by certain HPV types. In January 2021, the Company received FDA approval for Verquvo (vericiguat), to ~~evaluate its pipeline, focusing its research efforts on~~reduce the ~~opportunities it believes have the greatest potential to address unmet medical needs.~~ risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults. Verquvo is being jointly developed with Bayer AG (Bayer).

In addition to the recent regulatory approvals discussed above, the Company ~~has continued to advance other programs in~~advanced its late-stage pipeline with several regulatory submissions. ~~MK-1439, doravirine, an investigational, non-nucleoside reverse transcriptase inhibitor~~Keytruda is under review in United States and/or internationally for the treatment of ~~HIV-1 infection,~~certain patients with TNBC, classical Hodgkin Lymphoma (cHL), colorectal cancer, cSCC, esophageal and ~~MK-1439A, doravirine with lamivudine and tenofovir disoproxil fumarate, are currently~~gastric cancer. Lenvima is under review ~~with the FDA. In addition, the FDA accepted for review a supplemental Biologics License Application (BLA) for~~ ~~Keytruda~~in Japan as monotherapy for the treatment of ~~adult~~thymic cancer. V114, an investigational 15-valent pneumococcal conjugate vaccine, is under priority review by the FDA for the prevention of invasive pneumococcal disease in adults 18 years of age and ~~pediatric patients with refractory primary mediastinal B-cell lymphoma (PMBCL)~~older. The European Medicines Agency (EMA) is also reviewing an application for licensure of V114 in adults. The Company is involved in litigation challenging the validity of several Pfizer Inc. patents that ~~is refractory~~relate to ~~or has relapsed after two prior lines of therapy. Additionally,~~ ~~Steglatro,Steglujan~~ ~~and~~ ~~Segluromet~~ ~~are under review~~pneumococcal vaccine technology in the ~~EU.~~United States and several foreign jurisdictions.

The Company’s Phase 3 oncology programs include Keytruda in the therapeutic areas of ~~breast, colorectal, esophageal,~~biliary tract, cervical, cutaneous squamous cell, endometrial, gastric, ~~head and neck,~~ hepatocellular, ~~nasopharyngeal, renal~~mesothelioma, ovarian, prostate and small-cell lung cancers; Lynparza as monotherapy for ~~pancreatic~~colorectal cancer and ~~prostate cancer;~~in combination with Keytruda for non-small-cell lung and ~~selumetinib~~small-cell lung cancers; and Lenvima in combination with Keytruda for ~~thyroid cancer.~~ bladder, endometrial, gastric, head and neck, melanoma and non-small-cell lung cancers. Also within oncology, MK-6482, belzutifan, an investigational hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor being evaluated for the treatment of patients with von Hippel-Lindau disease-associated renal cell carcinoma (RCC), received Breakthrough Therapy designation from the FDA. Additionally, the Company has candidates in Phase 3 clinical development in several other therapeutic areas, ~~(see “Research~~including MK-7264, gefapixant, a selective, non-narcotic, orally-administered, investigational P2X3-receptor antagonist being developed for the treatment of refractory, chronic cough; MK-7110, an investigational treatment for patients hospitalized with COVID-19; MK-8591A, islatravir, an investigational nucleoside reverse transcriptase translocation inhibitor (NRTTI) in combination with doravirine for the treatment of HIV-1 infection; and ~~Development” below).~~V114, which is being evaluated for the prevention of pneumococcal disease in pediatric patients.

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The Company ~~continues~~is allocating resources to support its ~~innovation strategy by remaining disciplined and prioritizing resources wherever possible to not only fund investment~~commercial opportunities in the ~~many opportunities in Merck’s pipeline that it believes can help drive~~near term while making the necessary investments to support long-term ~~growth, but also fund near-term opportunities to grow revenue.~~ growth. Research and development expenses in ~~2017~~2020 reflect ~~increased~~higher costs related to business development activity, higher clinical development spending ~~as the Company continues to invest~~and increased investment in ~~the pipeline.~~discovery research and early drug development.

In November ~~2017,~~2020, Merck’s Board of Directors ~~raised~~approved an increase to the Company’s quarterly dividend, raising it to ~~$0.48~~$0.65 per share from ~~$0.47~~$0.61 per ~~share.~~share on the Company’s outstanding common stock. During ~~2017,~~2020, the Company returned ~~$9.2~~$7.5 billion to shareholders through dividends and share repurchases.

~~Earnings per common share assuming dilution attributable~~Management

In February 2021, Merck announced that Kenneth C. Frazier, chairman and chief executive officer, will retire as chief executive officer, effective June 30, 2021. Mr. Frazier will continue to ~~common shareholders (EPS)~~serve on Merck’s Board of Directors as executive chairman, for ~~2017 were $0.87 compared with $1.41 in 2016. EPS in both years reflect~~a transition period to be determined by the ~~impact~~board. The Merck Board of ~~acquisition~~Directors has unanimously elected Robert M. Davis, Merck’s current executive vice president, global services and ~~divestiture-related costs, which in 2016 includes a charge related to the uprifosbuvir clinical development program,~~chief financial officer, as chief executive officer, as well as ~~restructuring costs~~a member of the board, effective July 1, 2021. Mr. Davis will become president of Merck, effective April 1, 2021, at which time the Company’s operating divisions—Human Health, Animal Health, Manufacturing, and ~~certain other items, which~~Merck Research Laboratories (MRL)—will begin reporting to Mr. Davis.

COVID-19

Overall, in ~~2017 include a provisional net tax charge related~~response to the ~~recent enactment~~COVID-19 pandemic, Merck remains focused on protecting the safety of ~~U.S. tax legislation~~its employees, ensuring that its supply of medicines and ~~an aggregate charge related~~vaccines reaches its patients, contributing its scientific expertise to the ~~formation~~development of ~~a collaboration~~antiviral approaches, and supporting health care providers and Merck’s communities. Although COVID-19-related disruptions to patients’ ability to access health care providers negatively affected results in 2020, Merck remains confident in the fundamental underlying demand for its products and its prospects for long-term growth.

In 2020, the estimated negative impact of the COVID-19 pandemic to Merck’s sales was approximately $2.5 billion, largely attributable to the Pharmaceutical segment, with ~~AstraZeneca. Non-GAAP EPS,~~approximately $50 million attributable to the Animal Health segment. Roughly two-thirds of Merck’s Pharmaceutical segment revenue is comprised of physician-administered products, which, ~~exclude these items, were $3.98~~despite strong underlying demand, have been affected by social distancing measures, fewer well visits and delays in ~~2017 and $3.78~~elective surgeries due to the COVID-19 pandemic. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in ~~2016 (see “Non-GAAP Income and Non-GAAP EPS” below).~~

~~Cyber-attack~~

~~On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption~~reduced administration of ~~its worldwide operations, including manufacturing, research and sales operations. All~~many of the Company’s manufacturing sites are now operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging and shipping product. The Company’s external manufacturing was not impacted. Throughout this time, Merck continued to fulfill orders and ship product.

~~Due to the cyber-attack, as anticipated, the Company was unable to fulfill orders for certain~~human health products, in ~~certain markets, which had an unfavorable effect on sales in 2017 of approximately $260 million.~~particular for its vaccines, including Gardasil 9, as well as for Keytruda and Implanon/Nexplanon. In addition, declines in elective surgeries negatively affected the demand for Bridion. However, sales of Pneumovax 23 increased due to heightened awareness of pneumococcal vaccination.

~~Company recorded manufacturing-related~~Operating expenses were positively affected in 2020 by approximately $600 million primarily ~~unfavorable manufacturing variances, in~~ ~~Materials~~due to lower promotional and ~~production~~selling costs, as well as ~~expenses related to remediation efforts in~~ ~~Marketing and administrative~~ ~~expenses and~~ ~~Research~~lower research and development expenses, ~~which aggregated approximately $285 million in 2017,~~ net of ~~insurance recoveries~~investments in COVID-19-related antiviral and vaccine research programs.

Merck believes that global health systems and patients have largely adapted to the impacts of COVID-19, but the Company’s assumption is that ongoing residual negative impacts will persist, particularly during the first half of 2021 and most notably with respect to vaccine sales, with the impact expected to be more acute in the United States. For the full year of 2021, Merck assumes an unfavorable impact to revenue of approximately $45 million. Due to a residual backlog of orders for certain products, the Company anticipates that in 2018 sales will be unfavorably affected in certain markets by approximately $200 million from the cyber-attack. Merck does not expect a significant impairment2% due to the ~~value~~COVID-19 pandemic, all of ~~intangible assets related~~which relates to ~~marketed products or inventories~~Pharmaceutical segment sales. In addition, for the full year of 2021, with respect to the COVID-19 pandemic, Merck expects a net negative impact to operating expenses, as ~~a result~~spending on the development of its COVID-19 antiviral programs is expected to exceed the ~~cyber-attack.~~favorable impact of lower spending in other areas due to the COVID-19 pandemic.

~~As referenced above,~~Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the ~~Company has insurance coverage insuring against costs resulting from cyber-attacks~~U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and ~~has received insurance proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims related to this incident.~~

~~Additionally, the temporary production shut-down from the cyber-attack~~private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s ~~inability~~revenue performance in 2020 was negatively

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affected by other cost-reduction measures taken by governments and other third-parties to ~~meet higher than expected demand for~~ ~~Gardasil~~ ~~9, which resulted in Merck’s decision to borrow doses of~~ ~~Gardasil~~ 9 from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile. The Company subsequently replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017.lower health care costs. The Company anticipates ~~it will replenish the remaining borrowed doses~~all of these actions and additional actions in the ~~second half of 2018.~~future will continue to negatively affect revenue performance.

~~Hurricane Maria~~

In September 2017, Hurricane Maria made direct landfall on Puerto Rico. The Company has one plant in Puerto Rico that makes a limited number of its pharmaceutical products, and the Company also works with contract manufacturers on the island. Merck’s plant did not sustain substantial damage, and production activities at the plant have resumed. While power has been restored to the facility, it is not yet fully reliable and the plant continues to be prepared to use alternative sources of power and water. The Company is making progress to fully restore normal operations despite the significant damage to the island’s infrastructure. Supply chains within Puerto Rico are improving, but are not yet fully restored. There was an immaterial impact to sales in 2017 and the Company expects an immaterial impact to sales in 2018.

Operating Results

Sales


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
United States	$	21,027	2	%	2	%	$	20,519	12	%	12	%	$	18,346
International	26,967		2	%	5	%	26,321		10	%	13	%	23,949
Total	$	47,994	2	%	4	%	$	46,840	11	%	13	%	$	42,294

U.S. plus international may not equal total due to rounding.

Worldwide sales ~~were $40.1 billion~~grew 2% in ~~2017, an increase~~2020 due to higher sales in the oncology franchise reflecting strong growth of ~~1% compared with 2016. Sales~~Keytruda, as well as increased alliance revenue from Lynparza and Lenvima. Also contributing to revenue growth ~~in 2017 was driven primarily by~~were higher sales of ~~recently launched~~certain vaccines, including Gardasil/Gardasil 9 and Pneumovax 23, as well as increased sales of certain hospital acute care products, including ~~Keytruda,Zepatier~~Prevymis and ~~Bridion~~. Additionally, sales in 2017 benefited from the December 31, 2016 termination of SPMSD, which marketed vaccines in most major European markets. In 2017, Merck began recording vaccine sales in the markets that were previously part of the SPMSD joint venture resulting in incremental vaccine sales of approximately $400 million during 2017.Bridion. Higher sales of~~Pneumovax~~ ~~23 and Adempas, as well as~~ animal health products also ~~contributed to~~drove revenue growth in ~~2017. These increases were largely~~2020.

Sales growth in 2020 was partially offset by the effects of generic competition for certain products including ~~Zetia~~women’s health product NuvaRing, ~~which lost U.S. market exclusivity in December 2016,~~ ~~Vytorin~~hospital acute care products Noxafil and Cubicin, ~~which lost U.S. market exclusivity in April 2017,~~ ~~Cubicin~~ ~~due to U.S. patent expiration in June 2016,~~ oncology products Emend/Emend for Injection, cardiovascular products Zetia and ~~Cancidas~~Vytorin, ~~which lost EU patent protection in April 2017. Revenue growth was also offset by continued biosimilar competition for~~ ~~Remicade~~and ~~ongoing generic erosion for products including~~ ~~Singulair~~ ~~and~~ ~~Nasonex. Collectively, the sales decline attributable to the above products affected by generic and biosimilar competition was $3.3 billion in 2017. Lower sales of other~~ products within the ~~Diversified Brands~~diversified brands franchise, ~~that~~particularly Singulair. The diversified brands franchise includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed ~~markets,~~markets. Lower sales of pediatric vaccines, including ~~Dulera~~ ~~Inhalation Aerosol,~~ProQuad, M-M-R II, and Varivax, as well as lower ~~combined~~ sales of ~~the~~ diabetes ~~franchise of~~ products Januvia and Janumet, and ~~declines in sales of~~ virology products Zepatier and Isentress/Isentress HD also partially offset revenue ~~growth. Additionally,~~growth in 2020. As discussed above, the COVID-19 pandemic negatively affected sales in ~~2017 were reduced by $125 million due to a borrowing the Company made from the CDC Pediatric Vaccine Stockpile of doses of~~ ~~Gardasil~~ 9 as discussed below. Also, as anticipated, the Company was unable to fulfill orders for certain products in certain markets due to the cyber-attack, which had an unfavorable effect on sales in 2017 of approximately $260 million.2020.

Sales in the United States ~~were $17.4 billion~~grew 2% in ~~2017, a decline of 6% compared with $18.5 billion in 2016. The decrease was~~2020 primarily driven ~~primarily by the effects of generic competition for~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~, ~~Cubicin, and declines of products within Diversified Brands including~~ ~~Nasonex~~ ~~and~~ ~~Dulera~~ ~~Inhalation Aerosol. Lower sales of~~ ~~Januvia/Janumet~~, ~~Gardasil/Gardasil~~ 9, ~~Isentress/Isentress HD~~ ~~and~~ ~~Zostavax~~,~~also contributed to the U.S. sales decline in 2017.~~

~~These declines were partially offset~~ by higher sales of Keytruda, ~~Zepatier~~, ~~Bridion~~,increased alliance revenue from Lynparza and ~~Pneumovax~~ ~~23, along with~~Lenvima, and higher sales of animal health products. Revenue growth was largely offset by lower sales of NuvaRing, Januvia, Noxafil, Emend/Emend for Injection, M-M-R II, Janumet, Varivax and Implanon/Nexplanon.

International sales ~~were $22.7 billion~~grew 2% in ~~2017, an~~2020. The increase ~~of 6% compared with $21.3 billion~~ in ~~2016,~~international sales primarily ~~reflecting~~reflects growth in Keytruda ~~and~~ ~~Zepatier~~, ~~and higher sales of vaccines due to the termination of the SPMSD joint venture,~~ Gardasil/Gardasil 9, increased alliance revenue from Lynparza, as well as higher sales ofPneumovax 23, Prevymis, Januvia and animal health products. Sales growth was partially offset by ~~ongoing biosimilar competition~~lower sales of Zepatier, Vytorin, Noxafil, Zetia, Remicade, Emend/Emend for ~~Remicade, as well as generic erosion for~~ ~~Cancidas~~Injection and products within ~~Diversified Brands.~~the diversified brands franchise, particularly Singulair and Nasonex. International sales represented ~~57% and 54%~~56% of total sales in ~~2017~~both 2020 and ~~2016, respectively.~~2019.

~~Global efforts toward health care cost containment continue~~See Note 18 to ~~exert pressure~~the consolidated financial statements for details on ~~product pricing and market access worldwide. In the United States, pricing pressures continue on many~~sales of the Company’s products. A discussion of performance for select products ~~and,~~ in ~~several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected~~ the Company’s revenue performance in 2017. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and other austerity measures will continue to negatively affect revenue performance in 2018.franchises follows.

Worldwide sales were $39.8 billion in 2016, an increase of 1% compared with 2015. Foreign exchange unfavorably affected global sales performance by 2% in 2016, which includes a lower benefit from revenue hedging activities as compared with 2015. Revenue growth primarily reflects higher sales of ~~Keytruda, the launch of the HCV treatment~~ ~~Zepatier,~~ ~~and growth in vaccine products, including~~ ~~Gardasil/Gardasil~~ 9, ~~Varivax~~ ~~and~~ ~~Pneumovax~~ ~~23. Also contributing to sales growth in 2016 were higher sales of hospital acute care products including~~ ~~Bridion~~ ~~and~~ ~~Noxafil, growth within the diabetes franchise of~~ ~~Januvia~~ ~~and~~ ~~Janumet, as well as higher sales of animal health products, particularly~~ ~~Bravecto. These increases were largely offset by sales declines attributable to the ongoing effects of generic and biosimilar competition for certain products, including~~ ~~Remicade~~ ~~and~~ ~~Nasonex, along with other products within Diversified Brands. Declines in~~ ~~Isentress~~ ~~and~~ ~~Dulera~~ Inhalation Aerosol also partially offset revenue growth in 2016. Sales performance in 2016 reflects a decline of approximately $625 million due to reduced operations by the Company in Venezuela as a result of the economic conditions and volatility in that country.

~~Sales of the Company’s products were as follows:~~

($ in millions) 2017 2016 2015
U.S. Int’l Total U.S. Int’l Total U.S. Int’l Total
Primary Care and Women’s Health
Cardiovascular
Zetia $ 352
$ 992
$ 1,344
$ 1,588
$ 972
$ 2,560
$ 1,612
$ 914
$ 2,526
Vytorin 124
627
751
473
668
1,141
479
771
1,251
Atozet —
225
225
1
146
146
2
34
36
Adempas —
300
300
—
169
169
—
30
30
Diabetes
Januvia 2,153
1,584
3,737
2,286
1,622
3,908
2,263
1,601
3,863
Janumet 863
1,296
2,158
984
1,217
2,201
976
1,175
2,151
General Medicine and Women’s Health
NuvaRing 564
197
761
576
202
777
515
216
732
Implanon/Nexplanon 496
191
686
420
186
606
367
221
588
Follistim AQ 123
174
298
157
197
355
160
223
383
Hospital and Specialty
Hepatitis
Zepatier 771
888
1,660
488
67
555
—
—
—
HIV
Isentress/Isentress HD 565
639
1,204
721
666
1,387
797
714
1,511
Hospital Acute Care
Bridion 239
465
704
77
405
482
—
353
353
Noxafil 309
327
636
284
312
595
212
275
487
Invanz 361
241
602
329
233
561
322
247
569
Cancidas 20
402
422
25
533
558
24
548
573
Cubicin ⁽¹⁾
189
193
382
906
181
1,087
1,030
97
1,127
Primaxin 10
270
280
4
293
297
8
305
313
Immunology
Remicade —
837
837
—
1,268
1,268
—
1,794
1,794
Simponi —
819
819
—
766
766
—
690
690
Oncology
Keytruda 2,309
1,500
3,809
792
610
1,402
393
173
566
Emend 342
213
556
356
193
549
326
209
535
Temodar 16
256
271
15
268
283
7
306
312
Diversified Brands
Respiratory
Singulair 40
692
732
40
874
915
39
892
931
Nasonex 54
333
387
184
352
537
449
409
858
Dulera 261
26
287
412
24
436
515
21
536
Other
Cozaar/Hyzaar 18
466
484
16
494
511
30
637
667
Arcoxia —
363
363
—
450
450
—
471
471
Fosamax 6
235
241
5
279
284
12
347
359
Vaccines ⁽²⁾

Gardasil/Gardasil 9
1,565
743
2,308
1,780
393
2,173
1,520
388
1,908
ProQuad/M-M-R II/Varivax
1,374
303
1,676
1,362
279
1,640
1,290
214
1,505
Pneumovax 23
581
240
821
447
193
641
378
164
542
RotaTeq 481
204
686
482
169
652
447
163
610
Zostavax 422
246
668
518
168
685
592
157
749
Other pharmaceutical ⁽³⁾
1,246
3,049
4,295
1,345
3,228
4,574
1,473
3,785
5,256
Total Pharmaceutical segment sales 15,854

19,536

35,390

17,073

18,077

35,151

16,238

18,544

34,782
Other segment sales ⁽⁴⁾
1,486
2,785
4,272
1,374
2,489
3,862
1,213
2,454
3,667
Total segment sales 17,340

22,321

39,662

18,447

20,566

39,013

17,451

20,998

38,449
Other ⁽⁵⁾
84
377
460
31
763
794
68
981
1,049
$ 17,424

$ 22,698

$ 40,122

$ 18,478

$ 21,329

$ 39,807

$ 17,519

$ 21,979

$ 39,498

~~U.S. plus international may not equal total due to rounding.~~


⁽¹⁾	~~Sales of~~ ~~Cubicin~~ ~~in 2015 represent sales subsequent to the Cubist acquisition date.~~

⁽²⁾

On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which marketed vaccines in most major European markets (see Note 9). Accordingly, vaccine sales in 2017 include sales in the European markets that were previously part of SPMSD. Amounts for 2016 and 2015 do not include sales of vaccines sold through SPMSD, the results of which are reflected in equity income from affiliates included in ~~Other (income) expense, net. Amounts for 2016 and 2015 do, however, include supply sales to SPMSD.~~


⁽³⁾	~~Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.~~


⁽⁴⁾	~~Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances.~~


⁽⁵⁾	Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in 2017 and 2016 also includes $85 million and $170 million, respectively, related to the sale of the marketing rights to certain products.

Pharmaceutical Segment

~~Primary Care~~Oncology


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Keytruda	$	14,380	30	%	30	%	$	11,084	55	%	58	%	$	7,171
Alliance Revenue - Lynparza (1)	725		63	%	62	%	444		137	%	141	%	187
Alliance Revenue - Lenvima (1)	580		44	%	43	%	404		171	%	173	%	149
Emend	145		(63)	%	(62)	%	388		(26)	%	(24)	%	522

(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and ~~Women’s Health~~commercialization costs (see Note 4 to the consolidated financial statements).

~~Cardiovascular~~

Table of Content s

~~Combined global~~Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved as monotherapy for the treatment of certain patients with cervical cancer, cHL, cSCC, ESCC, gastric or gastroesophageal junction adenocarcinoma, HNSCC, hepatocellular carcinoma (HCC), non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), melanoma, Merkel cell carcinoma, MSI-H or dMMR cancer including MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma (PMBCL), TMB-H cancer, and urothelial carcinoma including NMIBC. Keytruda is also approved for the treatment of certain patients: in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy for HNSCC, in combination with chemotherapy for TNBC, in combination with axitinib for RCC, and in combination with Lenvima for endometrial carcinoma. The Keytruda clinical development program includes studies across a broad range of cancer types.

Global sales of ~~Zetia~~ ~~(marketed~~Keytruda grew 30% in ~~most countries outside the United States as~~ ~~Ezetrol~~), ~~Vytorin~~ ~~(marketed outside the United States as~~ ~~Inegy), and~~ ~~Atozet~~ ~~(marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $2.3 billion in 2017, a decline of 40% compared with 2016. The sales decline was~~2020 driven by ~~lower volumes and pricing of~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~higher demand as the Company continues to launch Keytruda with multiple new indications globally, although the COVID-19 pandemic had a dampening effect on growing demand. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of advanced NSCLC as monotherapy, and in combination with chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with uptake in the RCC, adjuvant melanoma, HNSCC, bladder cancer and endometrial carcinoma indications. Uptake of the every six weeks (Q6W) adult dosing regimen in the United States benefited sales in 2020. Keytruda sales growth in international markets was driven by continued uptake in approved indications, particularly in the EU. Sales growth was partially offset by declines in Japan due to pricing. Pursuant to a re-pricing rule, the Japanese government reduced the price of Keytruda by 17.5% effective February 2020. Additionally, Keytruda was subject to another price reduction of 20.9% in April 2020 under a provision of the Japanese pricing rules.

In January 2020, the FDA approved Keytruda as monotherapy for the treatment of certain patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk, NMIBC based on the results of the KEYNOTE-057 trial.

In April 2020, the FDA granted accelerated approval for an additional recommended dosage of 400 mg every six weeks (Q6W) for Keytrudaacross all adult indications, including monotherapy and combination therapy. This new dosage option is available in addition to the current dose of 200 mg every three weeks (Q3W).

In June 2020, the FDA granted accelerated approval for Keytruda as monotherapy for the treatment of adult and pediatric patients with unresectable or metastatic TMB-H solid tumors, as determined by an FDA-approved test, that have progressed following prior treatment and who have no satisfactory alternative treatment options based in part on the results of the KEYNOTE-158 trial.

Also in June 2020, the FDA approved Keytruda as monotherapy for the treatment of patients with recurrent or metastatic cSCC that is not curable by surgery or radiation based on data from the KEYNOTE-629 trial.

Additionally in June 2020, the FDA approved Keytruda as monotherapy for the first-line treatment of patients with unresectable or metastatic MSI-H or dMMR colorectal cancer based on results from the KEYNOTE-177 trial.

In October 2020, the FDA approved an expanded label for Keytruda as monotherapy for the treatment of adult patients with relapsed or refractory cHL based on results from the KEYNOTE-204 trial. The FDA also approved an updated pediatric indication for Keytruda for the treatment of pediatric patients with refractory cHL or cHL that has relapsed after two or more lines of therapy. Keytruda was previously approved under the FDA’s accelerated approval process for the treatment of adult and pediatric patients with refractory cHL, or who have relapsed after three or more prior lines of therapy based on data from the KEYNOTE-087 trial. In accordance with accelerated approval regulations, continued approval was contingent upon verification and description of clinical benefit; these accelerated approval requirements have been fulfilled with the data from KEYNOTE-204.

In November 2020, the FDA granted accelerated approval for Keytruda in combination with chemotherapy for the treatment of patients with locally recurrent unresectable or metastatic TNBC whose tumors express PD-L1 (Combined Positive Score [CPS] ≥10) as determined by an FDA-approved test. The approval is based on results from the KEYNOTE-355 trial.

In June 2020, Keytruda was approved by the National Medical Products Administration (NMPA) in China as monotherapy for the second-line treatment of patients with locally advanced or metastatic ESCC whose

Table of Content s

tumors express PD-L1 (CPS ≥10). This indication was granted based on the KEYNOTE-181 trial, including data from an extension of the global study in Chinese patients. In December 2020, China’s NMPA approved Keytruda as monotherapy for the first-line treatment of patients with metastatic or with unresectable, recurrent HNSCC whose tumors express PD-L1 (CPS ≥20) as determined by a fully validated test.

In August 2020, Keytruda was approved by Japan’s Pharmaceuticals and Medical Devices Agency (PMDA) as monotherapy for the treatment of patients whose tumors are PD-L1-positive, and have radically unresectable, advanced or recurrent ESCC who have progressed after chemotherapy. The approval was based on results from the KEYNOTE-181 trial. Additionally, Keytruda was approved by Japan’s PMDA for use at an additional recommended dosage of 400 mg Q6W, including monotherapy and combination therapy. This new dosage option is available in addition to the current dose of 200 mg Q3W.

In January 2021, Keytruda was approved by the European Commission (EC) as a ~~result~~first-line treatment in adult patients with MSI-H or dMMR colorectal cancer based on the results of ~~generic competition. By agreement,~~the KEYNOTE-177 study.

The Company is a ~~generic manufacturer launched~~party to certain third-party license agreements pursuant to which the Company pays royalties on sales of Keytruda. Under the terms of the more significant of these agreements, Merck pays a ~~generic version~~royalty of ~~Zetia~~6.5% on worldwide sales of Keytruda through 2023 to one third party; this royalty will decline to 2.5% for 2024 through 2026 and will terminate thereafter. The Company pays an additional 2% royalty on worldwide sales of Keytruda to another third party, the termination date of which varies by country; this royalty will expire in the United States in ~~December 2016. The U.S. patent~~2024 and ~~exclusivity periods for~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~otherwise expired in April 2017. Accordingly, the Company is experiencing rapid and substantial declines in U.S.~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~sales and expects the declines to continue. The Company will lose market exclusivity~~ in major European markets ~~for~~ ~~Ezetrol~~ in ~~April 2018 and for~~ ~~Inegy~~2025. The royalties are included in ~~April 2019 and anticipates~~Cost of sales ~~declines in these markets thereafter. Sales~~.

Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of~~Ezetrol~~ ~~and~~ ~~Inegy~~ ~~in these markets were $552 million and $457 million, respectively, in 2017. Combined worldwide sales of~~ ~~Zetia~~, ~~Vytorin~~ ~~and~~ ~~Atozet~~ were $3.8 billion in 2016, growth of 1% compared with 2015, reflecting volume growth in Europe and higher pricing in the United States, largely offset by lower sales in Venezuela due to reduced operations by the Company in that country and lower volumes in the United States reflecting in part generic competition for ~~Zetia~~.

~~Pursuant to~~ a collaboration with ~~Bayer AG (Bayer)~~AstraZeneca (see Note 4 to the consolidated financial statements), ~~Merck has lead commercial rights for Adempas, a cardiovascular drug~~is approved for the treatment of ~~pulmonary arterial hypertension,~~certain types of advanced ovarian, breast, pancreatic and prostate cancers. Alliance revenue related to Lynparza grew 63% in ~~countries outside~~2020 due to continued uptake across the Americas while Bayer has lead rights in the Americas, including the United States. The companies share profits equally under the collaboration. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017. Merck recorded sales for Adempas of $300 million in 2017, $169 million in 2016 and $30 million in 2015, which includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.

~~Diabetes~~

~~Worldwide combined sales of~~ ~~Januvia~~ ~~and~~ ~~Janumet~~, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $5.9 billion in 2017, a decline of 3% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by ongoing pricing pressure partially offset by continued volume growth globally. Combined global sales of ~~Januvia~~ ~~and~~ ~~Janumet~~ ~~were $6.1 billion in 2016, an increase of 2% compared with 2015. Sales growth was driven primarily by higher volumes~~multiple approved indications in the United States, ~~Europe~~the EU, China and ~~Canada, partially offset by pricing pressures in the United States and Europe, and lower sales in Venezuela due to the Company’s reduced operations in that country.~~Japan.

In ~~April 2017, Merck announced that the FDA issued a Complete Response Letter (CRL) regarding Merck’s supplemental New Drug Applications (NDA) for~~ ~~Januvia~~, ~~Janumet~~ ~~and~~ ~~Janumet XR~~ (sitagliptin and metformin HCl extended-release). With these applications, Merck is seeking to include data from TECOS (Trial Evaluating Cardiovascular Outcomes with Sitagliptin) in the prescribing information of sitagliptin-containing medicines. Merck is taking actions to respond to the CRL.

~~In December 2017,~~May 2020, the FDA approved ~~Steglatro~~ ~~(ertugliflozin) tablets,~~Lynparza in combination with bevacizumab as a first-line maintenance treatment of certain adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy. In November 2020, Lynparza was approved in the EU for the maintenance treatment of adult patients with advanced high-grade epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response following completion of first-line platinum-based chemotherapy in combination with bevacizumab and whose cancer is associated with homologous recombination deficiency (HRD)-positive status. These approvals were based on the results from the PAOLA-1 trial.

Also in May 2020, the FDA approved Lynparza for the treatment of adult patients with deleterious or suspected deleterious germline or somatic homologous recombination repair (HRR) gene-mutated mCRPC who have progressed following prior treatment. In November 2020, Lynparza was approved in the EU as monotherapy for the treatment of adult patients with mCRPC and BRCA1/2 mutations (germline and/or somatic) who have progressed following a prior therapy. These approvals were based on the results from the PROfound trial.

In July 2020, Lynparza was approved in the EU as a monotherapy for the maintenance treatment of adult patients with germline BRCA1/2 mutations who have metastatic adenocarcinoma of the pancreas and have not progressed after a first-line chemotherapy regimen. This approval was based on the results from the POLO trial.

In December 2020, Lynparza was approved in Japan for the treatment of three types of advanced cancer: ovarian, prostate and pancreatic cancer. The three approvals authorize Lynparza for use as maintenance treatment after first-line chemotherapy containing bevacizumab (genetical recombination) in patients with HRD ovarian cancer; the treatment of patients with BRCA gene-mutated (BRCAm) mCRPC; and maintenance treatment after platinum-based chemotherapy for patients with BRCAm curatively unresectable pancreas cancer. The concurrent approvals by the Japanese Ministry of Health, Labor, and Welfare are based on results from the PAOLA-1, PROfound and POLO trials.

Lenvima, an oral ~~sodium-glucose cotransporter 2 (SGLT2)~~receptor tyrosine kinase inhibitor ~~and the fixed-dose combination~~ ~~Steglujan~~ ~~(ertugliflozin and sitagliptin) tablets, the only fixed-dose combination of an SGLT2 inhibitor and dipeptidyl peptidase-4 inhibitor~~ ~~Januvia~~ ~~(sitagliptin). The FDA also approved the fixed-dose combination~~ ~~Segluromet~~ ~~(ertugliflozin and metformin hydrochloride).~~ ~~Steglatro~~, ~~Steglujan~~ ~~and~~ ~~Segluromet~~ ~~are indicated to improve glycemic control in adults with type 2 diabetes mellitus. These products are~~being developed as part of a ~~worldwide (except Japan)~~ collaboration ~~between Merck and Pfizer Inc. (Pfizer)~~with Eisai (see Note 4 to the consolidated financial statements), is approved for the ~~co-development~~treatment of certain types of thyroid cancer, HCC, in combination with everolimus for certain patients with RCC, and ~~co-promotion~~in combination with Keytruda for the

Table of ~~ertugliflozin. As a result~~Content s

treatment of ~~FDA approval, Merck will make a $60 million payment~~certain patients with endometrial carcinoma. Alliance revenue related to ~~Pfizer, which was accrued for~~Lenvima grew 44% in ~~the fourth quarter of 2017. The amount was capitalized and will be amortized over its estimated useful life, subject~~2020 due to ~~impairment testing. Merck will exclusively promote~~ ~~Steglatro~~ and the two fixed-dose combination products in the United States. Merck and Pfizer will share revenues and certain costs on a 60%/40% basis, with Merck having the 60% share, and Pfizer may be entitled to additional milestone payments. In January 2018, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending approval of ertugliflozin and the two fixed-dose combination products. The CHMP positive opinion will be considered by the European Commission (EC). If approval of any of the products in the EU is received, Merck will make an additional $40 million milestone payment to Pfizer.

~~General Medicine and Women’s Health~~

~~Worldwide sales of~~ ~~NuvaRing~~, a vaginal contraceptive product, were $761 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by lower sales in the United States reflecting lower volumes that were partially offset by higher pricing, and lower demand in Europe. Global sales of ~~NuvaRing~~ were $777 million in 2016, an increase of 6% compared with 2015 including a 1% unfavorable effect from foreign exchange. Sales growth largely reflects higher pricing in the United States, partially offset by volume declines in Europe. The patent that provides U.S. market exclusivity for ~~NuvaRing~~ ~~will expire in April 2018 and the Company anticipates a significant decline in U.S.~~ ~~NuvaRing~~ ~~sales thereafter.~~

~~Worldwide sales of~~ ~~Implanon/Nexplanon~~, single-rod subdermal contraceptive implants, grew to $686 million in 2017, an increase of 13% compared with 2016, primarily reflecting higher pricing and volume growth in the United States. Global sales of ~~Implanon/Nexplanon~~ ~~were $606 million in 2016, an increase of 3% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth reflects~~ higher demand in the United States, ~~partially offset by declines in international markets, particularly in Venezuela.~~China and the EU.

In November 2020, China’s NMPA approved Lenvima as a monotherapy for the treatment of differentiated thyroid cancer.

~~Hospital and Specialty~~

~~Hepatitis~~

Global sales of ~~Zepatier~~Emend, for the prevention of certain chemotherapy-induced nausea and vomiting, declined 63% in 2020 primarily due to lower demand and pricing in the United States due to generic competition for Emend for Injection following U.S. patent expiry in September 2019. Also contributing to the Emend sales decline was lower demand in the EU and Japan as a result of generic competition for the oral formulation of Emend following loss of market exclusivity in May 2019 and December 2019, respectively. U.S. market exclusivity for the oral formulation of Emend previously expired in 2015.

In April 2020, the FDA approved Koselugo (selumetinib) for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 (NF1) who have symptomatic, inoperable plexiform neurofibromas (PN). The FDA approval is based on positive results from the National Cancer Institute (NCI) Cancer Therapy Evaluation Program (CTEP)-sponsored Phase 2 SPRINT Stratum 1 trial coordinated by the NCI’s Center for ~~chronic hepatitis C (HCV) infection, were $1.7 billion~~Cancer Research, Pediatric Oncology Branch. This is the first regulatory approval of a medicine for the treatment of NF1 PN, a rare and debilitating genetic condition. Koselugo is being jointly developed and commercialized with AstraZeneca globally (see Note 4 to the consolidated financial statements).

Vaccines


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Gardasil/Gardasil 9	$	3,938	5	%	6	%	$	3,737	19	%	21	%	$	3,151
ProQuad	678		(10)	%	(10)	%	756		27	%	29	%	593
M-M-R II	378		(31)	%	(31)	%	549		28	%	29	%	430
Varivax	823		(15)	%	(15)	%	970		25	%	28	%	774
Pneumovax 23	1,087		17	%	18	%	926		2	%	3	%	907

Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of HPV, grew 5% in ~~2017~~2020 primarily due to higher volumes in China and ~~$555~~the replenishment in 2020 of doses borrowed from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile in 2019. The replenishment resulted in the recognition of sales of $120 million in ~~2016. Sales growth was driven primarily by higher~~2020, which, when combined with the reduction of sales of $120 million in ~~Europe,~~2019 due to the borrowing, resulted in a favorable impact to sales of $240 million in 2020. Lower demand in the United States and Hong Kong, SAR, PRC attributable to the COVID-19 pandemic partially offset the increase in sales of Gardasil/Gardasil 9.

In June 2020, the FDA approved an expanded indication for Gardasil 9 for the prevention of oropharyngeal and other head and neck cancers caused by HPV Types 16, 18, 31, 33, 45, 52, and 58. The oropharyngeal and head and neck cancer indication was approved under accelerated approval based on effectiveness in preventing HPV-related anogenital disease.

In July 2020, Gardasil 9 was approved by the PMDA in Japan ~~following product launch~~for use in ~~2016. Merck has~~women and girls nine years and older for the prevention of cervical cancer, certain cervical, vaginal and vulvar precancers, and genital warts caused by the HPV types covered by the vaccine. In December 2020, Silgard 9 was also ~~launched~~ ~~Zepatier~~approved in ~~other international markets.~~ Japan for the prevention of anal cancer and precursor lesions caused by HPV types 6, 11, 16 and 18 for individuals nine years and older and for genital warts for men nine years and older. Gardasil 9 is marketed in Japan as Silgard 9.

The Company is ~~beginning~~a party to ~~experience~~certain third-party license agreements pursuant to which the ~~unfavorable effects of increasing competition and declining patient volumes and anticipates that~~Company pays royalties on sales of ~~Zepatier~~Gardasil/Gardasil 9. Under the terms of the more significant of these agreements, Merck pays a 7% royalty on worldwide sales of Gardasil/Gardasil 9 to one third party (royalty obligations under this agreement expire in December 2023) and an additional 7% royalty on sales of Gardasil/Gardasil 9 in the ~~future will be materially adversely affected by these factors.~~United States to another third party (these royalty obligations expire in December 2028). The royalties are included in Cost of sales.

~~HIV~~

Table of Content s

~~Worldwide~~Global sales of ~~Isentress/Isentress HD,~~ ~~an HIV integrase inhibitor for use~~ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, declined 10% in ~~combination with other antiretroviral agents for the treatment of HIV-1 infection, were $1.2 billion in 2017, a decline of 13% compared with 2016. The sales decline~~2020 driven primarily ~~reflects~~by lower demand in the United States ~~and Europe due to competitive pressures. In May 2017,~~resulting from fewer measles outbreaks in 2020 compared with 2019, coupled with the ~~FDA approved~~ ~~Isentress~~HD~~, a once-daily dose~~unfavorable impact of ~~Isentress.~~ ~~In July 2017,~~ the ~~EC granted marketing authorization for the once-daily dose of~~ ~~Isentress~~ ~~(where it will be marketed as~~ ~~Isentress~~ ~~600 mg). Global~~COVID-19 pandemic, partially offset by higher pricing.

Worldwide sales of ~~Isentress~~ ~~were $1.4 billion~~M-M-R II, a vaccine to help protect against measles, mumps and rubella, declined 31% in ~~2016, a decline of 8% compared with 2015 including a 2% unfavorable effect from foreign exchange. The sales decline was~~2020 driven primarily by lower ~~volumes~~demand in the United States ~~as well as~~resulting from fewer measles outbreaks in 2020 compared with 2019, coupled with the unfavorable impact of the COVID-19 pandemic. Lower demand in Brazil also contributed to the M-M-R II sales decline in 2020.

Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), declined 15% in 2020 driven primarily by lower demand ~~and pricing~~ in ~~Europe due to competitive pressures,~~the United States resulting from the COVID-19 pandemic, partially offset by higher pricing. The Varivax sales decline was also attributable to lower government tenders in Brazil.

Worldwide sales of Pneumovax 23, a ~~favorable adjustment~~vaccine to ~~discount reserves~~help prevent pneumococcal disease, grew 17% in 2020 primarily due to higher volumes in the EU and in the United ~~States.~~States attributable in part to heightened awareness of pneumococcal vaccination. Higher pricing in the United States also contributed to Pneumovax 23 sales growth in 2020.

Hospital Acute Care


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Bridion	$	1,198	6	%	7	%	$	1,131	23	%	26	%	$	917
Noxafil	329		(50)	%	(50)	%	662		(11)	%	(7)	%	742
Prevymis	281		70	%	69	%	165		128	%	131	%	72
Cubicin	152		(41)	%	(40)	%	257		(30)	%	(28)	%	367
Zerbaxa	130		8	%	10	%	121		39	%	42	%	87

Global sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, ~~were $704 million~~grew 6% in ~~2017, growth of 46% compared with 2016, driven by strong global~~2020 due to higher demand globally, particularly in the United States. However, fewer elective surgeries as a result of the COVID-19 pandemic unfavorably affected demand in 2020.

Worldwide sales ~~were $482 million~~of Noxafil, an antifungal agent for the prevention of certain invasive fungal infections, declined 50% in ~~2016, growth of 37% compared with 2015 including a 2% favorable effect from foreign exchange. Sales growth reflects volume growth in most markets, including~~2020 due to generic competition in the United States ~~where it was approved by the FDA in December 2015, partially offset by a decline in Venezuela due to reduced operations by the Company in this country.~~

~~Worldwide sales of~~ ~~Noxafil, for the prevention of invasive fungal infections, were $636 million in 2017, an increase of 7% compared with 2016, primarily reflecting higher demand~~ and ~~pricing~~ in the ~~United States, as well as volume growth in Europe. Global sales of~~ ~~Noxafil~~ grew 22% in 2016 to $595 million driven primarily by higher pricing in the United States, volume growth in Europe reflecting an ongoing positive impact from the approval of new formulations, and higher demand in the Asia Pacific region. Foreign exchange unfavorably affected global sales performance by 3% in 2016.

~~Global sales of~~ ~~Invanz~~, for the treatment of certain infections, were $602 million in 2017, an increase of 7% compared with 2016, driven primarily by higher sales in the United States, reflecting higher pricing that was partially offset by lower demand, as well as higher demand in Brazil. Worldwide sales of ~~Invanz~~ were $561 million in 2016, a decline of 1% compared with 2015 including a 2% unfavorable effect from foreign exchange. Sales performance in 2016 reflects higher pricing in the United States, largely offset by a decline in Venezuela.EU. The patent that provided U.S.

market exclusivity for ~~Invanz~~certain forms of Noxafil representing the majority of U.S. Noxafil sales expired in ~~November 2017 and~~July 2019. Additionally, the ~~Company anticipates a significant decline in U.S.~~ ~~Invanz~~ ~~sales in future periods.~~

~~Global sales of~~ ~~Cancidas~~, an anti-fungal product sold primarily outside of the United States, were $422 million in 2017, a decline of 24% compared with 2016, driven primarily by generic competition in certain European markets. The EU compound patent for ~~Cancidas~~Noxafil expired in ~~April 2017. Accordingly,~~a number of major European markets in December 2019. As a result, the Company is experiencing ~~a significant decline in~~ ~~Cancidas~~ ~~sales in these European markets and expects the decline to continue. Worldwide sales of~~ ~~Cancidas~~ ~~were $558 million in 2016, a decline of 3% compared with 2015, reflecting a 4% unfavorable effect from foreign exchange~~volume and pricing declines in ~~Europe that were offset by higher volumes~~Noxafil sales in ~~China.~~

~~Global sales of~~ ~~Cubicin~~, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible organisms, were $382 million in 2017, a decline of 65% compared with 2016, and were $1.1 billion in 2016, a decline of 4% compared with 2015. The U.S. composition patent for ~~Cubicin~~ ~~expired in June 2016. Accordingly, the Company is experiencing a rapid and substantial decline in U.S.~~ ~~Cubicin~~ ~~sales~~these markets as a result of generic competition and expects the ~~decline~~declines to continue. ~~The Company anticipates it will lose market exclusivity for~~ ~~Cubicin~~ ~~in some European markets in early 2018.~~

~~In November 2017, Merck announced that the FDA approved~~ Worldwide sales of Prevymis ~~(letermovir)~~, a medicine for prophylaxis (prevention) of ~~CMV~~cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients ~~[R+]~~ of an ~~allogeneic~~allogenic hematopoietic stem cell ~~transplant. As a result of FDA approval, Merck made a €105 million ($125 million) milestone payment~~transplant, grew 70% in 2020 due to ~~AiCuris~~continued uptake since launch in ~~2017. This amount was capitalized~~the EU and ~~will be amortized over its estimated useful life, subject to impairment testing. In January 2018,~~ in the United States. Prevymiswas approved by the EC in January 2018 and asby the FDA in November 2017.

Global sales of Cubicin for injection, an antibiotic for the treatment of certain bacterial infections, declined 41% in 2020 primarily due to ongoing generic competition in the EU and in the United States.

In December 2020, the Company temporarily suspended sales of Zerbaxa, a combination antibacterial and beta-lactamase inhibitor for the treatment of certain bacterial infections, and subsequently issued a product recall, following the identification of product sterility issues. As a result, ~~Merck~~the Company recorded an intangible asset impairment charge related to Zerbaxa (see Note 8 to the consolidated financial statements). The Company does not anticipate that Zerbaxa will ~~make an additional €30 million milestone payment~~return to ~~AiCuris. Merck also has filed~~ ~~Prevymis~~the market before 2022.

In June 2020, the FDA approved a supplemental New Drug Application (NDA) for ~~regulatory approval in other markets including Japan.~~Recarbrio (imipenem, cilastatin, and relebactam) for the treatment of patients 18 years of age and older with hospital-acquired

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bacterial pneumonia and ventilator-associated bacterial pneumonia caused by certain susceptible Gram-negative microorganisms.

Immunology


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Simponi	$	838	1	%	1	%	$	830	(7)	%	(2)	%	$	893
Remicade	330		(20)	%	(20)	%	411		(29)	%	(25)	%	582

Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were nearly flat in 2020. Sales of Simponi are being unfavorably affected by the launch of biosimilars for a competing product. The Company expects this competition will continue to unfavorably affect sales of Simponi.

Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), ~~were $837 million~~declined 20% in ~~2017, a decline of 34% compared with 2016, and were $1.3 billion~~2020 driven by ongoing biosimilar competition in ~~2016, a decline of 29% compared with 2015. Foreign exchange unfavorably affected sales performance by 1%~~the Company’s marketing territories in ~~2016.~~Europe. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.

~~Sales~~The Company’s marketing rights with respect to these products will revert to Janssen Pharmaceuticals, Inc. in the second half of ~~Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $819 million in 2017, growth~~2024.

Virology


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Isentress/Isentress HD	$	857	(12)	%	(11)	%	$	975	(15)	%	(10)	%	$	1,140
Zepatier	167		(55)	%	(54)	%	370		(19)	%	(16)	%	455

Worldwide sales of ~~7% compared with 2016 including a 1% favorable effect from foreign exchange. Sales growth primarily reflects higher demand in Europe. Sales of~~ ~~Simponi~~ were $766 million in 2016, an increase of 11% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth was driven primarily by higher volumes in Europe reflecting in part an ongoing positive impact from the ulcerative colitis indication.

~~Oncology~~

~~Sales of~~ ~~Keytruda~~Isentress/Isentress HD, an ~~anti-PD-1 therapy, were $3.8 billion~~HIV integrase inhibitor for use in 2017, $1.4 billion in 2016 and $566 million in 2015. The year-over-year increases were driven by volume growth in all markets, particularly in the United States, Europe and Japan as the Company continues to launch ~~Keytruda~~combination with ~~multiple new indications globally. U.S. sales of~~ ~~Keytruda~~ ~~were $2.3 billion in 2017, $792 million in 2016 and $393 million in 2015. Sales in the United States continue to build across the multiple approved indications, in particular~~other antiretroviral agents for the treatment of ~~NSCLC reflecting both the continued adoption of~~ ~~Keytruda~~HIV-1 infection, declined 12% in ~~the first-line setting as monotherapy for patients with metastatic NSCLC whose tumors have high PD-L1 expression, as well as the uptake of~~ ~~Keytruda~~ in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous NSCLC with or without PD-L1 expression. Other indications, including melanoma, head and neck cancer, and bladder cancer, also contributed2020 primarily due to growth in 2017. Sales growth in international markets reflects positive performance in the melanoma indications, as well as a greater contribution from the treatment of patients with NSCLC as reimbursement is established in additional markets in the first- and second-line settings.

~~In March 2017, the FDA approved~~ ~~Keytruda~~ ~~for the treatment of adult and pediatric patients with cHL refractory to treatment, or who have relapsed after three or more prior lines of therapy. In May 2017, the EC approved~~ ~~Keytruda~~ for the treatment of adult patients with relapsed or refractory cHL who have failed autologous stem cell transplant and brentuximab vedotin, or who are transplant-ineligible and have failed brentuximab vedotin.

~~In May 2017, the FDA approved~~ ~~Keytruda~~ ~~in combination with pemetrexed and carboplatin for the first-line treatment of metastatic nonsquamous NSCLC, irrespective of PD-L1 expression.~~ ~~Keytruda~~ ~~is the only anti-PD-1 treatment approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In October 2016,~~ ~~Keytruda~~ ~~was approved by the FDA as monotherapy in the first-line setting for patients with metastatic NSCLC whose tumors have high PD-L1 expression, with no EGFR or ALK genomic tumor aberrations.~~ ~~Keytruda~~ as monotherapy is also indicated for the second-line or greater treatment setting for patients with metastatic NSCLC whose tumors express PD-L1, with disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving ~~Keytruda. Additionally, in January 2017, the EC approved~~ ~~Keytruda~~ ~~for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression with no EGFR or ALK positive tumor mutations.~~

~~Also in May 2017, the FDA approved~~ ~~Keytruda~~ ~~for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer. In the first-line setting,~~ ~~Keytruda~~ ~~is approved for the treatment of patients with locally advanced or metastatic urothelial carcinoma who are ineligible for cisplatin-containing chemotherapy. In the second-line setting,~~ ~~Keytruda~~ is approved for the treatment of patients with locally advanced or metastatic urothelial carcinoma who have disease progression during or following platinum-containing chemotherapy or within 12 months of neoadjuvant or adjuvant treatment with platinum-containing chemotherapy. In September 2017, the EC approved ~~Keytruda~~ for use as monotherapy for the treatment of locally advanced or metastatic urothelial carcinoma in adults who have received prior platinum-containing chemotherapy, as well as adults who are not eligible for cisplatin-containing chemotherapy.

~~Additionally in May 2017, the FDA approved~~ ~~Keytruda~~ for a first-of-its-kind indication: the treatment of adult and pediatric patients with previously treated unresectable or metastatic MSI-H or mismatch repair deficient solid tumors. With this unique indication, ~~Keytruda~~ ~~is the first cancer therapy approved for use based on a biomarker, regardless of tumor type.~~

~~In September 2017, the FDA approved~~ ~~Keytruda~~ for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1. In December 2017, Merck announced that the pivotal Phase 3 KEYNOTE-061 trial investigating ~~Keytruda~~, as a second-line treatment for patients with advanced gastric or gastroesophageal junction adenocarcinoma, did not meet its primary endpoint of overall survival (OS) in patients whose tumors expressed PD-L1. Additionally, progression free survival (PFS) in the PD-L1 positive population did not show statistical significance. The safety profile observed in KEYNOTE-061 was consistent with that observed in previously reported studies of ~~Keytruda; no new safety signals were identified. The current indication remains unchanged and the Company continues to evaluate~~ ~~Keytruda~~ ~~for gastric or gastroesophageal junction adenocarcinoma through KEYNOTE-062, a Phase 3 clinical trial studying~~ ~~Keytruda~~ as a monotherapy or in combination with chemotherapy as first-line treatment for patients with PD-L1 positive advanced gastric or gastroesophageal junction cancer, and with KEYNOTE-585, a Phase 3 trial studying ~~Keytruda~~ ~~in combination with chemotherapy in a neoadjuvant/adjuvant setting.~~

~~In August 2016, Merck announced that the FDA approved~~ ~~Keytruda~~ for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy. In July 2017, Merck announced that the pivotal Phase 3 KEYNOTE-040 trial investigating ~~Keytruda~~ in previously treated patients with recurrent or metastatic HNSCC did not meet its pre-specified primary endpoint of OS. The safety profile observed in KEYNOTE-040 was consistent with that observed in previously reported studies of ~~Keytruda; no new safety signals were identified. The current indication remains unchanged and clinical trials continue, including KEYNOTE-048, a Phase 3 clinical trial of~~ ~~Keytruda~~ ~~in the first-line treatment of recurrent or metastatic HNSCC.~~

~~As a result of the additional approvals received in 2017 as noted above,~~ ~~Keytruda~~ ~~is now approved~~competitive pressure in the United States and in the ~~EU as monotherapy~~EU. The Company expects competitive pressures for ~~the~~Isentress/Isentress HD to continue.

Global sales of Zepatier, a treatment ~~of certain~~for adult patients with ~~NSCLC, melanoma, cHL~~chronic hepatitis C virus genotype (GT) 1 or GT4 infection, declined 55% in 2020 driven by lower demand globally due to competition and ~~urothelial carcinoma.~~ ~~Keytruda~~ ~~is also approved~~declining patient volumes, coupled with the impact of the COVID-19 pandemic.

Cardiovascular


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Zetia/Vytorin	$	664	(24)	%	(24)	%	$	874	(35)	%	(34)	%	$	1,355
Atozet	453		16	%	16	%	391		13	%	18	%	347
Rosuzet	130		8	%	9	%	120		107	%	115	%	58
Alliance revenue - Adempas (1)	281		38	%	38	%	204		47	%	47	%	139
Adempas	220		3	%	2	%	215		13	%	17	%	190

(1) Alliance revenue represents Merck’s share of profits from sales in ~~the United States as monotherapy for the treatment~~Bayer’s marketing territories, which are product sales net of ~~certain patients with HNSCC, gastric or gastroesophageal junction adenocarcinoma~~cost of sales and ~~MSI-H or mismatch repair deficient cancer, and in combination with pemetrexed and carboplatin in certain patients with NSCLC.~~ ~~Keytruda~~ ~~is also approved in Japan for the treatment of radically unresectable melanoma, PD-L1-positive unresectable advanced or recurrent NSCLC,~~

~~relapsed or refractory cHL, and radically unresectable urothelial carcinoma. The~~ ~~Keytruda~~ ~~clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).~~

~~In January 2017, Merck entered into a settlement and license agreement to resolve worldwide patent infringement litigation related to~~ ~~Keytruda~~ ~~(see Note 11 to the consolidated financial statements). Pursuant to the settlement, the Company will pay royalties of 6.5% on net sales of~~ ~~Keytruda~~ ~~in 2017 through 2023; and 2.5% on net sales of~~ ~~Keytruda~~ ~~in 2024 through 2026.~~

Lynparza, an oral PARP inhibitor being developed as part of a collaboration formed in July 2017 with AstraZeneca (see Note 4 to the consolidated financial statements), is currently approved for certain types of ovarian and breast cancer. In January 2018, the FDA approved Lynparza for use in patients with BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. As a result of this approval, Merck will make a $70 million milestone payment to AstraZenecacommercialization costs (see Note 4 to the consolidated financial statements). Also in January 2018, the Japanese Ministry of Health, Labour and Welfare approved Lynparza for use as a maintenance therapy in patients for platinum-sensitive relapsed ovarian cancer, regardless of their BRCA mutation status, who responded to their last platinum-based chemotherapy. Lynparza is the first PARP inhibitor to be approved in Japan.

~~Diversified Brands~~

Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.

~~Respiratory~~

~~Worldwide~~Combined global sales of ~~Singulair,~~ ~~a once-a-day oral medicine~~Zetia (marketed in most countries outside the United States as Ezetrol) and Vytorin (marketed outside the United States as Inegy), medicines for ~~the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $732 million~~lowering LDL cholesterol, declined 24% in 2017, a decline of 20% compared with 2016, and were $915 million in 2016, a decrease of 2% compared with 2015. Foreign exchange unfavorably affected global sales performance by 1% in 2017 and favorably affected global sales performance by 2% in 2016. The sales declines were2020 driven primarily by lower ~~volumes~~sales of Ezetrol in Japan ~~as a result of generic competition.~~and Ezetrol and Inegy in the EU. The ~~patents~~patent that provided market exclusivity for ~~Singulair~~Ezetrol in Japan expired in ~~2016.As a result,~~September 2019 and generic competition began in June 2020. The

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EU patents for Ezetrol and Inegy expired in April 2018 and April 2019, respectively. Accordingly, the Company is experiencing ~~a significant decline~~sales declines in ~~Singulair~~ ~~sales in Japan and expects the decline to continue. The Company no longer has market exclusivity for~~ ~~Singulair~~ ~~in any major market.~~

~~Global sales of~~ ~~Nasonex~~, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $387 million in 2017, a decline of 28% compared with 2016, and were $537 million in 2016, a decline of 37% compared with 2015. Foreign exchange favorably affected global sales performance by 1% in 2017. The Company is experiencing a substantial decline in U.S. ~~Nasonex~~ ~~sales~~these markets as a result of generic competition and expects the ~~decline~~declines to continue. The sales decline in ~~global~~ ~~Nasonex~~ ~~sales in 2016~~2020 was also ~~driven by~~attributable to lower ~~volumes and~~ pricing following loss of exclusivity in ~~Europe from ongoing generic erosion and lower~~Australia. Higher demand for Ezetrol in China partially offset the sales decline in ~~Venezuela due to reduced operations by the Company in this country.~~

~~Global sales of~~ ~~Dulera~~ ~~Inhalation Aerosol, a combination medicine for the treatment of asthma, were $287 million in 2017, a decline of 34% compared with 2016, driven by lower sales~~2020. Merck lost market exclusivity in the United States ~~reflecting ongoing competitive pricing pressure, as well as lower demand. Worldwide~~for Zetia in 2016 and Vytorin in 2017 and subsequently lost nearly all U.S. sales of ~~Dulera~~ ~~Inhalation Aerosol were $436 million~~these products as a result of generic competition.

Sales of Atozet (marketed outside of the United States), a medicine for lowering LDL cholesterol, grew 16% in ~~2016, a decline of 19% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was~~2020, primarily driven by ~~lower sales~~higher demand in most markets, particularly in the ~~United Sales reflecting competitive pricing pressure that was partially offset by higher demand.~~

~~Vaccines~~

~~On December 31, 2016, Merck~~EU, Japan and ~~Sanofi terminated their equally-owned joint venture, SPMSD, which developed and marketed vaccines in Europe. Accordingly, vaccine sales in 2017 include sales of Merck vaccines~~other countries in the ~~European markets that were previously part of~~Asia Pacific region.

Zetia, Vytorin, Atozet and Rosuzet will be contributed to Organon in connection with the SPMSD joint venture, whereas sales in periods prior to 2017 do not. Prior to 2017, vaccine sales in these European markets were sold through the SPMSD joint venture, the results of which are reflected in equity income from affiliates included in ~~Other (income) expense, net~~spin-off (see Note 151 to the consolidated financial statements). ~~Supply sales~~

Adempas, a cardiovascular drug for the treatment of pulmonary arterial hypertension, is part of a worldwide collaboration with Bayer to ~~SPMSD, however, are included in vaccine sales in periods prior~~market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 4 to ~~2017. Incremental vaccine sales resulting~~the consolidated financial statements). Revenue from Adempas includes Merck’s share of profits from the ~~termination~~sale of ~~the SPMSD joint venture~~Adempas in ~~2017 were approximately $400 million, of~~Bayer’s marketing territories, which ~~approximately $215 million relate to~~ ~~Gardasil/Gardasil~~ 9.

~~Worldwide sales of~~ ~~Gardasil/Gardasil~~ ~~9, vaccines to help prevent certain cancers and diseases caused by certain types of human papillomavirus (HPV), were $2.3 billion~~grew 38% in ~~2017, growth of 6% compared with 2016. Sales growth was driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture noted above,~~2020, as well as ~~higher demand in Asia Pacific due in part to the launch in China, partially offset by lower~~ sales in Merck’s marketing territories, which grew 3% in 2020.

In January 2021, the ~~United States. Lower~~FDA approved Verquvo (vericiguat), an sGC stimulator, to reduce the risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults with symptomatic chronic heart failure and reduced ejection fraction. The approval was based on the results of the pivotal Phase 3 VICTORIA trial and follows a priority regulatory review. Verquvo is part of the same worldwide clinical development collaboration with Bayer that includes Adempas referenced above.

Diabetes


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Januvia/Janumet	$	5,276	(4)	%	(4)	%	$	5,524	(7)	%	(4)	%	$	5,914

Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in ~~the United States reflect the timing of public sector purchases. In addition, during 2017, the Company made a request to borrow doses of~~ ~~Gardasil~~ ~~9 from the CDC Pediatric Vaccine Stockpile, which the CDC granted. The Company’s decision to borrow the doses from the CDC was driven~~adults with type 2 diabetes, declined 4% in ~~part by the temporary shutdown resulting from the cyber-attack that occurred in June,~~2020 as ~~well as by overall higher demand than expected. As~~ a result of the borrowing, the Company reversed the sales related to the borrowed doses and recognized a corresponding liability. The Company subsequently replenished nearly half of the doses borrowed from the stockpile. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed doses in the second half of 2018, which will result in the recognition of sales and a reversal of the remaining liability. Additionally, in October 2016, the FDA approved a 2-dose vaccination regimen for ~~Gardasil~~ 9, for use in girls and boys 9 through 14 years of age, and the CDC’s Advisory Committee on Immunization Practices (ACIP) voted to recommend the 2-dose vaccination regimen for certain 9 through 14 year olds. The Company is experiencing an impact from the transition from a 3-dose vaccine regimen to a 2-dose vaccination regimen; however, increased patient starts are helping to offset the negative effects of the transition. Merck’s sales of ~~Gardasil/Gardasil~~ ~~9 were $2.2 billion in 2016, growth of 14% compared with 2015. Sales growth was driven primarily by higher volumes and~~continued pricing in the United States, as well as higher demand in the Asia Pacific region, partially offset by a decline in government tenders in Brazil. The Company is a party to certain third-party license agreements with respect to ~~Gardasil/Gardasil~~ ~~9 (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide~~ ~~Gardasil/Gardasil~~ ~~9 sales of 10% to 18% which vary by country and are included in~~ ~~Materials and production~~ ~~costs.~~

~~Global sales of~~ ~~ProQuad~~, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $528 million in 2017, $495 million in 2016 and $454 million in 2015. The increase in 2017 as compared with 2016 was driven primarily by higher pricing and volumes in the United States, as well as volume growth in international markets, particularly in Europe. Sales growth in 2016 as compared with 2015 was driven primarily by higher demand and pricing in the United States.

~~Worldwide sales of~~ ~~M-M-R~~ II, a vaccine to help protect against measles, mumps and rubella, were $382 million in 2017, $353 million in 2016 and $365 million in 2015. Sales growth in 2017 as compared with 2016 was largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Sales performance in 2016 as compared with 2015 was driven by higher demand in 2015 resulting from measles outbreaks in the United States.

~~Global sales of~~ ~~Varivax,~~ a vaccine to help prevent chickenpox (varicella), were $767 million in 2017, $792 million in 2016 and $686 million in 2015. The sales decline in 2017 as compared with 2016 was driven primarily by lower volumes in Brazil due to the loss of a government tender, as well as lower sales in the United States reflecting lower demand partially offset by higher pricing. Higher sales in Europe resulting from the termination of the SPMSD joint venture partially offset the decline. Sales growth in 2016 as compared with 2015 was driven primarily by higher sales in the United States reflecting the effects of public sector purchasing and higher pricing that were partially offset by lower demand. Volume growth in Brazil reflecting the timing of government tenders also contributed to the sales increase in 2016 as compared with 2015.

~~Worldwide sales of~~ ~~Pneumovax~~ 23, a vaccine to help prevent pneumococcal disease, were $821 million in 2017, an increase of 28% compared with 2016, driven primarily by higher demand and pricing in the United States, as well as higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of ~~Pneumovax~~ 23 were $641 million in 2016, an increase of 18% compared with 2015, driven primarily by higher volumes and pricing in the United States and higher demand in the Asia Pacific region. Foreign exchange unfavorably affected sales performance by 1% in 2017 and favorably affected sales performance by 1% in 2016.

~~Global sales of~~ ~~RotaTeq,~~ a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $686 million in 2017, an increase of 5% compared with 2016, driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of ~~RotaTeq~~ ~~were $652 million in 2016, an increase of 7% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales performance was driven~~

~~primarily by the effects of public sector purchasing in the United States, as well as volume growth in several international markets.~~

~~Worldwide sales of~~ ~~Zostavax,~~ a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $668 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by lower demand in the United States reflecting the approval of a competitor’s vaccine that received a preferential recommendation from the ACIP in October 2017 for the prevention of shingles over ~~Zostavax. The Company anticipates this competition will have a material adverse effect on sales of~~ ~~Zostavax~~ in future periods. The U.S. sales decline was largely offset by growth in Europe resulting from the termination of the SPMSD joint venture and volume growth in the Asia Pacific region. Merck’s sales of ~~Zostavax~~ ~~were $685 million in 2016, a decline of 9% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes~~pressure in the United States, partially offset by higher demand in certain international markets, particularly in China. The Company expects U.S. pricing pressure to continue. Januvia and Janumet will lose market exclusivity in the United States in January 2023. The supplementary patent certificates that provide market exclusivity for Januvia and Janumet in the EU expire in September 2022 and April 2023, respectively. The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after loss of market exclusivity.

Women’s Health


($ in millions)	2020	% Change		% Change Excluding Foreign Exchange		2019	% Change		% Change Excluding Foreign Exchange		2018
Implanon/Nexplanon	680	(14)	%	(13)	%	787	12	%	14	%	703
NuvaRing	236	(73)	%	(73)	%	879	(3)	%	(2)	%	902

Worldwide sales of Implanon/Nexplanon, a single-rod subdermal contraceptive implant, declined 14% in 2020, primarily driven by lower demand in the United States and ~~higher demand~~ in the ~~Asia Pacific region.~~EU resulting from the COVID-19 pandemic.

~~Other Segments~~

~~The Company’s other segments are the Animal Health, Healthcare Services and Alliances segments, which are not material for separate reporting.~~

~~Animal Health~~

Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Worldwide sales of NuvaRing, a vaginal contraceptive product, declined 73% in 2020 due to generic competition in the United States. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and generic competition began in December 2019. Accordingly, the Company is experiencing a rapid and substantial decline in U.S. NuvaRing sales and expects the decline to continue.

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Implanon/Nexplanon and NuvaRing will be contributed to Organon in connection with the spin-off (see Note 1 to the consolidated financial statements).

Biosimilars


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change	% Change Excluding Foreign Exchange	2018
Biosimilars	$	330	31	%	31	%	$	252	*	*	$	64

* Calculation not meaningful.

Biosimilar products are marketed by the Company pursuant to an agreement with Samsung Bioepis Co., Ltd. (Samsung) to develop and commercialize multiple pre-specified biosimilar candidates. Currently, the Company markets Renflexis (infliximab-abda), a biosimilar to Remicade (infliximab) for the treatment of certain inflammatory diseases; Ontruzant (trastuzumab-dttb), a biosimilar to Herceptin (trastuzumab) for the treatment of HER2-positive breast cancer and HER2 overexpressing gastric cancer; Brenzys (etanercept biosimilar), a biosimilar to Enbrel for the treatment of certain inflammatory diseases; and Aybintio (bevacizumab) for the treatment of certain types of cancer. Merck’s commercialization territories under the agreement vary by product. Sales growth of biosimilars in 2020 was primarily due to continued post-launch uptake of Renflexis in the United States and Canada and the launch of Ontruzant in Brazil in 2020.

In August 2020, the EC granted marketing authorization for Aybintio for the treatment of metastatic carcinoma of the colon or rectum, metastatic breast cancer, NSCLC, advanced and/or metastatic RCC, epithelial ovarian, fallopian tube and primary peritoneal cancer and cervical cancer. An application seeking approval of Aybintio in the United States was filed in September 2019.

The above biosimilar productswill be contributed to Organon in connection with the spin-off (see Note 1 to the consolidated financial statements).

Animal Health ~~products were $3.9 billion in 2017, $3.5 billion in 2016 and $3.3 billion in 2015. Global sales~~Segment


($ in millions)	2020		% Change		% Change Excluding Foreign Exchange		2019		% Change		% Change Excluding Foreign Exchange		2018
Livestock	$	2,939	6	%	9	%	$	2,784	6	%	11	%	$	2,630
Companion Animal	1,764		10	%	11	%	1,609		2	%	5	%	1,582

Sales of ~~Animal Health~~livestock products grew ~~11%~~6% in ~~2017 compared with 2016 primarily reflecting higher~~2020 predominantly due to an additional five months of sales in 2020 related to the April 2019 acquisition of ~~companion~~Antelliq, a leader in digital animal ~~products, largely driven by growth in~~ ~~Bravecto, a line of products that kill fleas~~identification, traceability and ticks in dogs and cats for up to 12 weeks, reflecting both growth in the oral formulation and continued uptake in the topical formulation, which was launched in 2016. Animal Health sales growth was also driven by higher sales of ruminant, poultry and swine products. Worldwide sales of Animal Health products increased 4% in 2016 compared with 2015 including a 4% unfavorable effect from foreign exchange. Sales growth reflects volume growth across most species areas, particularly in products for companion animals, driven primarily by higher sales of ~~Bravecto,~~ ~~as well as in poultry and swine products.~~

~~In March 2017, Merck acquired a controlling interest in Vallée, a leading privately held producer of animal health products in Brazil~~monitoring solutions (see Note 3 to the consolidated financial statements). Sales of companion animal products grew 10% in 2020 driven primarily by higher demand for the Bravecto line of products for parasitic control, as well as higher demand for companion animal vaccines.

Costs, Expenses and Other


($ in millions)	2020		% Change		2019		% Change		2018
Cost of sales	$	15,485	10	%	$	14,112	4	%	$	13,509
Selling, general and administrative	10,468		(1)	%	10,615		5	%	10,102
Research and development	13,558		37	%	9,872		1	%	9,752
Restructuring costs	578		(9)	%	638		1	%	632
Other (income) expense, net	(886)		*		139		*		(402)
	$	39,203	11	%	$	35,376	5	%	$	33,593

* Calculation not meaningful.

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($ in millions) 2017 Change 2016 Change 2015
Materials and production $ 12,775
-8 % $ 13,891
-7 % $ 14,934
Marketing and administrative 9,830
1 % 9,762
-5 % 10,313
Research and development 10,208
1 % 10,124
51 % 6,704
Restructuring costs 776
19 % 651
5 % 619
Other (income) expense, net 12
-98 % 720
-53 % 1,527
$ 33,601
-4 % $ 35,148
3 % $ 34,097
Cost of Sales

~~Materials and Production~~

~~Materials and production costs were $12.8~~Cost of sales was $15.5 billion in ~~2017, $13.9~~2020 compared with $14.1 billion in ~~2016 and $14.9 billion in 2015. Costs include expenses for~~2019. Cost of sales includes the amortization of intangible assets recorded in connection with ~~business~~ acquisitions, collaborations, and licensing arrangements, which totaled ~~$3.1~~$1.8 billion in ~~2017, $3.7~~2020 compared with $2.0 billion in ~~2016~~2019, respectively. Additionally, costs in 2020 and ~~$4.7 billion in 2015. Costs in 2017, 2016 and 2015 also~~2019 include intangible asset impairment charges of ~~$58~~$1.6 billion and $705 million ~~$347 million and $45 million, respectively,~~ related to marketed products and other intangibles ~~recorded in connection with business acquisitions~~ (see Note 8 to the consolidated financial statements). ~~Costs in 2017 also include a $76 million intangible asset impairment charge related to a licensing agreement.~~ The Company may recognize additional ~~non-cash~~ impairment charges in the future related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material. ~~In addition, expenses~~Costs in 2020 also include a charge of $260 million in connection with the discontinuation of COVID-19 vaccine development programs (see Note 3 to the consolidated financial statements) and inventory write-offs of $120 million related to a recall for ~~2015 include $105 million of amortization of purchase accounting adjustments~~Zerbaxa (see Note 8 to ~~Cubist’s~~

~~inventories.~~the consolidated financial statements). Also included in ~~materials and production costs~~cost of sales are expenses associated with restructuring activities which amounted to ~~$138 million, $181 million and $361~~$175 million in ~~2017, 2016 and 2015, respectively,~~2020 compared with $251 million in 2019, primarily reflecting accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.

Gross margin was ~~68.2%~~67.7% in ~~2017~~2020 compared with ~~65.1%~~69.9% in 2016 and 62.2% in 2015. The improvements in gross margin reflect a lower net impact from the amortization of intangible assets, intangible asset impairment charges and restructuring costs as noted above, which reduced gross margin by 8.2 percentage points in 2017, 10.6 percentage points in 2016 and 13.2 percentage points in 2015.2019. The gross margin ~~improvement~~decline in ~~2017 compared with 2016 also~~2020 reflects the unfavorable effects of higher impairment charges (noted above), pricing pressure, a charge related to the discontinuation of COVID-19 vaccine development programs, and higher inventory write-offs related to the recall of Zerbaxa (noted above), partially offset by the favorable effects of product mix. Manufacturing-related costs associated with the cyber-attack partially offset the gross margin improvement in 2017. The improvement in gross margin in 2016 as compared with 2015 was also driven bymix, lower ~~inventory write-offs~~amortization of intangible assets and ~~the favorable effects of foreign exchange.~~lower restructuring costs.

~~Marketing~~Selling, General and Administrative

~~Marketing~~Selling, general and administrative (M(SG&A) expenses were ~~$9.8~~$10.5 billion in ~~2017, an increase~~2020, a decline of 1% compared with ~~2016. Higher~~2019. The decline was driven primarily by lower administrative, selling and promotional costs, including ~~costs associated with the Company operating its vaccines business~~lower travel and meeting expenses, due in ~~the European markets that were previously~~ part ~~of the SPMSD joint venture, remediation costs related~~ to the ~~cyber-attack, and higher promotional expenses related to product launches were partially offset by lower restructuring and acquisition and divestiture-related costs, lower selling expenses~~COVID-19 pandemic, and the favorable effect of foreign ~~exchange. M~~exchange, partially offset by higher costs related to the spin-off of Organon and a contribution to the Merck Foundation. SG&A expenses ~~were $9.8 billion~~ in ~~2016, a decline~~2020 include $710 million of ~~5% compared with 2015, driven largely by lower acquisition and divestiture-related~~ costs ~~the favorable effects of foreign exchange, lower administrative expenses, such as legal defense costs, as well as lower selling costs. Higher promotional spending largely~~ related to ~~product launches and higher restructuring costs partially offset~~ the ~~decline. M~~spin-off of Organon. SG&A expenses ~~for 2017, 2016~~in 2020 and ~~2015~~2019 include restructuring costs of ~~$2 million, $95~~$47 million and ~~$78~~$34 million, respectively, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected in Restructuring costs as discussed below. M&A expenses also include acquisition and divestiture-related costs of $44 million, $78 million and $436 million in 2017, 2016 and 2015, respectively, consisting of integration, transaction, and certain other costs related to business acquisitions and divestitures. Acquisition and divestiture-related costs in 2015 include costs related to the acquisition of Cubist (see Note 3 to the consolidated financial statements).

Research and Development

Research and development (R&D) expenses were ~~$10.2~~$13.6 billion in ~~2017,~~2020, an increase of 1%37% compared with ~~2016.~~2019. The increase was driven primarily by higher upfront payments related to acquisitions and collaborations, including a $2.7 billion charge in ~~2017~~2020 related to the ~~formation~~acquisition of ~~a collaboration with AstraZeneca, an unfavorable effect from changes in~~VelosBio (see Note 3 to the ~~estimated fair value measurement of liabilities for contingent consideration and~~consolidated financial statements), as well as higher expenses related to clinical development ~~spending, largely~~and increased investment in discovery research and early drug development. Higher restructuring costs also contributed to the increase in R&D expenses in 2020. The increase in R&D expenses in 2020 was partially offset by lower in-process research and development (IPR&D) impairment charges and lower ~~restructuring costs. R&D expenses were $10.1 billion in 2016 compared with $6.7 billion in 2015. The increase was driven primarily by higher IPR&D impairment charges, increased clinical development~~costs resulting from the COVID-19 pandemic, net of spending ~~higher restructuring~~on COVID-19-related vaccine and licensing costs, partially offset by a reduction in expenses associated with a decrease in the estimated fair value measurement of liabilities for contingent consideration, as well as by the favorable effects of foreign exchange.antiviral research programs.

R&D expenses are comprised of the costs directly incurred by ~~Merck Research Laboratories (MRL),~~MRL, the Company’s research and development division that focuses on human health-related activities, which were ~~$4.6~~$6.6 billion in ~~2017, $4.3~~2020 compared with $6.1 billion in ~~2016 and $4.0 billion in 2015.~~2019. Also included in R&D expenses are Animal Health research costs, licensing costs and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, ~~as well as licensing activity, and certain costs from operating segments, including the Pharmaceutical and Animal Health segments,~~ which in the aggregate were $2.7 billion ~~$2.5 billion~~in 2020 and $2.6 billion ~~for 2017, 2016 and 2015, respectively.~~in 2019. Additionally, R&D expenses in ~~2017~~2020 include a ~~$2.35~~$2.7 billion ~~aggregate~~ charge for the acquisition of VelosBio (noted above), a $462 million charge for the acquisition of OncoImmune and charges of $826 million related to transactions with Seagen. R&D expenses in 2019 include a $993 million charge for the ~~formation~~acquisition of ~~a collaboration with AstraZeneca (see~~Peloton. See Note 43 to the consolidated financial ~~statements).~~statements for more information on these transactions. R&D expenses also include IPR&D impairment charges of ~~$483~~$90 million ~~$3.6 billion~~ and ~~$63~~$172 million in ~~2017, 2016~~2020 and ~~2015,~~2019, respectively (see ~~“Research and Development” below)~~Note 8 to the consolidated financial statements). The Company may recognize additional ~~non-cash~~ impairment charges in the future related to the cancellation or delay of other pipeline programs that were measured at fair value and capitalized in connection with business acquisitions and such

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charges could be material. In addition, R&D expenses in 2020 include $83 million of costs associated with restructuring activities, primarily relating to accelerated depreciation. R&D expenses also include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration recorded in connection

with business acquisitions. During ~~2017, the Company recorded charges of $27 million to increase the estimated fair value of liabilities for contingent consideration. During 2016~~2020 and ~~2015,~~2019, the Company recorded a net reduction in expenses of ~~$402~~$95 million and ~~$24~~$39 million, respectively, ~~to decrease the estimated fair value of liabilities for contingent consideration~~ related to ~~the discontinuation or delay of certain programs (see Note 6 to the consolidated financial statements). R&D expenses~~changes in ~~2017, 2016 and 2015 also reflect $11 million, $142 million and $52 million, respectively, of accelerated depreciation and asset abandonment costs associated with restructuring activities.~~these estimates.

Restructuring Costs

~~The Company incurs substantial costs for~~In early 2019, Merck approved a new global restructuring program ~~activities related to Merck’s productivity~~(Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and ~~cost reduction initiatives,~~supply network, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reducereducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the planned spin-off of Organon. As the Company continues to evaluate its global footprint and ~~improve~~overall operating model, it subsequently identified additional actions under the ~~efficiency~~Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of ~~its manufacturing and supply network.~~2023, with the cumulative pretax costs to be incurred by the Company to implement the program now estimated to be approximately $3.0 billion. The Company expects to record charges of approximately $700 million in 2021 related to the Restructuring Program. The Company anticipates the actions under the Restructuring Program to result in annual net cost savings of approximately $900 million by the end of 2023. Actions under previous global restructuring programs have been substantially completed.

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were ~~$776 million, $651 million and $619~~$578 million in ~~2017, 2016~~2020 and ~~2015, respectively. In 2017, 2016 and 2015, separation~~$638 million in 2019. Separation costs ~~of $552 million, $216 million and $208 million, respectively,~~incurred were ~~incurred~~ associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. ~~Merck eliminated approximately 2,450 positions in 2017, 2,625 positions in 2016 and 3,770 positions in 2015 related to these restructuring activities.~~ Also included in restructuring costs are asset abandonment, facility shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.

Additional costs associated with the Company’s restructuring activities are included in ~~Materials~~Cost of sales, Selling, general and ~~production~~, ~~Marketing~~administrative expenses and ~~administrative~~ ~~and~~ Research and development ~~as discussed above.~~costs. The Company recorded aggregate pretax costs of $883 million in 2020 and $927 million in ~~2017, $1.1 billion in 2016 and $1.1 billion in 2015~~2019 related to restructuring program activities (see Note 5 to the consolidated financial statements). While the Company has substantially completed the actions under the programs, approximately $500 million of additional pretax costs are expected to be incurred in 2018 relating to anticipated employee separations and remaining asset-related costs.

Other (Income) Expense, Net

Other (income) expense, net, was ~~$12~~$886 million of income in 2020 compared with $139 million of expense in ~~2017, $720 million of expense~~2019, primarily due to higher income from investments in ~~2016 and $1.5 billion of expense in 2015.~~equity securities, net, largely related to Moderna, Inc. For details on the components of Other (income) expense, net,, see Note 1514 to the consolidated financial statements.


Segment Profits

($ in millions)	2020		2019		2018
Pharmaceutical segment profits	$	29,722	$	28,324	$	24,871
Animal Health segment profits	1,650		1,609		1,659
Other non-reportable segment profits	1		(7)		103
Other	(22,582)		(18,462)		(17,932)
Income Before Taxes	$	8,791	$	11,464	$	8,701

Segment Profits
($ in millions) 2017 2016 2015
Pharmaceutical segment profits $ 22,586
$ 22,180
$ 21,658
Other non-reportable segment profits 1,834
1,507
1,573
Other (17,899 ) (19,028 ) (17,830 )
Income before taxes $ 6,521
$ 4,659
$ 5,401

~~Segment~~Pharmaceutical segment profits are comprised of segment sales less standard costs, ~~certain operating~~as well as SG&A expenses directly incurred by the segment. Animal Health segment ~~components~~profits are comprised of ~~equity income or loss from affiliates~~segment sales, less all cost of sales, as well as SG&A and ~~certain depreciation and amortization expenses.~~R&D expenses directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate ~~materials and production costs, other than standard costs,~~ the ~~majority~~remaining cost of sales not included in segment profits as described above, research and development expenses incurred by MRL, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for

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monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are costs related to restructuring activities and acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments, intangible asset impairment charges, and changes in the estimated fair value measurement of liabilities for contingent ~~consideration, restructuring costs, and a portion of equity income.~~consideration. Additionally, segment profits do not reflect other expenses from

corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items ~~including a loss on the extinguishment of debt in 2017, a charge related to the settlement of worldwide~~ ~~Keytruda~~ ~~patent litigation in 2016, gains on divestitures in 2016 and 2015, as well as a net charge related to the settlement of~~ ~~Vioxx~~ ~~shareholder class action litigation and foreign exchange losses related to the devaluation of the Company’s net monetary assets in Venezuela in 2015,~~ are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales.

Pharmaceutical segment profits grew 2%5% in ~~2017~~2020 compared with ~~2016~~2019 driven primarily ~~reflecting~~by higher sales, as well as lower selling and promotional costs. Animal Health segment profits grew 3% in 2020 driven primarily by higher sales and lower promotional and selling costs, partially offset by higher R&D costs and the ~~favorable effects~~unfavorable effect of ~~product mix. Pharmaceutical segment profits grew 2% in 2016 compared with 2015 primarily reflecting higher sales.~~foreign exchange.

Taxes on Income

The effective income tax rates of ~~62.9%~~19.4% in ~~2017, 15.4%~~2020 and 14.7% in ~~2016 and 17.4% in 2015~~2019 reflect the impacts of acquisition and divestiture-related costs ~~which in 2016 include $3.6 billion of IPR&D impairment charges, as well as~~and restructuring costs, ~~and~~partially offset by the beneficial impact of foreign ~~earnings.~~earnings, including product mix. The effective income tax rate in 2020 reflects the unfavorable impact of a charge for the acquisition of VelosBio for which no tax benefit was recognized. The effective income tax rate in 2019 reflects the favorable impact of a $364 million net tax benefit related to the settlement of certain federal income tax matters (see Note 15 to the consolidated financial statements) and the reversal of tax reserves established in connection with the 2014 divestiture of Merck’s Consumer Care (MCC) business due to the lapse in the statute of limitations. In addition, the effective income tax rate in 2019 reflects the unfavorable impacts of a charge for ~~2017 includes a provisional net charge~~the acquisition of ~~$2.6 billion~~Peloton for which no tax benefit was recognized and charges of $117 million related to the finalization of treasury regulations for the transition tax associated with the 2017 enactment of U.S. tax legislation known as the Tax Cuts and Jobs Act (TCJA) (see Note 16 to the consolidated financial statements). The effective income tax rate for 2017 also reflects the unfavorable impact of a $2.35 billion aggregate pretax charge recorded in connection with the formation of a collaboration with AstraZeneca for which no tax benefit was recognized, partially offset by the favorable impact of a net benefit of $234 million related to the settlement of certain federal income tax issues (see Note 16 to the consolidated financial statements) and a benefit of $88 million related to the settlement of a state income tax issue. The effective income tax rate for 2015 reflects the favorable impact of a net benefit of $410 million related to the settlement of certain federal income tax issues, the impact of a net charge related to the settlement of ~~Vioxx~~ shareholder class action litigation being fully deductible at combined U.S. federal and state tax rates and the favorable impact of tax legislation enacted in the fourth quarter of 2015, as well as the unfavorable effect of non-tax deductible foreign exchange losses related to Venezuela (see Note 15 to the consolidated financial statements).

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests was $15 million in 2020 compared with $(66) million in 2019. The loss in 2019 was driven primarily by the portion of goodwill impairment charges related to certain businesses in the Healthcare Services segment that were attributable to noncontrolling interests.

Net Income and Earnings per Common Share

Net income attributable to Merck & Co., Inc. was ~~$2.4~~$7.1 billion in ~~2017, $3.9~~2020 and $9.8 billion in ~~2016 and $4.4 billion in 2015.~~2019. EPS was ~~$0.87~~$2.78 in ~~2017, $1.41~~2020 and $3.81 in ~~2016 and $1.56 in 2015.~~2019.

Non-GAAP Income and Non-GAAP EPS

Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance.

Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. ~~Senior~~In addition, senior management’s annual compensation is derived in part using non-GAAP ~~income and non-GAAP EPS.~~pretax income. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP).

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A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:


($ in millions except per share amounts)	2020		2019		2018
Income before taxes as reported under GAAP	$	8,791	$	11,464	$	8,701
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs (1)	3,704		2,681		3,066
Restructuring costs	883		927		658
Other items:
Charge for the acquisition of VelosBio	2,660		—		—
Charges for the formation of collaborations (2)	1,076		—		1,400
Charge for the acquisition of OncoImmune	462		—		—
Charge for the discontinuation of COVID-19 vaccine development programs	305		—		—
Charge for the acquisition of Peloton	—		993		—
Charge related to the termination of a collaboration with Samsung	—		—		423
Charge for the acquisition of Viralytics Limited	—		—		344
Other	(20)		55		(57)
Non-GAAP income before taxes	17,861		16,120		14,535
Taxes on income as reported under GAAP	1,709		1,687		2,508
Estimated tax benefit on excluded items (3)	1,122		695		535
Adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition	(67)		—		—
Net tax benefit from the settlement of certain federal income tax matters	—		364		—
Tax benefit from the reversal of tax reserves related to the divestiture of MCC	—		86		—
Net tax charge related to the finalization of treasury regulations related to the enactment of the TCJA	—		(117)		(160)
Non-GAAP taxes on income	2,764		2,715		2,883
Non-GAAP net income	15,097		13,405		11,652
Less: Net income (loss) attributable to noncontrolling interests as reported under GAAP	15		(66)		(27)
Acquisition and divestiture-related costs attributable to noncontrolling interests	—		(89)		(58)
Non-GAAP net income attributable to noncontrolling interests	15		23		31
Non-GAAP net income attributable to Merck & Co., Inc.	$	15,082	$	13,382	$	11,621
EPS assuming dilution as reported under GAAP	$	2.78	$	3.81	$	2.32
EPS difference	3.16		1.38		2.02
Non-GAAP EPS assuming dilution	$	5.94	$	5.19	$	4.34

($ in millions except per share amounts) 2017 2016 2015
Income before taxes as reported under GAAP $ 6,521
$ 4,659
$ 5,401
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs 3,760
7,312
5,398
Restructuring costs 927
1,069
1,110
Other items:
Aggregate charge related to the formation of an oncology collaboration with AstraZeneca 2,350
—
—
Charge related to the settlement of worldwide Keytruda patent litigation
—
625
—
Foreign currency devaluation related to Venezuela —
—
876
Net charge related to the settlement of Vioxx shareholder class action litigation
—
—
680
Gain on sale of certain migraine clinical development programs —
—
(250 )
Gain on divestiture of certain ophthalmic products —
—
(147 )
Other (16 ) (67 ) (34 )
Non-GAAP income before taxes 13,542
13,598
13,034
Taxes on income as reported under GAAP 4,103
718
942
Estimated tax benefit on excluded items ⁽¹⁾
785
2,321
1,470
Provisional net tax charge related to the enactment of the TCJA (2,625 ) —
—
Net tax benefits from the settlements of certain federal income tax issues 234
—
410
Tax benefit related to the settlement of a state income tax issue 88
—
—
Non-GAAP taxes on income 2,585

3,039

2,822
Non-GAAP net income 10,957
10,559
10,212
Less: Net income attributable to noncontrolling interests 24
21
17
Non-GAAP net income attributable to Merck & Co., Inc. $ 10,933

$ 10,538

$ 10,195
EPS assuming dilution as reported under GAAP $ 0.87
$ 1.41
$ 1.56
EPS difference ⁽²⁾
3.11
2.37
2.03
Non-GAAP EPS assuming dilution $ 3.98
$ 3.78
$ 3.59
(1)Amount in 2020 includes a $1.6 billion intangible asset impairment charge related to Zerbaxa. Amount in 2019 includes a $612 million intangible asset impairment charge related to Sivextro. See Note 8 to the consolidated financial statements.

⁽¹⁾

(2)Amount in 2020 includes $826 million related to transactions with Seagen (see Note 3 to the consolidated financial statements). Amount in 2018 represents charge for the formation of a collaboration with Eisai (see Note 4 to the consolidated financial statements).

(3) The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.

~~The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.~~


⁽²⁾	Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable year.

Acquisition and Divestiture-Related Costs

Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with business acquisitions and divestitures. These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Also excluded are integration, transaction, and certain other costs associated with business acquisitions and divestitures.

Restructuring Costs

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 to the consolidated financial statements). These amounts include employee separation costs and accelerated depreciation

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associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, facility shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.

Certain Other Items

~~Non-GAAP income and non-GAAP EPS exclude certain other items.~~ These items are adjusted for after evaluating them on an individual basis considering their quantitative and qualitative ~~aspects, and typically~~aspects. Typically, these consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in ~~2017 is an aggregate charge~~2020 are charges for the acquisitions of VelosBio and OncoImmune, charges related to ~~the formation of a collaboration~~collaborations, including transactions with ~~AstraZeneca~~Seagen (see Note 43 to the consolidated financial statements), a ~~provisional net~~charge for the discontinuation of COVID-19 vaccine development programs, and an adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition. Excluded from non-GAAP income and non-GAAP EPS in 2019 is a charge for the acquisition of Peloton (see Note 3 to the consolidated financial statements), tax charges related to the ~~enactment~~finalization of U.S. treasury regulations related to the TCJA, a net tax benefit related to the settlement of certain federal income tax ~~issues~~matters, and a tax benefit related to the ~~settlement~~reversal of ~~a state income~~ tax ~~issue~~reserves established in connection with the 2014 divestiture of MCC (see Note 1615 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in ~~2016~~2018 is a charge ~~to settle worldwide patent litigation related to~~ ~~Keytruda~~ ~~(see Note 11 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2015 are foreign exchange losses~~ related to the ~~devaluation~~formation of ~~the Company’s net monetary assets in Venezuela~~a collaboration with Eisai (see Note 154 to the consolidated financial statements), a ~~net~~ charge related to the ~~previously disclosed settlement~~termination of ~~Vioxx~~ ~~shareholder class action litigation,~~ a ~~gain on the sale of certain migraine clinical development programs~~collaboration agreement with Samsung for insulin glargine (see Note 3 to the consolidated financial statements), a ~~gain on~~charge for the ~~divestiture~~acquisition of ~~the Company’s remaining ophthalmics business in international markets~~Viralytics (see Note 3 to the consolidated financial statements), ~~as well as a net tax benefit~~and measurement-period adjustments related to the ~~settlement of certain federal income tax issues~~provisional amounts recorded for the TCJA (see Note 1615 to the consolidated financial statements).

Beginning in 2021, the Company will be changing the treatment of certain items for the purposes of its non-GAAP reporting. Historically, Merck’s non-GAAP results excluded the amortization of intangible assets recognized in connection with business acquisitions (reflected as part of acquisition and divestiture-related costs) but did not exclude the amortization of intangibles originating from collaborations, asset acquisitions or licensing arrangements. Beginning in 2021, Merck’s non-GAAP results will no longer differentiate between the nature of the intangible assets being amortized and will exclude all amortization of intangible assets. Also, beginning in 2021, Merck’s non-GAAP results will exclude gains and losses on investments in equity securities. Prior period amounts will be recast to conform to the new presentation.

Research and Development

~~A chart reflecting the Company’s current research pipeline as of February 23, 2018 is set forth in Item 1. “Business~~ —Research ~~and Development” above.~~Pipeline

~~Research and Development Update~~

The Company currently has several candidates under regulatory review in the United States and ~~internationally.~~

~~Keytruda~~ ~~is an approved anti-PD-1 therapy in clinical development for expanded indications in different cancer types.~~

~~In December 2017, the FDA accepted for review a supplemental BLA for~~ ~~Keytruda~~ for the treatment of adult and pediatric patients with refractory PMBCL, or who have relapsed after two or more prior lines of therapy. The FDA granted Priority Review status with a Prescription Drug User Fee Action (PDUFA), or target action, date of April 3, 2018.

~~Additionally,~~ ~~Keytruda~~ has received Breakthrough Therapy designation from the FDA in combination with axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma; for the treatment of high-risk early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy; and for the treatment of Merkel cell carcinoma. Also, in January 2018, Merck and Eisai Co., Ltd. (Eisai) announced receipt of Breakthrough Therapy designation from the FDA for Eisai’s multiple receptor tyrosine kinase inhibitor Lenvima (lenvatinib) in combination with ~~Keytruda~~ ~~for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma. The Lenvima and~~ ~~Keytruda~~ ~~combination therapy is being jointly developed by Eisai and Merck. This marks the 12~~^th ~~Breakthrough Therapy designation granted to~~ ~~Keytruda~~. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.

~~In January 2018, Merck announced that the pivotal Phase 3 KEYNOTE-189 trial investigating~~ ~~Keytruda~~ in combination with pemetrexed (Alimta) and cisplatin or carboplatin, for the first-line treatment of patients with metastatic non-squamous NSCLC, met its dual primary endpoints of OS and PFS. Based on an interim analysis conducted by the independent Data Monitoring Committee, treatment with ~~Keytruda~~ in combination with pemetrexed plus platinum chemotherapy resulted in significantly longer OS and PFS than pemetrexed plus platinum chemotherapy alone. Results from KEYNOTE-189 will be presented at an upcoming medical meeting and submitted to regulatory authorities.

~~In 2017, the FDA placed a full clinical hold on KEYNOTE-183 and KEYNOTE-185 and a partial clinical hold on Cohort 1 of KEYNOTE-023, three combination studies of~~ ~~Keytruda~~ with lenalidomide or pomalidomide versus lenalidomide or pomalidomide alone in the blood cancer multiple myeloma. This decision followed a review of data by the Data Monitoring Committee in which more deaths were observed in the ~~Keytruda~~ ~~arms of KEYNOTE-183 and~~

~~KEYNOTE-185. The FDA determined that the data available at the time indicated that the risks of~~ ~~Keytruda~~ ~~plus pomalidomide or lenalidomide outweighed any potential benefit for patients with multiple myeloma. All patients enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the~~ ~~Keytruda/lenalidomide/dexamethasone cohort in KEYNOTE-023 have discontinued investigational treatment with~~ ~~Keytruda. This clinical hold does not apply to other studies with~~ ~~Keytruda~~.

MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under review with the Japan Pharmaceuticals and Medical Devices Agency. MK-0431 is being developed for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.

MK-1439, doravirine, is an investigational, non-nucleoside reverse transcriptase inhibitor for the treatment of HIV-1 infection. In January 2018, Merck announced that the FDA accepted for review two NDAs for doravirine. The NDAs include data for doravirine as a once-daily tablet for use in combination with other antiretroviral agents, and for use of doravirine with lamivudine and tenofovir disoproxil fumarate in a once-daily fixed-dose combination single tablet as a complete regimen (MK-1439A). The PDUFA action date for both applications is October 23, 2018.

V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a joint venture between Merck and Sanofi. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by ~~Haemophilus influenzae~~ ~~type b (Hib), and hepatitis B. In 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are working to provide additional data requested by the FDA. V419 is being marketed as~~ ~~Vaxelis~~ ~~in the EU.~~

~~In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the~~ ~~Keytruda~~ ~~programs discussed above.~~

MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a Qualified Infectious Disease Product with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.

MK-7339, Lynparza (olaparib), is an oral PARP inhibitor currently approved for certain types of ovarian and breast cancer. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types (see Note 4 to the consolidated financial statements).

MK-5618, selumetinib, is an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple cancer types. Additionally, in February 2018, the FDA granted Orphan Drug designation for selumetinib for the treatment of neurofibromatosis type 1. The development of selumetinib is part of the global strategic oncology collaboration between Merck and AstraZeneca reference above.

V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization

(WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness;internationally, as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies to be included in the first regulatory filing are anticipated in the first half of 2018.

MK-1242, vericiguat, is an investigational treatment for heart failure being studied in patients suffering from chronic heart failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer (see Note 4 to the consolidated financial statements).

V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster. The Company completed a Phase 3 trial in autologous hematopoietic cell transplant patients and another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017. The study in patients with solid tumor malignancies undergoing chemotherapy met its primary endpoints, but the primary efficacy endpoint was not met in patients with hematologic malignancies. Merck will present the results from this study at an upcoming scientific meeting. Due to the competitive environment, development of V212 is currently on hold.

~~MK-7264 is a selective, non-narcotic, orally-administered P2X3-receptor agonist being developed for the treatment of refractory, chronic cough. Merck plans to initiate a Phase 3~~late-stage clinical trial in the first half of 2018. MK-7264 was originally developed by Afferent Pharmaceuticals (Afferent), which was acquired by the Company in 2016 (see Note 3 to the consolidated financial statements). Upon initiation of the Phase 3 clinical trial, Merck will make a $175 million milestone payment, which was accrued for at estimated fair value at the time of acquisition.

~~The Company also discontinued certain drug candidates.~~

In February 2018, Merck announced that it will be stopping protocol 019, also known as the APECS study, a Phase 3 study evaluating verubecestat, MK-8931, an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1), in people with prodromal Alzheimer’s disease. The decision to stop the study follows a recommendation by the external Data Monitoring Committee (eDMC), which assessed overall benefit/risk during a recent interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the trial continued. As a result, the Company recorded an IPR&D impairment charge as discussed below.

~~In 2017, Merck announced that it will not submit applications for regulatory approval for MK-0859, anacetrapib,~~development. A chart reflecting the Company’s ~~investigational cholesteryl ester transfer protein (CETP) inhibitor. The decision followed a thorough review~~current research pipeline as of ~~the clinical profile of anacetrapib, including discussions with external experts.~~

~~Also~~February 22, 2021 and related discussion is set forth in ~~2017, Merck made a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir)~~Item 1. “Business — Research and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of chronic HCV infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including ~~Zepatier~~, which is currently marketed by the Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge as discussed below.Development” above.

opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to ensuring that externally sourced programs remain an important component of its pipeline strategy, with a focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.

The Company’s clinical pipeline includes candidates in multiple disease areas, including cancer, cardiovascular diseases, diabetes, infectious diseases, neurosciences, obesity, pain, respiratory diseases and vaccines.

Acquired In-Process Research and Development

In connection with business acquisitions, the Company has recorded the fair value of in-process research projects which, at the time of acquisition, had not yet reached technological feasibility. At December 31, ~~2017,~~2020, the balance of IPR&D was ~~$1.2 billion.~~$3.2 billion (see Note 8 to the consolidated financial statements).

During 2017, 2016 and 2015, $14 million, $8 million and $280 million, respectively, of IPR&D projects received marketing approval in a major market and the Company began amortizing these assets based on their estimated useful lives.

~~All of the~~The IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The time periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or the Company’s failure to obtain approval at all, would delay or prevent the Company from realizing revenues from these products. Additionally, if certain of the IPR&D programs fail or are abandoned during development, then the Company will not realize the future cash flows it has estimated and recorded as IPR&D as of

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the acquisition ~~date, and the Company may also not recover the research and development expenditures made since the acquisition to further develop such programs.~~date. If such circumstances were to occur, the Company’s future operating results could be adversely affected and the Company may recognize impairment charges and such charges could be material.

In ~~2017,~~2020, 2019, and 2018 the Company recorded ~~$483 million of~~ IPR&D impairment charges within Research and development ~~expenses. Of this amount, $240~~ expenses of $90 million, resulted from a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of chronic HCV infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including ~~Zepatier~~, which is currently marketed by the Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge to write-off the remaining intangible asset related to uprifosbuvir. The Company had previously recorded an impairment charge for uprifosbuvir in 2016 as described below. The IPR&D impairment charges in 2017 also include a charge of $226 million to write-off the intangible asset related to verubecestat, an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1), resulting from a decision in February 2018 to stop a Phase 3 study evaluating verubecestat in people with prodromal Alzheimer’s disease. The decision to stop the study followed a recommendation by the eDMC, which assessed overall benefit/risk during an interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the trial continued.

During 2016, the Company recorded $3.6 billion of IPR&D impairment charges. Of this amount, $2.9 billion relates to the clinical development program for uprifosbuvir, a nucleotide prodrug that was being evaluated for the treatment of HCV. The Company determined that changes to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and considering different scenarios, the Company concluded that its best estimate of the fair value of the intangible asset related to uprifosbuvir was $240 million, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of $180$172 million and ~~$143~~$152 million, ~~related to the discontinuation~~

~~of programs obtained in connection with the acquisitions of cCAM Biotherapeutics Ltd. and OncoEthix,~~ respectively resulting from unfavorable efficacy data. An additional $72 million relates to programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program for house dust mite allergies that, for business reasons, was returned to the licensor. The remaining IPR&D impairment charges in 2016 primarily relate to deprioritized pipeline programs that were deemed to have no alternative use during the period, including a $79 million impairment charge for an investigational candidate for contraception. The discontinuation or delay of certain of these clinical development programs resulted in a reduction of the related liabilities for contingent consideration (see Note 68 to the consolidated financial statements).

During 2015, the Company recorded $63 million of IPR&D impairment charges, of which $50 million related to the surotomycin clinical development program. In 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.

Additional research and development will be required before any of the remaining programs reach technological feasibility. The costs to complete the research projects will depend on whether the projects are brought to their final stages of development and are ultimately submitted to the FDA or other regulatory agencies for approval.

Acquisitions, Research Collaborations and License Agreements

Merck continues to remain focused on pursuing opportunities that have the potential to drive both near- and long-term growth. Certain ~~of the more~~ recent transactions are ~~described below.~~summarized below; additional details are included in Note 3 to the consolidated financial statements. Merck is actively monitoring the landscape for growth opportunities that meet the Company’s strategic criteria.

In ~~February 2018,~~January 2020, Merck ~~and Viralytics Limited (Viralytics) announced~~acquired ArQule, a ~~definitive agreement pursuant to which Merck will acquire Viralytics, an Australian~~ publicly traded biopharmaceutical company focused on ~~oncolytic immunotherapy treatments~~kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases for $2.7 billion. ArQule’s lead investigational candidate, MK-1026 (formerly ARQ 531), is a ~~range~~novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of ~~cancers,~~B-cell malignancies. The transaction was accounted for ~~AUD 1.75 per share.~~as an acquisition of a business. The ~~proposed acquisition values~~Company recorded IPR&D of $2.3 billion (related to MK-1026), goodwill of $512 million and other net liabilities of $102 million.

In July 2020, Merck and Ridgeback Bio, a closely held biotechnology company, closed a collaboration agreement to develop molnupiravir (MK-4482, also known as EIDD-2801), an orally available antiviral candidate in clinical development for the ~~total issued shares in Viralytics at approximately AUD 502 million ($394 million). Upon completion~~treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize molnupiravir and related molecules. Under the terms of the ~~transaction, Merck will gain full rights~~agreement, Ridgeback Bio received an upfront payment and also is eligible to ~~Cavatax (CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatax is based on Viralytics’s proprietary formulation~~receive future contingent payments dependent upon the achievement of ~~an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect~~certain developmental and ~~kill cancer cells. Cavatax~~regulatory approval milestones, as well as a share of the net profits of molnupiravir and related molecules, if approved. Molnupiravir is currently being evaluated in ~~multiple~~ Phase 12/3 clinical trials in both the hospital and outpatient settings. The primary completion date for the Phase 2/3 studies is June 2021. The Company anticipates interim efficacy data in the first quarter of 2021.

In September 2020, Merck and Seagen announced an oncology collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in Phase 2 clinical trials ~~both as an intratumoral~~for breast cancer and ~~intravenous agent, including in combination with~~ ~~Keytruda. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the~~ ~~Keytruda~~ and Cavatax combination in melanoma, prostate, lung and bladder cancers. The transaction remains subject to a Viralytics’s shareholder vote and customary regulatory approvals. Merck anticipates the transaction will close in the second quarter of 2018.

In October 2017, Merck acquired Rigontec. Rigontec is a leader in accessing the retinoic acid-inducible gene I pathway, part of the innate immune system, as a novel and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity. Rigontec’s lead candidate, RGT100, is currently in Phase I development evaluating treatment in patients with variousother solid tumors. Under the terms of the agreement, Merck made an upfront ~~cash~~ payment of ~~€119~~$600 million ~~($140 million)~~ and ~~may make additional contingent payments~~a $1.0 billion equity investment in 5 million shares of ~~up to €349~~Seagen common stock at a price of $200 per share. Merck recorded $616 million ~~(of which €184 million are~~in Research and development expenses in 2020 related to this transaction. Seagen is also eligible to receive future contingent milestone payments dependent upon the achievement of ~~research~~certain developmental and sales-based milestones.

Concurrent with the above transaction, Seagen granted Merck an exclusive license to commercialize Tukysa (tucatinib), a small molecule tyrosine kinase inhibitor, for the treatment of HER2-positive cancers, in Asia, the Middle East and Latin America and other regions outside of the United States, Canada and Europe. Under the terms of the agreement, Merck made upfront payments aggregating $210 million, which were recorded as Research and development expenses in 2020. Seagen is also eligible to receive future contingent regulatory approval milestones and tiered royalties based on annual sales levels of Tukysa in Merck’s territories.

In December 2020, Merck acquired OncoImmune, a privately held, clinical-stage biopharmaceutical company, for an upfront payment of $423 million. In addition, OncoImmune shareholders will be eligible to receive future contingent regulatory ~~approvals~~approval milestone payments and ~~€165~~tiered royalties. OncoImmune’s lead therapeutic candidate MK-7110 (also known as CD24Fc) is being evaluated for the treatment of patients hospitalized with COVID-19. Topline results from a pre-planned interim efficacy analysis from a Phase 3 study of MK-7110 were released in September 2020. Full results from this Phase 3 study, which were consistent with the topline results, were received in February 2021 and will be submitted for publication in the future. The transaction was accounted

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for as an acquisition of an asset. Under the agreement, prior to the completion of the acquisition, OncoImmune spun-out certain rights and assets unrelated to the MK-7110 program to a new entity owned by the existing shareholders of OncoImmune. In connection with the closing of the acquisition, Merck invested $50 million ~~are~~for a 20% ownership interest in the new entity, which was valued at $33 million resulting in a $17 million premium. Merck also recognized other net liabilities of $22 million. The Company recorded Research and development expenses of $462 million in 2020 related to this transaction.

In December 2020, Merck announced it had entered into an agreement with the ~~achievement~~U.S. Government to support the development, manufacture and initial distribution of ~~commercial targets).~~MK-7110 upon approval or Emergency Use Authorization (EUA) from the FDA by June 30, 2021. Under the agreement, Merck was to receive up to approximately $356 million for manufacturing and supply of approximately 60,000-100,000 doses of MK-7110 to the U.S. government by June 30, 2021 to help meet the government’s pandemic response goals. Following the execution of this agreement, Merck received feedback from the FDA that additional data, beyond the study conducted by OncoImmune, would be needed to support a potential EUA application. Based on this FDA feedback, Merck no longer expects to supply the U.S. government with MK-7110 in the first half of 2021. Merck is actively working with FDA to address the agency’s comments.

In December 2020, Merck acquired VelosBio, a privately held clinical-stage biopharmaceutical company, for $2.8 billion. VelosBio’s lead investigational candidate is MK-2140 (formerly known as VLS-101), an antibody-drug conjugate targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1) that is currently being evaluated for the treatment of patients with hematologic malignancies and solid tumors. The transaction was accounted for as an acquisition of an ~~asset~~asset. Merck recorded net assets of $180 million (primarily cash) and ~~the upfront payment is reflected within~~ Research and development expenses of $2.7 billion in ~~2017.~~2020 related to the transaction.

In ~~July 2017,~~February 2021, Merck and ~~AstraZeneca~~Pandion Therapeutics, Inc. (Pandion) entered into a ~~global strategic oncology collaboration~~definitive agreement under which Merck will acquire Pandion, a clinical-stage biotechnology company developing novel therapeutics designed to ~~co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib)~~address the unmet needs of patients living with autoimmune diseases, for ~~multiple cancer types. Lynparza~~$60 per share in cash representing an approximate total equity value of $1.85 billion. Pandion is ~~an oral PARP inhibitor currently approved for certain types~~advancing a pipeline of ovarian and breast cancer. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, ~~Keytruda~~ (pembrolizumab) and Imfinzi (durvalumab). The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications including thyroid cancer.precision immune modulators targeting critical immune control nodes. Under the terms of the acquisition agreement, ~~AstraZeneca and~~ Merck, through a subsidiary, will ~~share the development and commercialization costs~~

for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities. Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies will be shared equally. Merck will fundinitiate a tender offer to acquire all ~~development and commercialization costs~~outstanding shares of ~~Keytruda~~ ~~in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. As part~~Pandion. The closing of the ~~agreement, Merck made an upfront payment~~tender offer is subject to ~~AstraZeneca~~certain conditions, including the tender of ~~$1.6 billion~~shares representing at least a majority of the total number of Pandion’s shares of fully-diluted common stock, the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The transaction is ~~making payments~~expected to close in the first half of $750 million over a multi-year period for certain license options ($250 million was paid in December 2017, $400 million will be paid in 2018 and $100 million will be paid in 2019). The Company recorded an aggregate charge of $2.35 billion in ~~Research and development~~ expenses in 2017 related to the upfront payment and future license options payments. In addition, Merck will pay AstraZeneca up to an additional $6.15 billion contingent upon successful achievement of future regulatory and sales-based milestones for total aggregate consideration of up to $8.5 billion. 2021.

Capital Expenditures

Capital expenditures were ~~$1.9~~$4.7 billion in ~~2017, $1.6~~2020, $3.5 billion in ~~2016~~2019 and ~~$1.3~~$2.6 billion in ~~2015.~~2018. Expenditures in the United States were ~~$1.2~~$2.7 billion in ~~2017, $1.0~~2020, $1.9 billion in ~~2016~~2019 and ~~$879 million~~$1.5 billion in ~~2015. Merck~~2018. The increased capital expenditures in 2020 and 2019 reflect investment in new capital projects focused primarily on increasing manufacturing capacity for Merck’s key products. The increased capital expenditures in 2020 also reflect the purchase of a manufacturing facility in Dunboyne, Ireland to support upcoming product launches (see Note 3 to the consolidated financial statements). The Company plans to invest ~~approximately $12.0~~more than $20 billion ~~over five years~~ in new capital projects ~~including approximately $8.0 billion in the United States.~~from 2020-2024.

Depreciation expense was ~~$1.5~~$1.7 billion in ~~2017, $1.6~~2020, $1.7 billion in ~~2016~~2019 and ~~$1.6~~$1.4 billion in ~~2015~~2018, of which $1.2 billion in 2020, $1.2 billion in 2019 and $1.0 billion ~~$1.0 billion and $1.1 billion, respectively, applied~~in 2018, related to locations in the United States. Total depreciation expense in ~~2017, 2016~~2020 and ~~2015~~2019 included accelerated depreciation of ~~$60 million, $227~~$268 million and ~~$174~~$233 million, respectively, associated with restructuring activities (see Note 5 to the consolidated financial statements).

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Analysis of Liquidity and Capital Resources

Merck’s strong financial profile enables it to fund research and development, focus on external alliances, support in-line products and maximize upcoming launches while providing significant cash returns to shareholders.


Selected Data										Selected Data
($ in millions)	2017			2016			2015			($ in millions)	2020			2019			2018
Working capital	$	6,152		$	13,410		$	10,550		Working capital	$	437		$	5,263		$	3,669
Total debt to total liabilities and equity	27.8		%	26.0		%	26.0		%	Total debt to total liabilities and equity	34.7		%	31.2		%	30.4		%
Cash provided by operations to total debt	0.3:1			0.4:1			0.5:1			Cash provided by operations to total debt	0.3:1			0.5:1			0.4:1

The decline in working capital in ~~2017 as~~2020 compared with ~~2016~~2019 is primarily ~~reflects the reclassification of $3.0 billion of notes due in the first half of 2018 from long-term debt~~related to increased short-term debt ~~$1.85 billion~~supporting the funding of ~~upfront~~business development activities and ~~option payments related to the formation of the AstraZeneca collaboration discussed above, as well as $810 million paid to redeem debt in connection with tender offers discussed below.~~capital expenditures.

Cash provided by operating activities was ~~$6.4~~$10.3 billion in ~~2017, $10.4~~2020 compared with $13.4 billion in ~~2016 and $12.5~~2019, reflecting higher payments related to collaborations which were $2.9 billion in ~~2015. The decline~~2020 compared with $805 million in cash provided by operating activities in 2017 reflects a $2.8 billion payment related to the settlement of certain federal income tax issues (see Note 16 to the consolidated financial statements), payments of $1.85 billion related to the formation of a collaboration with AstraZeneca (see Note 4 to the consolidated financial statements), and a $625 million payment made by the Company related to the settlement of worldwide ~~Keytruda~~ ~~patent litigation (see Note 11 to the consolidated financial statements). Cash provided by operating activities in 2016 reflects a net payment of approximately $680 million to fund the~~ ~~Vioxx~~ ~~shareholder class action litigation settlement not covered by insurance proceeds.~~2019. Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.

Cash provided by investing activities was $2.7 billion in 2017 compared with a use of cash in investing activities of $3.2 billion in 2016. The change was driven primarily by lower purchases of securities and other investments, higher proceeds from the sales of securities and other investments and a lower use of cash for the acquisitions of businesses. Cash used in investing activities was ~~$3.2~~$9.4 billion in ~~2016~~2020 compared with ~~$4.8~~$2.6 billion in ~~2015.~~2019. The ~~lower use of cash in 2016~~increase was driven primarily ~~by cash used in 2015 for the acquisition of Cubist, as well as lower purchases of securities and other investments in 2016, partially offset~~ by lower proceeds from the sales of securities and other investments, ~~in 2016 and the~~higher use of cash ~~in 2016~~ for ~~the~~ acquisitions and higher capital expenditures, partially offset by lower purchases of ~~Afferent~~securities and ~~The StayWell Company LLC.~~

other investments.

Cash used in financing activities was ~~$10.0~~$2.8 billion in ~~2017~~2020 compared with ~~$9.0~~$8.9 billion in ~~2016.~~2019. The ~~increase in~~lower use of cash ~~used~~ in financing activities was driven primarily by a net increase in short-term borrowings in 2020 compared with a net decrease in short-term borrowing in 2019, as well as lower purchases of treasury stock, partially offset by higher payments on debt (see below), lower proceeds from the issuance of debt ~~in 2016, as well as~~(see below), higher ~~purchases of treasury stock~~dividends paid to shareholders and lower proceeds from the exercise of stock ~~options~~options.

The Company has accounts receivable factoring agreements with financial institutions in 2017, partially offset by lower payments on debt in 2017. Cash used in financing activities was $9.0 billion in 2016 compared with $5.4 billion in 2015 driven primarily by lower proceeds from the issuance of debt, partially offset by a decrease in short-term borrowings in 2015, lower payments on debt, lower purchases of treasury stock and higher proceeds from the exercise of stock options.

~~During 2015, the Company recorded charges of $876 million related~~certain countries to ~~the devaluation of its net monetary assets in Venezuela, the large majority of which was cash~~sell accounts receivable (see Note 156 to the consolidated financial statements).

The Company factored $2.3 billion and $2.7 billion of accounts receivable in the fourth quarter of 2020 and 2019, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. At December 31, ~~2017,~~2020 and 2019 the ~~total of worldwide cash~~Company had collected $102 million and investments was $20.6 billion, including $8.5 billion of cash, cash equivalents and short-term investments, and $12.1 billion of long-term investments. A substantial majority of cash and investments are held by foreign subsidiaries that, prior to the enactment$256 million, respectively, on behalf of the ~~TCJA, would have been subject~~financial institutions, which was remitted to ~~significant tax payments if such~~them in January 2021 and 2020, respectively. The net cash ~~and investments were repatriated~~flows from these collections are reported as financing activities in the ~~form~~Consolidated Statement of dividends. In accordance with the TCJA, the Company has recorded a provisional amount for taxes on unremitted earnings through December 31, 2017 that were previously deemed to be indefinitely reinvested outsideCash Flows.

Table of the United States (see Note 16 to the consolidated financial statements). As a result of the TCJA, repatriation of foreign earnings in the future will have little to no incremental U.S. tax consequences.Content s

The Company’s contractual obligations as of December 31, ~~2017~~2020 are as follows:


Payments Due by Period
($ in millions)	Total		2021		2022—2023		2024—2025		Thereafter
Purchase obligations (1)	$	3,458	$	977	$	1,232	$	668	$	581
Loans payable and current portion of long-term debt	6,432		6,432		—		—		—
Long-term debt	25,437		—		4,000		3,863		17,574
Interest related to debt obligations	10,779		759		1,431		1,254		7,335
Unrecognized tax benefits (2)	305		305		—		—		—
Transition tax related to the enactment of the TCJA (3)	3,006		390		736		1,880		—
Milestone payments related to collaborations (4)	200		200		—		—		—
Leases (5)	1,778		335		521		342		580
	$	51,395	$	9,398	$	7,920	$	8,007	$	26,070

Payments Due by Period
($ in millions) Total 2018 2019—2020 2021—2022 Thereafter
Purchase obligations ⁽¹⁾
$ 2,226
$ 715
$ 892
$ 478
$ 141
Loans payable and current portion of long-term debt ⁽²⁾
3,074
3,074
—
—
—
Long-term debt 21,400
—
3,200
4,589
13,611
Interest related to debt obligations 8,206
675
1,200
1,011
5,320
Unrecognized tax benefits ⁽³⁾
67
67
—
—
—
Transition tax related to the enactment of the TCJA ⁽⁴⁾
5,057
545
853
1,194
2,465
Operating leases 852
255
301
158
138
$ 40,882
$ 5,331
$ 6,446
$ 7,430
$ 21,675
(1) Includes future inventory purchases the Company has committed to in connection with certain divestitures.

⁽¹⁾

(2)As of December 31, 2020, the Company’s Consolidated Balance Sheet reflects liabilities for unrecognized tax benefits, including interest and penalties, of $1.8 billion, including $305 million reflected as a current liability. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for unrecognized tax benefits beyond one year, a reasonable estimate of the period of cash settlement for years beyond 2021 cannot be made.

(3)In connection with the enactment of the TCJA, the Company is required to pay a one-time transition tax, which the Company has elected to pay over a period of eight years through 2025 as permitted under the TCJA (see Note 15 to the consolidated financial statements).

(4)Reflects payments under collaborative agreements for sales-based milestones that were achieved in 2020 (and therefore deemed to be contractual obligations) but not paid until 2021 (see Note 4 to the consolidated financial statements).

(5) Amounts exclude reasonably certain lease renewals that have not yet been executed (see Note 9 to the consolidated financial statements).

~~Includes future inventory purchases the Company has committed to in connection with certain divestitures.~~


⁽²⁾	~~In January 2018, $1.0 billion of notes matured and were repaid.~~

⁽³⁾

As of December 31, 2017, the Company’s Consolidated Balance Sheet reflects liabilities for unrecognized tax benefits, interest and penalties of $2.1 billion, including $67 million reflected as a current liability. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for unrecognized tax benefits beyond one year, a reasonable estimate of the period of cash settlement for years beyond 2018 cannot be made.


⁽⁴⁾	In connection with the enactment of the TCJA, the Company is required to pay a one-time transition tax, which the Company has elected to pay over a period of eight years as permitted under the TCJA (see Note 16 to the consolidated financial statements).

Purchase obligations are enforceable and legally binding obligations for purchases of goods and services including minimum inventory contracts, research and development and advertising. Amounts ~~reflected for research and development obligations~~ do not include contingent milestone payments related to collaborative arrangements ~~and acquisitions. Contingent milestone payments~~or acquisitions as they are not considered contractual obligations ~~as they are contingent upon~~until the successful achievement of developmental, regulatory approval ~~and~~or commercial milestones. At December 31, ~~2017,~~2020, the Company has ~~$635 million of accrued~~recognized liabilities for contingent sales-based milestone payments related to collaborations with ~~Pfizer, Bayer~~AstraZeneca and ~~AstraZeneca~~Eisai where payment remains subject to the achievement of the related sales milestone aggregating $1.0 billion (see Note 4 to the consolidated financial statements), as well as in connection with certain licensing arrangements, that are payable in 2018. In addition, at December 31, 2017, the Company has $315 million of current liabilities for contingent consideration related to business acquisitions expected to be paid in 2018 (see Note 6 to the consolidated financial statements). ~~Also excluded~~Excluded from research and development obligations are potential future funding commitments of up to approximately ~~$60~~$52 million for investments in research venture capital funds. Loans payable and current portion of long-term debt reflects $73 million of long-dated notes that are subject to repayment at the option of the holders. Required funding obligations for ~~2018~~2021 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. However, the Company currently anticipates contributing

approximately ~~$60~~$300 million to its U.S. pension plans, ~~$150~~$170 million to its international pension plans and ~~$25~~$35 million to its other postretirement benefit plans during ~~2018.~~2021.

In November 2017, the Company launched tender offers for certain outstanding notes and debentures. The Company paid $810 million in aggregate consideration (applicable purchase price together with accrued interest) to redeem $585 million principal amount of debt that was validly tendered in connection with the tender offers.

~~In November 2016,~~June 2020, the Company issued ~~€1.0~~$4.5 billion principal amount of senior unsecured notes consisting of ~~€500 million~~$1.0 billion of 0.75% notes due 2026, $1.25 billion of 1.45% notes due 2030, $1.0 billion of 2.35% notes due 2040 and $1.25 billion of 2.45% notes due 2050. Merck used the net proceeds from the offering for general corporate purposes, including without limitation the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.

In March 2019, the Company issued $5.0 billion principal amount of ~~0.50%~~senior unsecured notes consisting of $750 million of 2.90% notes due 2024, ~~and €500 million principal amount~~$1.75 billion of ~~1.375%~~3.40% notes due ~~2036.~~2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds offrom the offering ~~of $1.1 billion~~ for general corporate ~~purposes.~~purposes, including the repayment of outstanding commercial paper borrowings.

The Company has a $6.0 billion ~~five-year~~ credit facility that matures in June ~~2022.~~2024. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.

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In ~~December 2015,~~March 2018, the Company filed a securities registration statement with the U.S. Securities and Exchange Commission (SEC) under the automatic shelf registration process available to “well-known seasoned issuers” which is effective for three years.

In February 2015, Merck issued $8.0 billion aggregate principal amount of senior unsecured notes. The Company used a portion of the net proceeds of the offering of $7.9 billion to repay commercial paper issued to substantially finance the Company’s acquisition of Cubist. The remaining net proceeds were used for general corporate purposes, including for repurchases of the Company’s common stock, and the repayment of outstanding commercial paper borrowings and debt maturities.

~~Also in February 2015, the Company redeemed $1.9 billion of legacy Cubist debt acquired in the acquisition (see Note 3 to the consolidated financial statements).~~

Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.

The Company continues to maintain a conservative financial profile. The Company places its cash and investments in instruments that meet high credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer. The Company does not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide financing or potentially expose the Company to unrecorded financial obligations.

In November ~~2017,~~2020, Merck’s Board of Directors declared a quarterly dividend of $0.65 per share on the Company’s outstanding common stock that was paid in January 2021. In January 2021, the Board of Directors declared a quarterly dividend of ~~$0.48 per share on the Company’s common stock that was paid in January 2018. In January 2018, the Board of Directors declared a quarterly dividend of $0.48~~$0.65 per share on the Company’s common stock for the second quarter of ~~2018~~2021 payable in April ~~2018.~~2021.

In ~~November 2017,~~October 2018, Merck’s ~~board~~Board of ~~directors~~Directors authorized ~~additional~~ purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions, on or off an exchange, or in privately negotiated transactions. The Company ~~purchased $4.0~~spent $1.3 billion to purchase 16 million shares of its common stock ~~(67 million shares)~~ for its treasury during ~~2017.~~2020 under this program. In March 2020, the Company temporarily suspended its share repurchase program. As of December 31, ~~2017,~~2020, the Company’s remaining share repurchase authorization was ~~$11.0 billion, which includes $1.0 billion in authorized repurchases remaining under a program announced in March 2015.~~$5.9 billion. The Company purchased ~~$3.4~~$4.8 billion and ~~$4.2~~$9.1 billion of its common stock during ~~2016~~2019 and ~~2015,~~2018, respectively, under authorized share repurchase programs.

In 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (the Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of $5 billion made by Merck to the Dealers in 2018, which were funded with existing cash and investments, as well as short-term borrowings. Upon settlement of the ASR agreements in 2019, Merck received an additional 7.7 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to 64.4 million.

Financial Instruments Market Risk Disclosures

The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.

A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives ~~and accounting related to~~of the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign Currency Risk Management

The Company has established revenue hedging, balance sheet risk management, and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by ~~volatility~~changes in foreign exchange rates.

The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro, Japanese yen and ~~Japanese yen.~~Chinese renminbi. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the

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future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.

The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other ComprehensiveIncome (Loss) (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts are recorded in Accumulated Other Comprehensive Income(Loss) (AOCI) and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

Because Merck principally sells foreign currency in its revenue hedging program, a uniform weakening of the U.S. dollar would yield the largest overall potential loss in the market value of these hedge instruments. The market value of Merck’s hedges would have declined by an estimated ~~$400~~$593 million and ~~$538~~$456 million at December 31, ~~2017~~2020 and ~~2016,~~2019, respectively, from a uniform 10% weakening of the U.S. dollar. The market value was determined using a foreign exchange option pricing model and holding all factors except exchange rates constant. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. ~~The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.~~

The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Consolidated ~~Statements~~Statement of Cash Flows.

A sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives, investments and monetary assets and liabilities indicated that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company at December 31, ~~2017~~2020 and ~~2016,~~ 2019, Income before taxes would have declined by approximately ~~$92~~$99 million and ~~$26~~$110 million in ~~2017~~2020 and ~~2016,~~2019, respectively. Because the Company was in a net short (payable) position relative to its major foreign currencies after consideration of forward contracts, a uniform weakening of the U.S. dollar will yield the largest overall potential net loss in earnings due to exchange. This measurement assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

~~Since January 2010, Venezuela has been designated~~The economy of Argentina was determined to be hyperinflationary ~~and, as a result, local foreign operations are remeasured~~ in 2018; consequently, in accordance with U.S. dollars with the impact recorded in results of operations. During 2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a decline in transactions that were settled at the then official (CENCOEX) rate,GAAP, the Company ~~determined it was unlikely that all outstanding net~~began remeasuring its monetary assets ~~would be settled at the CENCOEX rate. Accordingly, during 2015, the Company recorded charges of $876 million within~~ ~~Other (income) expense, net~~and liabilities for those operations in earnings. The impact to ~~devalue its net monetary assets in Venezuela to an amount that represented~~ the Company’s estimate of the U.S. dollar amount that would ultimately be collected and recorded additional exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating transactions and net monetary assets consistent with these rates.results was immaterial.

The Company ~~may~~ also ~~use~~uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The ~~Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in~~ ~~Other (income) expense, net. The effective portion of the~~ unrealized gains or losses on these contracts isare recorded in foreign currency translation adjustment within ~~Other ComprehensiveIncome~~ (OCI), and ~~remains~~remain in ~~Accumulated Other Comprehensive Income~~ (~~AOCI)~~AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative

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instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.

Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

Interest Rate Risk Management

The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.

At December 31, ~~2017,~~2020, the Company was a party to 2614 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.


($ in millions)	2020
Debt Instrument	Par Value of Debt		Number of Interest Rate Swaps Held	Total Swap Notional Amount
3.875% notes due 2021 (1)	$	1,150	5	$	1,150
2.40% notes due 2022	1,000		4	1,000
2.35% notes due 2022	1,250		5	1,250

($ in millions) 2017
Debt Instrument Par Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 2018 $ 1,000
4
$ 1,000
5.00% notes due 2019 1,250
3
550
1.85% notes due 2020 1,250
5
1,250
3.875% notes due 2021 1,150
5
1,150
2.40% notes due 2022 1,000
4
1,000
2.35% notes due 2022 1,250
5
1,250
(1) These interest rate swaps matured in January 2021.

The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense ~~and offset by~~along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

The Company’s investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly affected by changes in interest rates. The market value of the Company’s medium- to long-term fixed-rate investments is modestly affected by changes in U.S. interest rates. Changes in medium- to long-term U.S. interest rates have a more significant impact on the market value of the Company’s fixed-rate borrowings, which generally have longer maturities. A sensitivity analysis to measure potential changes in the market value of Merck’s investments and debt from a change in interest rates indicated that a one percentage point increase in interest rates at ~~both~~ December 31, ~~2017~~2020 and ~~2016~~2019 would have positively affected the net aggregate market value of these instruments by ~~$1.3 billion.~~$2.6 billion and $2.0 billion, respectively. A one percentage point decrease at December 31, ~~2017~~2020 and ~~2016~~2019 would have negatively affected the net aggregate market value by ~~$1.5~~$3.1 billion and ~~$1.6~~$2.2 billion, respectively. The fair value of Merck’s debt was determined using pricing models reflecting one percentage point shifts in the appropriate yield curves. The fair values of Merck’s investments were determined using a combination of pricing and duration models.

Critical Accounting ~~Policies~~Estimates

The Company’s consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities ~~primarily~~(primarily IPR&D, other intangible assets and contingent ~~consideration,~~consideration), as well as subsequent fair value

measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including

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those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities, accruals for contingent sales-based milestone payments and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Application of the following accounting policies result in accounting estimates having the potential for the most significant impact on the financial statements.

Acquisitions and Dispositions

To determine whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, the Company makes certain judgments, which include assessment of the inputs, processes, and outputs associated with the acquired set of activities. If the Company determines that substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in a transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs.

In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair ~~value if~~value. If fair value ~~can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency~~ cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. The fair values of intangible assets, including acquired IPR&D, are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a ~~separate~~ determination as to the ~~then useful~~then-useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period until the contingency is resolved, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.

The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.

The fair values of identifiable intangible assets related to currently marketed products and product rights are primarily determined by using an income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company’s estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the time and investment that will be required to develop products and technologies; the ability to obtain marketing and regulatory approvals; the ability to manufacture and commercialize

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the products; the extent and timing of potential

new product introductions by the Company’s competitors; and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.

The fair values of identifiable intangible assets related to IPR&D are also determined using an income approach, through which fair value is estimated based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate.

If the Company determines the transaction will not be accounted for as an acquisition of a business, the transaction will be accounted for as an asset acquisition rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense and contingent consideration is not recognized at the acquisition date. In these instances, product development milestones are recognized upon achievement and sales-based milestones are recognized when the milestone is deemed probable by the Company of being achieved.

Revenue Recognition

~~Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically at time of delivery.~~ Recognition of revenue ~~also~~ requires ~~reasonable assurance~~evidence of a contract, probable collection of sales proceeds and completion of substantially all performance obligations. ~~Domestically,~~Merck acts as the principal in substantially all of its customer arrangements and therefore records revenue on a gross basis. The majority of the Company’s contracts related to the Pharmaceutical and Animal Health segments have a single performance obligation - the promise to transfer goods. Shipping is considered immaterial in the context of the overall customer arrangement and damages or loss of goods in transit are rare. Therefore, shipping is not deemed a separately recognized performance obligation.

The vast majority of revenues from sales of products are recognized at a point in time when control of the goods is transferred to the customer, which the Company has determined is when title and risks and rewards of ownership transfer to the customer and the Company is entitled to payment. For certain services in the Animal Health segment, revenue is recognized over time, generally ratably over the contract term as services are provided. These service revenues are not material.

The nature of the Company’s business gives rise to several types of variable consideration including discounts and returns, which are estimated at the time of sale generally using the expected value method, although the most likely amount method is used for prompt pay discounts.

In the United States, sales discounts are issued to customers at the point-of-sale, through an intermediary wholesaler (known as chargebacks), or in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts ~~for customers for which~~if collection of accounts receivable is expected to be in excess of one year.

The U.S. provision for aggregate customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted customer purchases ~~directly~~ through an intermediary wholesaler. The contracted customer generally purchases product from the wholesaler at its contracted price plus a ~~mark-up from the wholesaler.~~mark-up. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. The provision for rebates is based on expected ~~payments, which are driven by~~ patient usage, ~~and contract performance by~~as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit ~~provider customers.~~

providers. The Company uses historical customer segment utilization mix, ~~adjusted for other known events,~~sales forecasts, changes to product mix and price, inventory levels in the distribution channel, government pricing calculations and prior payment history in order to estimate the expected provision. Amounts accrued for aggregate customer discounts are evaluated on a quarterly

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basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers, federal and state agencies, and other customers to the amounts accrued. ~~Adjustments are recorded when trends or significant events indicate that a change in the estimated provision is appropriate.~~

The Company continually monitors its provision for aggregate customer discounts. There were no material adjustments to estimates associated with the aggregate customer discount provision in ~~2017, 2016~~2020, 2019 or ~~2015.~~2018.

Summarized information about changes in the aggregate customer discount accrual related to U.S. sales is as follows:


($ in millions)	2020		2019
Balance January 1	$	2,436	$	2,630
Current provision	13,144		11,999
Adjustments to prior years	(16)		(230)
Payments	(12,454)		(11,963)
Balance December 31	$	3,110	$	2,436

($ in millions) 2017 2016
Balance January 1 $ 2,945
$ 2,798
Current provision 10,938
9,831
Adjustments to prior years (223 ) (169 )
Payments (11,109 ) (9,515 )
Balance December 31 $ 2,551
$ 2,945

Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates as current liabilities. The accrued balances relative to these provisions included in Accounts receivable and Accrued

and other current liabilities were ~~$198~~$249 million and ~~$2.4~~$2.9 billion, respectively, at December 31, ~~2017~~2020 and were ~~$196~~$233 million and ~~$2.7~~$2.2 billion, respectively, at December 31, ~~2016.~~2019.

Outside of the United States, variable consideration in the form of discounts and rebates are a combination of commercially-driven discounts in highly competitive product classes, discounts required to gain or maintain reimbursement, or legislatively mandated rebates. In certain European countries, legislatively mandated rebates are calculated based on an estimate of the government’s total unbudgeted spending and the Company’s specific payback obligation. Rebates may also be required based on specific product sales thresholds. The Company applies an estimated factor against its actual invoiced sales to represent the expected level of future discount or rebate obligations associated with the sale.

The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of ~~additional~~ generic competition, changes in formularies or launch of over-the-counter products, among others. The product returns provision for U.S. pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was ~~2.1%~~0.6% in ~~2017, 1.4%~~2020, 1.1% in ~~2016~~2019 and ~~1.5%~~1.6% in ~~2015.~~2018. Outside of the United States, returns are only allowed in certain countries on a limited basis.

Merck’s payment terms for U.S. pharmaceutical customers are typically 36 days from receipt of invoice and for U.S. animal health customers are typically 30 days from receipt of invoice; however, certain products, including Keytruda, have longer payment terms, some of which are up to 90 days. Outside of the United States, payment terms are typically 30 days to 90 days, although certain markets have longer payment terms.

Through its distribution programs with U.S. wholesalers, the Company encourages wholesalers to align purchases with underlying demand and maintain inventories below specified levels. The terms of the programs allow the wholesalers to earn fees upon providing visibility into their inventory levels, as well as by achieving certain performance parameters such as inventory management, customer service levels, reducing shortage claims and reducing product returns. Information provided through the wholesaler distribution programs includes items such as sales trends, inventory on-hand, on-order quantity and product returns.

Wholesalers generally provide only the ~~above mentioned~~above-mentioned data to the Company, as there is no regulatory requirement to report lot level information to manufacturers, which is the level of information needed to determine the remaining shelf life and original sale date of inventory. Given current wholesaler inventory levels, which are generally less than a month, the Company believes that collection of order lot information across all wholesale customers would have limited use in estimating sales discounts and returns.

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Inventories Produced in Preparation for Product Launches

The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory does not begin until the related product candidates are in Phase 3 clinical trials and are considered to have a high probability of regulatory approval. The Company monitors the status of each respective product within the regulatory approval process; however, the Company generally does not disclose specific timing for regulatory approval. If the Company is aware of any specific risks or contingencies other than the normal regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized. Expiry dates of the inventory are affected by the stage of completion. The Company manages the levels of inventory at each stage to optimize the shelf life of the inventory in relation to anticipated market demand in order to avoid product expiry issues. For inventories that are capitalized, anticipated future sales and shelf lives support the realization of the inventory value as the inventory shelf life is sufficient to meet initial product launch requirements. Inventories produced in preparation for product launches capitalized at ~~both~~ December 31, ~~2017~~2020 and ~~2016~~2019 were ~~$80 million.~~$279 million and $168 million, respectively.

Contingencies and Environmental Liabilities

The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property and commercial litigation, as well as certain additional matters including governmental and environmental matters (see Note 1110 to the consolidated financial statements). The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable.

Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, ~~2017~~2020 and ~~2016~~2019 of approximately ~~$160~~$250 million and ~~$185~~$240 million, respectively, represents the Company’s best estimate

of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. When a legitimate claim for contribution is asserted, a liability is initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as site investigations, feasibility studies and related cost assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties who may be jointly and severally liable can be expected to contribute is determined.

The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and accruing for these costs. In the past, Merck performed a worldwide survey to assess all sites for potential contamination resulting from past industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the need for remedial action. Where such need was identified, remedial action was then initiated. As definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were established or adjusted accordingly. These estimates and related accruals continue to be refined annually.

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The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. Expenditures for remediation and environmental liabilities were $11 million in ~~2017,~~2020 and are estimated at ~~$56~~$46 million in the aggregate for the years ~~2018~~2021 through ~~2022.~~2025. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled ~~$82 million and $83~~$67 million at both December 31, ~~2017~~2020 and ~~2016, respectively.~~2019. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed ~~$63~~approximately $65 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial ~~position,~~condition, results of operations ~~liquidity~~ or ~~capital resources~~liquidity for any year.

Share-Based Compensation

The Company expenses all share-based payment awards to employees, including grants of stock options, over the requisite service period based on the grant date fair value of the awards. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. Total pretax share-based compensation expense was ~~$312~~$475 million in ~~2017, $300~~2020, $417 million in ~~2016~~2019 and ~~$299~~$348 million in ~~2015.~~2018. At December 31, ~~2017,~~2020, there was ~~$469~~$678 million of total pretax unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a ~~weighted average~~weighted-average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.

Pensions and Other Postretirement Benefit Plans

Net periodic benefit cost for pension plans totaled ~~$201~~$454 million in ~~2017, $144~~2020, $137 million in ~~2016~~2019 and ~~$277~~$195 million in ~~2015.~~2018. Net periodic benefit (credit) for other postretirement benefit plans was ~~$(60)~~$(59) million in ~~2017, $(88)~~2020, $(49) million in ~~2016~~2019 and ~~$(24)~~$(45) million in ~~2015.~~2018. Pension and other postretirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations and an expected rate of return on plan assets. The changes in net periodic benefit cost year over year for pension plans are largely attributable to changes in the discount rate affecting net loss amortization. The increase in net periodic benefit (credit) for other postretirement benefit plans in 2017 and 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015, partially offset by lower returns on plan assets.

The Company reassesses its benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The discount rates for the Company’s U.S. pension and other postretirement benefit plans ranged from ~~3.20%~~2.10% to ~~3.80%~~2.80% at December 31, ~~2017,~~2020, compared with a range of ~~3.40%~~3.20% to ~~4.30%~~3.50% at December 31, ~~2016.~~2019.

The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term compound annualized returns of historical market data, current market conditions and actual returns on the Company’s plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted-average expected long-term rate of return for a target portfolio allocated across these investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For ~~2018,~~2021, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from ~~7.70%~~6.50% to ~~8.30%~~6.70%, compared to a range of ~~8.00%~~7.00% to ~~8.75%~~7.30% in ~~2017. The decrease is primarily due to a modest shift in asset allocation.~~2020.

The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated ~~35%~~30% to ~~55%~~45% in U.S. equities, ~~20%~~15% to ~~35%~~30% in international equities, ~~20%~~35% to ~~35%~~45% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard

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deviation of returns of the target portfolio, which approximates ~~13%~~11%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

Actuarial assumptions are based upon management’s best estimates and judgment. A reasonably possible change of plus (minus) 25 basis points in the discount rate assumption, with other assumptions held constant, would have had an estimated ~~$77~~$80 million favorable (unfavorable) impact on the Company’s net periodic benefit cost in ~~2017.~~2020. A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other assumptions held constant, would have had an estimated ~~$44~~$40 million favorable (unfavorable) impact on Merck’s net periodic benefit cost in ~~2017.~~2020. Required funding obligations for ~~2018~~2021 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. The preceding hypothetical changes in the discount rate and expected rate of return assumptions would not impact the Company’s funding requirements.

Net loss amounts, which ~~reflect experience differentials~~ primarily ~~relating to~~reflect differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions, are recorded as a component of ~~Accumulated Other Comprehensive Income (AOCI)~~AOCI. Expected returns for pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from the Company’s expected returns are recognized in the market-related value of assets ratably over a five-year period. Also, netNet loss amounts in AOCI in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees.

Restructuring Costs

Restructuring costs have been recorded in connection with restructuring programs designed to streamline the Company’s cost structure. As a result, the Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the restructuring actions take place. When accruing ~~these~~termination costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. In connection with these actions, management also assesses the recoverability of long-lived assets employed in the business. In certain instances, asset lives have been shortened based on changes in the expected useful lives of the affected assets. Severance and other related costs are reflected within Restructuring

costs. Asset-related charges are reflected within ~~Materials~~Cost of sales, Selling, general and ~~production~~ ~~costs,~~ ~~Marketing and~~ administrative expenses and Research and development expenses depending upon the nature of the asset.

Impairments of Long-Lived Assets

The Company assesses changes in economic, regulatory and legal conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and other intangible assets.

The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows approach.

Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses ~~acquired and~~acquired. Goodwill is assigned to reporting ~~units. The Company tests its goodwill~~units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the factors considered in the assessment include general macroeconomic conditions, conditions specific to the industry and market, cost factors which could have a significant effect on earnings or cash flows, the overall financial performance of the reporting unit, and whether there have been sustained declines in the Company’s share price. ~~Additionally, the Company evaluates the extent to which the fair value exceeded the carrying value of the reporting unit at the last date a valuation was performed.~~ If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill).

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Other acquired intangible assets (excluding IPR&D) are initially recorded at fair value, assigned an estimated useful life, and ~~are~~ amortized primarily on a straight-line basis over their estimated useful lives. When events or circumstances warrant a review, the Company will assess recoverability from future operations using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that the carrying value of the intangible asset exceeds its fair value, which is determined based on the net present value of estimated future cash flows.

IPR&D that the Company acquires ~~through~~in conjunction with the acquisition of a business ~~combinations~~ represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the ~~project.~~projects. The Company ~~tests~~evaluates IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount,performing a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying ~~value is performed.~~value. For impairment testing purposes, the Company may combine separately recorded IPR&D intangible assets into one unit of account based on the relevant facts and circumstances. Generally, the Company will combine IPR&D intangible assets for testing purposes if they operate as a single asset and are essentially inseparable. If the fair value is less than the carrying amount, an impairment loss is recognized ~~within the Company’s~~in operating results.

The judgments made in evaluating impairment of long-lived intangibles can materially affect the Company’s results of operations.

Impairments of Investments

The Company reviews its investments in marketable debt securities for impairments based on the determination of whether the decline in market value of the investment below the carrying value is other-than-temporary. The Company considers available evidence in evaluating potential impairments of its investments in marketable debt securities, including the duration and extent to which fair value is less than ~~cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an~~cost. Changes in fair value that are considered temporary are reported net of tax in OCI. An other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the marketable debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the

other-than-temporary impairment recognized in earnings, recorded in Other (income) expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI.

Investments in publicly traded equity securities are reported at fair value determined using quoted market prices in active markets for identical assets or quoted prices for similar assets or other inputs that are observable or can be corroborated by observable market data. Changes in fair value are included in Other (income) expense, net. Investments in equity securities without readily determinable fair values are recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, minus impairments. Such adjustments are recognized in Other (income) expense, net. Realized gains and losses for equity securities are included in Other (income) expense, net.

Taxes on Income

The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or one-time item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. The Company considers the resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions. The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the

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financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period (see Note 1615 to the consolidated financial statements).

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the financial statements. The Company establishes valuation allowances for its deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the tax return, but has not yet recognized as expense in the financial statements.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 2 to the consolidated financial statements.

Cautionary Factors That May Affect Future Results

The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on this Form 10-K and Forms 10-Q and 8-K. In Item 1A. “Risk Factors” of this annual report on Form 10-K the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify

all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.


~~Item 7A.~~	~~Quantitative and Qualitative Disclosures about Market Risk.~~

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

The information required by this Item is incorporated by reference to the discussion under “Financial Instruments Market Risk Disclosures” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


~~Item 8.~~	~~Financial Statements and Supplementary Data.~~

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~~(a)~~	~~Financial Statements~~

Item 8.Financial Statements and Supplementary Data.

(a)Financial Statements

The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, ~~2017~~2020 and ~~2016,~~2019, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, ~~2017,~~2020, the notes to consolidated financial statements, and the report dated February ~~27, 2018~~25, 2021 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:

Consolidated Statement of Income

Merck & Co., Inc. and Subsidiaries

Years Ended December 31

($ in millions except per share amounts)


	2017		2016		2015			2020		2019		2018
Sales	$	40,122	$	39,807	$	39,498	Sales	$	47,994	$	46,840	$	42,294
Costs, Expenses and Other							Costs, Expenses and Other
Materials and production	12,775		13,891		14,934
Marketing and administrative	9,830		9,762		10,313
Cost of sales							Cost of sales	15,485		14,112		13,509
Selling, general and administrative							Selling, general and administrative	10,468		10,615		10,102
Research and development	10,208		10,124		6,704		Research and development	13,558		9,872		9,752
Restructuring costs	776		651		619		Restructuring costs	578		638		632
Other (income) expense, net	12		720		1,527		Other (income) expense, net	(886)		139		(402)
	33,601		35,148		34,097			39,203		35,376		33,593
Income Before Taxes	6,521		4,659		5,401		Income Before Taxes	8,791		11,464		8,701
Taxes on Income	4,103		718		942		Taxes on Income	1,709		1,687		2,508
Net Income	2,418		3,941		4,459		Net Income	7,082		9,777		6,193
Less: Net Income Attributable to Noncontrolling Interests	24		21		17
Less: Net Income (Loss) Attributable to Noncontrolling Interests							Less: Net Income (Loss) Attributable to Noncontrolling Interests	15		(66)		(27)
Net Income Attributable to Merck & Co., Inc.	$	2,394	$	3,920	$	4,442	Net Income Attributable to Merck & Co., Inc.	$	7,067	$	9,843	$	6,220
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	0.88	$	1.42	$	1.58	Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	2.79	$	3.84	$	2.34
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	0.87	$	1.41	$	1.56	Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	2.78	$	3.81	$	2.32

	~~For the Fiscal Year Ended December 31, 2017~~
		☐	or
☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	~~For the transition period from~~ to



New Jersey			22-1918501
(State or other jurisdiction of incorporation)			(I.R.S Employer Identification No.)


Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock ($0.50 par value)	MRK	New York Stock Exchange
1.125% Notes due 2021	MRK/21	New York Stock Exchange
0.500% Notes due 2024	MRK 24	New York Stock Exchange
1.875% Notes due 2026	MRK/26	New York Stock Exchange
2.500% Notes due 2034	MRK/34	New York Stock Exchange
1.375% Notes due 2036	MRK 36A	New York Stock Exchange



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐
		Emerging growth company	☐



Documents Incorporated by Reference:
Document						Part of Form 10-K
Proxy Statement for the Annual Meeting of Shareholders to be held May ~~22, 2018,~~25, 2021, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report						Part III



			☒			Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



					Page
Part I
Item 1.		Business			1
Item 1A.		Risk Factors			1826
		Cautionary Factors that May Affect Future Results			2941
Item 1B.		Unresolved Staff Comments			3042
Item 2.		Properties			3042
Item 3.		Legal Proceedings			3143
Item 4.		Mine Safety Disclosures			3143
		Executive Officers of the Registrant			3244
Part II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			3345
Item 6.7.		~~Selected Financial Data~~			35
~~Item 7.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3647
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			6978
Item 8.		Financial Statements and Supplementary Data			7079
		(a)		Financial Statements	7079
				Notes to Consolidated Financial Statements	7483
				Report of Independent Registered Public Accounting Firm	~~128~~136
		~~(b)~~Item 9.	~~Supplementary Data~~			~~130~~
~~Item 9.~~	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~131~~138
Item 9A.		Controls and Procedures			~~131~~138
		Management’s Report			~~131~~138
Item 9B.		Other Information			~~132~~139
Part III
Item 10.		Directors, Executive Officers and Corporate Governance			~~133~~140
Item 11.		Executive Compensation			~~133~~140
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			~~134~~141
Item 13.		Certain Relationships and Related Transactions, and Director Independence			~~134~~141
Item 14.		Principal Accountant Fees and Services			~~134~~141
Part IV
Item 15.		Exhibits and Financial Statement Schedules			~~135~~142

Item 16.		Form 10-K Summary			~~138~~146
		Signatures			~~139~~147


⁽¹⁾	~~Other revenues are primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, and third-party manufacturing sales.~~



Product		Date	Approval
~~Keytruda~~ Dificid (1)		~~December 2017~~January 2020	~~Japanese Ministry of Health, Labour and Welfare approved~~ ~~Keytruda~~ ~~for the treatment of patients with radically unresectable urothelial carcinoma who progressed after cancer chemotherapy.~~
~~September 2017~~	~~The~~ U.S. Food and Drug Administration (FDA) approved ~~Keytruda~~ ~~for previously treated patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction cancer whose tumors express PD-L1.~~
~~September 2017~~	~~The European Commission (EC) approved~~ ~~Keytruda~~Dificidas an oral suspension, and Dificid tablets for the treatment of ~~certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer.~~Clostridioides (formerly Clostridium) difficile-associated diarrhea in children aged six months and older.
~~May 2017~~Gardasil		November 2020	~~FDA~~China’s National Medical Products Administration (NMPA) granted expanded approval for Gardasil for use in girls and women from 9 to 45 years of age.
Gardasil 9		December 2020	Japan’s Ministry of Health, Labour and Welfare (MHLW) approved ~~Keytruda~~additional indication, dosage and administrations of Gardasil 9 (marketed as Silgard 9) for the ~~treatment~~prevention of ~~adult~~anal cancer (squamous cell cancer) and ~~pediatric patients with previously treated unresectable or metastatic, microsatellite instability-high (MSI-H) or mismatch repair deficient, solid tumors.~~precursor lesions (anal intraepithelial neoplasia (AIN) grade 1/2/3) caused by HPV types 6, 11, 16 and 18 for individuals 9 years and older and for Genital Warts (condyloma acuminate) for men 9 years and older.
		~~May 2017~~July 2020	~~FDA~~Japan’s Pharmaceuticals and Medical Devices Agency (PMDA) approved ~~Keytruda~~Gardasil 9 for use in girls and women 9 years and older for the ~~treatment~~prevention of cervical cancer, certain ~~patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer.~~cervical, vaginal and vulvar precancers, and genital warts caused by the HPV types covered by the vaccine.
		~~May 2017~~June 2020	FDA granted accelerated approval for an expanded indication for Gardasil 9for the prevention of oropharyngeal and other head and neck cancers caused by HPV Types 16, 18, 31, 33, 45, 52, and 58.


Keytruda	December 2020	NMPA approved Keytruda ~~in combination with pemetrexed and carboplatin~~ as monotherapy for the first-line treatment of patients with metastatic ~~nonsquamous NSCLC.~~or with unresectable, recurrent HNSCC whose tumors express PD-L1 (Combined Positive Score CPS ≥20) as determined by a fully validated test.
	~~May 2017~~November 2020	ECFDA granted accelerated approval for Keytruda in combination with chemotherapy for patients with locally recurrent unresectable or metastatic triple‑negative breast cancer whose tumors express PD-L1 (CPS ≥10).
	October 2020	FDA approved an expanded label for Keytruda, as monotherapy for the treatment of adult patients with relapsed or refractory ~~classical Hodgkin Lymphoma (cHL)~~cHL.
	August 2020	PMDA approved Keytruda for use at an additional recommended dosage of 400 mg every six weeks (Q6W) administered as an intravenous infusion over 30 minutes across all adult indications, including Keytruda monotherapy and combination therapy.
	August 2020	PMDA approved Keytruda for the treatment of patients whose tumors are PD-L1-positive, and have radically unresectable, advanced or recurrent esophageal squamous cell carcinoma (ESCC) who have ~~failed autologous stem cell transplant (ASCT) and brentuximab vedotin (BV), or who are transplant-eligible and have failed BV.~~progressed after chemotherapy.
	~~March 2017~~June 2020	FDA approved Keytrudaas monotherapy for the first-line treatment of patients with unresectable or metastatic MSI-H or dMMR colorectal cancer.
	June 2020	FDA approved Keytrudaas monotherapy for the treatment of patients with recurrent or metastatic cSCC that is not curable by surgery or radiation.
	June 2020	NMPA approved Keytruda as monotherapy for the treatment of patients with locally advanced or metastatic ESCC whose tumors express PD-L1 (CPS ≥10) as determined by a fully validated test, following failure of one prior line of systemic therapy.
	June 2020	FDA granted accelerated approval for Keytrudaas monotherapy for the treatment of adult and pediatric patients with ~~refractory cHL,~~unresectable or metastatic TMB-H [≥10 mutations/megabase (mut/Mb)] solid tumors, as determined by an FDA-approved test, that have progressed following prior treatment and who have ~~relapsed after three or more prior lines of therapy.~~no satisfactory alternative treatment options.
	~~January 2017~~April 2020	ECFDA granted accelerated approval for Keytruda for use at an additional recommended dose of 400 mg every six weeks (Q6W) for all approved adult indications.
	January 2020	FDA approved Keytruda for ~~the first-line treatment of metastatic NSCLC~~patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk, non-muscle invasive bladder cancer with carcinoma in ~~adults whose~~situ with or without papillary tumors who are ineligible for or have ~~high PD-L1 expression with no EGFR or ALK positive tumor mutations.~~elected not to undergo cystectomy.
~~Lynparza~~⁽¹⁾Koselugo(2)	~~August 2017~~April 2020	FDA approved the ~~oral poly (ADP-ribose) polymerase (PARP)~~kinase inhibitor ~~Lynparza(olaparib),~~Koselugo for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 (NF1) who have symptomatic, inoperable plexiform neurofibromas (PN).
Lenvima	November 2020	NMPA approved Lenvima as ~~follows:~~a monotherapy for the treatment of differentiated thyroid cancer.


Lynparza(2)	December 2020	PMDA approved Lynparza for the treatment of patients with BRCA gene-mutated (BRCAm) castration-resistant prostate cancer with distant metastasis.
	December 2020	PMDA approved Lynparza as a maintenance treatment after platinum-based chemotherapy for ~~recurrent,~~patients with BRCAm curatively unresectable pancreas cancer.
	December 2020	PMDA approved Lynparza as maintenance treatment after first-line chemotherapy containing bevacizumab (genetical recombination) in patients with homologous recombination repair deficient (HRD) ovarian cancer.
	November 2020	The European Commission (EC) approved Lynparza for the maintenance treatment of adult patients with advanced (FIGO stages III and IV) high-grade epithelial ovarian, fallopian tube or primary peritoneal ~~adult~~ cancer who are in response to(complete or partial) following completion of first-line platinum-based chemotherapy ~~regardless of~~ in combination with bevacizumab and whose cancer is associated with HRD-positive status defined by either a breast cancer susceptibility gene 1/2 (BRCA ~~status;~~1/2) mutation and/or genomic instability. ~~• New use of~~
	November 2020	EC approved Lynparza ~~tablets (2 tablets twice daily)~~ as ~~opposed to capsules (8 capsules twice daily);~~ ~~• Lynparza tablets also now indicated~~monotherapy for the ~~use in~~treatment of adult patients with metastatic castration-resistant prostate cancer (mCRPC) and BRCA1/2 mutations (germline and/or somatic) who have progressed following a prior therapy that included a new hormonal agent.
	July 2020	EC approved Lynparza as a monotherapy for the maintenance treatment of adult patients with germline BRCA1/2 mutations who have metastatic adenocarcinoma of the pancreas and have not progressed after a minimum of 16 weeks of platinum treatment within a first-line chemotherapy regimen.
	May 2020	FDA approved Lynparza for the treatment of adult patients with deleterious or suspected deleterious germline ~~BRCA-mutated advanced ovarian cancer,~~or somatic homologous recombination repair (HRR) gene-mutated mCRPC, as determined by an FDA-approved test, who have ~~been treated~~progressed following prior treatment with ~~three~~enzalutamide or ~~more prior lines of chemotherapy.~~abiraterone.
	~~Isentress~~	~~November 2017~~May 2020	FDA approved ~~Isentress~~ ~~for use~~ Lynparza in combination with ~~other antiretroviral agents~~bevacizumab as a first-line maintenance treatment of adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy and whose cancer is associated with HRD positive status defined by either a deleterious or suspected deleterious BRCA mutation, and/or genomic instability, as determined by an FDA-approved test.
Recarbrio	June 2020	FDA approved Recarbrio for the treatment of ~~HIV-1 in neonates - newborn~~ patients ~~from birth to four weeks~~18 years of age ~~- weighing at least 2 kg.~~



~~Isentress HD~~	~~July 2017~~	~~EC approved~~ ~~Isentress~~ ~~600 mg film-coated tablets, in combination~~and older with ~~other anti-retroviral medicinal products, as a once-daily treatment of HIV-1 infection in patients who are treatment-naïve or who are virologically suppressed on an initial regimen of~~ ~~Isentress~~ ~~400 mg twice daily.~~
	~~May 2017~~	~~FDA approved~~ ~~Isentress HD, a once-daily dose of~~ ~~Isentress, in combination with other antiretroviral agents, for the treatment of HIV-1 infection patients who are treatment-naïve or whose virus has been suppressed on an initial regimen of~~ ~~Isentress~~ ~~400 mg given twice daily.~~
~~Prevymis~~	~~November 2017~~	~~FDA approved~~ ~~Prevymis~~ ~~(letermovir) for prophylaxis (prevention) of cytomegalovirus (CMV) infection~~hospital-acquired bacterial pneumonia and ~~disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant (HSCT)~~ventilator-associated bacterial pneumonia (HABP/VABP).
~~Steglatro/~~ ~~Steglujan/~~ ~~Segluromet~~⁽²⁾Steglatro(3)			~~December 2017~~July 2020	~~FDA~~NMPA approved Steglatro ~~(ertugliflozin)~~ 5 mg tablets ~~an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, the fixed-dose combination~~ ~~Steglujan~~ ~~(ertugliflozin and sitagliptin) tablets, and the fixed-dose combination~~ ~~Segluromet~~ ~~(ertugliflozin and metformin hydrochloride)~~ for the treatment of type 2 diabetes.


⁽²⁾	~~In 2013, Merck and Pfizer Inc. announced that they entered into a worldwide collaboration, except Japan, for the co-development and co-promotion of ertugliflozin.~~



Product	Year of Expiration (U.S.)	Year of Expiration (EU)⁽¹⁾	Year of Expiration (Japan)
Cancidas	Expired	Expired	2022
Zostavax	Expired	2018 (use)	N/A
Zetia	Expired	2018	2019
Vytorin	Expired	2019	2019
Asmanex	2018 (formulation)	2018 (formulation)	2020 (formulation)
NuvaRing	2018 (delivery system)	2018 (delivery system)	N/A
Emend for Injection	2019⁽²⁾	2020⁽²⁾	2020
Follistim AQ	2019 (formulation)	2019 (formulation)	2019 (formulation)
Noxafil	2019	2019	N/A
RotaTeq	2019	Expired	Expired
Recombivax	2020 (method of making)	Expired	Expired
Dulera	2020 (combination)	N/A	N/A
Januvia	2022⁽²⁾	2022⁽²⁾	2025-2026⁽³⁾
Janumet	2022⁽²⁾	2023	N/A
Janumet XR	2022⁽²⁾	N/A	N/A
Isentress	2024	2022⁽²⁾	2022
Simponi	N/A⁽⁴⁾	2024	N/A⁽⁴⁾
Adempas⁽⁵⁾	2026⁽²⁾	2023 (patents), 2028⁽²⁾ (SPCs)	2027-2028⁽³⁾
Bridion	2026⁽²⁾ (with pending PTE)	2023	2024
Nexplanon	2027 (device)	2025 (device)	Not Marketed
Bravecto	2027 (with pending PTE)	2025 (patents), 2029 (SPCs)	2029
Gardasil	2028	2021⁽²⁾	2017
Gardasil 9	2028	2025 (patents), 2030⁽²⁾ (SPCs)	N/A
Keytruda	2028	2028 (patents), 2030⁽²⁾ (SPCs)	2032
Lynparza⁽⁶⁾	2028⁽²⁾(with pending PTE)	2024 (patents), 2029⁽²⁾ (SPCs)	2024⁽⁷⁾
Zerbaxa	2028⁽²⁾ (with pending PTE)	2023 (patents), 2028⁽²⁾ (SPCs)	N/A
Sivextro	2028⁽²⁾	2024 (patents), 2029⁽²⁾ (SPCs)	N/A
Belsomra	2029⁽²⁾	N/A	2031
Prevymis	2029⁽²⁾ (with pending PTE)	2024⁽⁸⁾	N/A
Steglatro⁽⁹⁾	2031⁽²⁾ (with pending PTE)	N/A	N/A
Steglujan⁽⁹⁾	2031(with pending PTE)	N/A	N/A
Segluromet⁽⁹⁾	2031 (with pending PTE)	N/A	N/A
Zepatier	2031⁽²⁾	2030 (patents), 2031⁽²⁾ (SPCs)	2034 (with pending PTE)



Cash Dividends Paid per Common Share
	Year		4th Q		3rd Q		2nd Q		1st Q
2017	$	1.88	$	0.47	$	0.47	$	0.47	$	0.47
2016	$	1.84	$	0.46	$	0.46	$	0.46	$	0.46
Common Stock Market Prices
Common Stock Market Prices
2017			4th Q		3rd Q		2nd Q		1st Q
High			64.90		66.41		66.40		66.80
Low			53.63		61.16		61.87		59.05
2016
High			$	65.46	$	64.00	$	57.87	$	53.60
Low			$	58.29	$	57.18	$	52.44	$	47.97


~~Item 1.~~	~~Business.~~



			($ in millions)
Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
October 1 — October 31	2,172,335	$63.38	$2,605
November 1 — November 30	11,850,338	$55.03	$1,953
December 1 — December 31	16,285,000	$56.05	$11,040
Total	30,307,673	$56.17	$11,040



	End of Period Value	2017/2012 CAGR**
MERCK	$162	10%
PEER GRP.**	185	13%
S&P 500	208	16%



	2012	2013	2014	2015	2016	2017
MERCK	100.00	126.90	148.70	142.70	164.30	161.80
PEER GRP.	100.00	134.60	150.20	154.70	151.60	184.70
S&P 500	100.00	132.40	150.50	152.50	170.80	208.10



	2017 ⁽¹⁾		2016⁽²⁾		2015⁽³⁾		2014 ⁽⁴⁾			2013
Results for Year:
Sales	$	40,122	$	39,807	$	39,498	$	42,237		$	44,033
Materials and production	12,775		13,891		14,934		16,768			16,954
Marketing and administrative	9,830		9,762		10,313		11,606			11,911
Research and development	10,208		10,124		6,704		7,180			7,503
Restructuring costs	776		651		619		1,013			1,709
Other (income) expense, net	12		720		1,527		(11,613		)	411
Income before taxes	6,521		4,659		5,401		17,283			5,545
Taxes on income	4,103		718		942		5,349			1,028
Net income	2,418		3,941		4,459		11,934			4,517
Less: Net income attributable to noncontrolling interests	24		21		17		14			113
Net income attributable to Merck & Co., Inc.	2,394		3,920		4,442		11,920			4,404
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders	$	0.88	$	1.42	$	1.58	$	4.12		$	1.49
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders	$	0.87	$	1.41	$	1.56	$	4.07		$	1.47
Cash dividends declared	5,177		5,135		5,115		5,156			5,132
Cash dividends declared per common share	$	1.89	$	1.85	$	1.81	$	1.77		$	1.73
Capital expenditures	1,888		1,614		1,283		1,317			1,548
Depreciation	1,455		1,611		1,593		2,471			2,225
Average common shares outstanding (millions)	2,730		2,766		2,816		2,894			2,963
Average common shares outstanding assuming dilution (millions)	2,748		2,787		2,841		2,928			2,996
Year-End Position:
Working capital	$	6,152	$	13,410	$	10,550	$	14,198		$	17,461
Property, plant and equipment, net	12,439		12,026		12,507		13,136			14,973
Total assets	87,872		95,377		101,677		98,096			105,370
Long-term debt	21,353		24,274		23,829		18,629			20,472
Total equity	34,569		40,308		44,767		48,791			52,326
Year-End Statistics:
Number of stockholders of record	121,700		129,500		135,500		142,000			149,400
Number of employees	69,000		68,000		68,000		70,000			77,000



($ in millions)	2017		Change		2016		Change		2015
Materials and production	$	12,775	-8	%	$	13,891	-7	%	$	14,934
Marketing and administrative	9,830		1	%	9,762		-5	%	10,313
Research and development	10,208		1	%	10,124		51	%	6,704
Restructuring costs	776		19	%	651		5	%	619
Other (income) expense, net	12		-98	%	720		-53	%	1,527
	$	33,601	-4	%	$	35,148	3	%	$	34,097


																						Common Stock		Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non- controlling Interests		Total
	Common Stock		Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Non- controlling Interests			Total
Balance January 1, 2015		$1,788	$	40,423		$	46,021		$	(4,323	)	$	(35,262	)	$	144		$	48,791
Balance January 1, 2018																					Balance January 1, 2018	$1,788		$	39,902	$	41,350	$	(4,910)	$	(43,794)	$	233	$	34,569
Net income attributable to Merck & Co., Inc.	—		—			4,442			—			—			—			4,442			Net income attributable to Merck & Co., Inc.	—		—		6,220		—		—		—		6,220
Other comprehensive income, net of taxes	—		—			—			175			—			—			175
Cash dividends declared on common stock ($1.81 per share)	—		—			(5,115		)	—			—			—			(5,115		)
Adoption of new accounting standards																					Adoption of new accounting standards	—		—		322		(274)		—		—		48
Other comprehensive loss, net of taxes																					Other comprehensive loss, net of taxes	—		—		—		(361)		—		—		(361)
Cash dividends declared on common stock ($1.99 per share)																					Cash dividends declared on common stock ($1.99 per share)	—		—		(5,313)		—		—		—		(5,313)
Treasury stock shares purchased	—		—			—			—			(4,186		)	—			(4,186		)	Treasury stock shares purchased	—		(1,000)		—		—		(8,091)		—		(9,091)
Changes in noncontrolling ownership interests	—		(20		)	—			—			—			(55		)	(75		)
Net loss attributable to noncontrolling interests																					Net loss attributable to noncontrolling interests	—		—		—		—		—		(27)		(27)
Distributions attributable to noncontrolling interests																					Distributions attributable to noncontrolling interests	—		—		—		—		—		(25)		(25)
Share-based compensation plans and other																					Share-based compensation plans and other	—		(94)		—		—		956		—		862
Balance December 31, 2018																					Balance December 31, 2018	1,788		38,808		42,579		(5,545)		(50,929)		181		26,882
Net income attributable to Merck & Co., Inc.																					Net income attributable to Merck & Co., Inc.	—		—		9,843		—		—		—		9,843
Other comprehensive loss, net of taxes																					Other comprehensive loss, net of taxes	—		—		—		(648)		—		—		(648)
Cash dividends declared on common stock ($2.26 per share)																					Cash dividends declared on common stock ($2.26 per share)	—		—		(5,820)		—		—		—		(5,820)
Treasury stock shares purchased																					Treasury stock shares purchased	—		1,000		—		—		(5,780)		—		(4,780)
Net loss attributable to noncontrolling interests																					Net loss attributable to noncontrolling interests	—		—		—		—		—		(66)		(66)
Distributions attributable to noncontrolling interests																					Distributions attributable to noncontrolling interests	—		—		—		—		—		(21)		(21)
Share-based compensation plans and other																					Share-based compensation plans and other	—		(148)		—		—		759		—		611
Balance December 31, 2019																					Balance December 31, 2019	1,788		39,660		46,602		(6,193)		(55,950)		94		26,001
Net income attributable to Merck & Co., Inc.																					Net income attributable to Merck & Co., Inc.	—		—		7,067		—		—		—		7,067
Other comprehensive loss, net of taxes																					Other comprehensive loss, net of taxes	—		—		—		(441)		—		—		(441)
Cash dividends declared on common stock ($2.48 per share)																					Cash dividends declared on common stock ($2.48 per share)	—		—		(6,307)		—		—		—		(6,307)
Treasury stock shares purchased																					Treasury stock shares purchased	—		—		—		—		(1,281)		—		(1,281)
Net income attributable to noncontrolling interests	—		—			—			—			—			17			17			Net income attributable to noncontrolling interests	—		—		—		—		—		15		15
Distributions attributable to noncontrolling interests	—		—			—			—			—			(15		)	(15		)	Distributions attributable to noncontrolling interests	—		—		—		—		—		(22)		(22)
Share-based compensation plans and other	—		(181		)	—			—			914			—			733			Share-based compensation plans and other	—		(72)		—		—		444		—		372
Balance December 31, 2015	1,788		40,222			45,348			(4,148		)	(38,534		)	91			44,767
Net income attributable to Merck & Co., Inc.	—		—			3,920			—			—			—			3,920
Other comprehensive loss, net of taxes	—		—			—			(1,078		)	—			—			(1,078		)
Cash dividends declared on common stock ($1.85 per share)	—		—			(5,135		)	—			—			—			(5,135		)
Treasury stock shares purchased	—		—			—			—			(3,434		)	—			(3,434		)
Changes in noncontrolling ownership interests	—		—			—			—			—			124			124
Net income attributable to noncontrolling interests	—		—			—			—			—			21			21
Distributions attributable to noncontrolling interests	—		—			—			—			—			(16		)	(16		)
Share-based compensation plans and other	—		(283		)	—			—			1,422			—			1,139
Balance December 31, 2016	1,788		39,939			44,133			(5,226		)	(40,546		)	220			40,308
Net income attributable to Merck & Co., Inc.	—		—			2,394			—			—			—			2,394
Other comprehensive income, net of taxes	—		—			—			316			—			—			316
Cash dividends declared on common stock ($1.89 per share)	—		—			(5,177		)	—			—			—			(5,177		)
Treasury stock shares purchased	—		—			—			—			(4,014		)	—			(4,014		)
Acquisition of Vallée S.A.	—		—			—			—			—			7			7
Net income attributable to noncontrolling interests	—		—			—			—			—			24			24
Distributions attributable to noncontrolling interests	—		—			—			—			—			(18		)	(18		)
Share-based compensation plans and other	—		(37		)	—			—			766			—			729
Balance December 31, 2017	$	1,788	$	39,902		$	41,350		$	(4,910	)	$	(43,794	)	$	233		$	34,569
Balance December 31, 2020																					Balance December 31, 2020	$	1,788	$	39,588	$	47,362	$	(6,634)	$	(56,787)	$	87	$	25,404


($ in millions)	January 16, 2020
Cash and cash equivalents	$	145
IPR&D MK-1026 (formerly ARQ 531) (1)	2,280
Licensing arrangement for ARQ 087	80
Deferred income tax liabilities	(361)
Other assets and liabilities, net	34
Total identifiable net assets	2,178
Goodwill (2)	512
Consideration transferred	$	2,690



Estimated fair value at January 21, 2015
Cash and cash equivalents	$	733
Accounts receivable	123
Inventories	216
Other current assets	55
Property, plant and equipment	151
Identifiable intangible assets:
Products and product rights (11 year weighted-average useful life)	6,923
IPR&D	50
Other noncurrent assets	184
Current liabilities⁽¹⁾	(233		)
Deferred income tax liabilities	(2,519		)
Long-term debt	(1,900		)
Other noncurrent liabilities ⁽¹⁾	(122		)
Total identifiable net assets	3,661
Goodwill ⁽²⁾	4,670
Consideration transferred	$	8,331


⁽¹⁾ ($ in millions)	~~Included in current liabilities~~April 1, 2019
Cash and ~~other noncurrent liabilities is contingent consideration of $73 million~~cash equivalents	$	31
Accounts receivable	73
Inventories	93
Property, plant and ~~$50 million, respectively.~~equipment

60
⁽²⁾Identifiable intangible assets (useful lives ranging from 18-24 years) (1)	~~The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition~~2,689
Deferred income tax liabilities	(589)
Other assets and ~~was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.~~liabilities, net	(82)
Total identifiable net assets	2,275
Goodwill (2)	1,376
Consideration transferred	$	3,651



Year Ended December 31	2017
Alliance revenues (net of commercialization costs)	$	20

Materials and production costs	4
Marketing and administrative expenses	1
Research and development expenses	2,419

Receivables from AstraZeneca	12
Payables to AstraZeneca	643



	Separation Costs		Accelerated Depreciation		Other		Total
Year Ended December 31, 2017
Materials and production	$	—	$	52	$	86	$	138
Marketing and administrative	—		2		—		2
Research and development	—		6		5		11
Restructuring costs	552		—		224		776
	$	552	$	60	$	315	$	927
Year Ended December 31, 2016
Materials and production	$	—	$	77	$	104	$	181
Marketing and administrative	—		8		87		95
Research and development	—		142		—		142
Restructuring costs	216		—		435		651
	$	216	$	227	$	626	$	1,069
Year Ended December 31, 2015
Materials and production	$	—	$	78	$	283	$	361
Marketing and administrative	—		59		19		78
Research and development	—		37		15		52
Restructuring costs	208		—		411		619
	$	208	$	174	$	728	$	1,110


⁽¹⁾	~~The remaining cash outlays are expected to be substantially completed by the end of 2020.~~


	2020		2019
Assets
Current Assets
Cash and cash equivalents	$	8,062	$	9,676
Short-term investments	0		774
Accounts receivable (net of allowance for doubtful accounts of $85 in 2020 and $86 in 2019)	7,851		6,778
Inventories (excludes inventories of $2,197 in 2020 and $1,480 in 2019 classified in Other assets - see Note 7)	6,310		5,978
Other current assets	5,541		4,277
Total current assets	27,764		27,483
Investments	785		1,469
Property, Plant and Equipment (at cost)
Land	350		343
Buildings	12,645		11,989
Machinery, equipment and office furnishings	16,649		15,394
Construction in progress	7,324		5,013
	36,968		32,739
Less: accumulated depreciation	18,982		17,686
	17,986		15,053
Goodwill	20,238		19,425
Other Intangibles, Net	14,604		14,196
Other Assets	10,211		6,771
	$	91,588	$	84,397
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt	$	6,431	$	3,610
Trade accounts payable	4,594		3,738
Accrued and other current liabilities	13,053		12,549
Income taxes payable	1,575		736
Dividends payable	1,674		1,587
Total current liabilities	27,327		22,220
Long-Term Debt	25,360		22,736
Deferred Income Taxes	1,015		1,470
Other Noncurrent Liabilities	12,482		11,970
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2020 and 2019	1,788		1,788
Other paid-in capital	39,588		39,660
Retained earnings	47,362		46,602
Accumulated other comprehensive loss	(6,634)		(6,193)
	82,104		81,857
Less treasury stock, at cost: 1,046,877,695 shares in 2020 and 1,038,087,496 shares in 2019	56,787		55,950
Total Merck & Co., Inc. stockholders’ equity	25,317		25,907
Noncontrolling Interests	87		94
Total equity	25,404		26,001
	$	91,588	$	84,397


($ in millions)	April 1, 2019
Cash and cash equivalents	$	31
Accounts receivable	73
Inventories	93
Property, plant and equipment	60
Identifiable intangible assets (useful lives ranging from 18-24 years) (1)	2,689
Deferred income tax liabilities	(589)
Other assets and liabilities, net	(82)
Total identifiable net assets	2,275
Goodwill (2)	1,376
Consideration transferred	$	3,651


	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)						Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
Years Ended December 31	2020		2019		2018		2020		2019		2018
Net Investment Hedging Relationships
Foreign exchange contracts	$	26	$	(10)	$	(18)	$	(19)	$	(31)	$	(11)
Euro-denominated notes	385		(75)		(183)		0		0		0


	Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
	2020		2019		2020		2019
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	1,150	$	1,249	$	0	$	(1)
Long-Term Debt	2,301		3,409		53		14


		2020						2019
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
	Balance Sheet Caption	Asset		Liability				Asset		Liability
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Other current assets	$	1	$	—	$	1,150	$	0	$	—	$	0
Interest rate swap contracts	Other Assets	54		—		2,250		15		—		3,400
Interest rate swap contracts	Accrued and other current liabilities	—		0		0		—		1		1,250
Foreign exchange contracts	Other current assets	12		—		3,183		152		—		6,117
Foreign exchange contracts	Other Assets	45		—		2,030		55		—		2,160
Foreign exchange contracts	Accrued and other current liabilities	—		217		5,049		—		22		1,748
Foreign exchange contracts	Other Noncurrent Liabilities	—		1		52		—		1		53
		$	112	$	218	$	13,714	$	222	$	24	$	14,728
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	70	$	—	$	7,260	$	66	$	—	$	7,245
Foreign exchange contracts	Accrued and other current liabilities	—		307		11,810		—		73		8,693
		$	70	$	307	$	19,070	$	66	$	73	$	15,938
		$	182	$	525	$	32,784	$	288	$	97	$	30,666


	Sales						Other (income) expense, net (1)				Other comprehensive income (loss)
Years Ended December 31	2020		2019		2018		2020		2019	2018	2020		2019		2018
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	47,994	$	46,840	$	42,294	$	(886)	139	(402)	$	(441)	$	(648)	$	(361)
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—		—		—		40		95	(27)	—		—		—
Derivatives designated as hedging instruments	—		—		—		(76)		(65)	50	—		—		—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of (loss) gain recognized in OCI on derivatives	—		—		—		—		—	—	(383)		87		228
(Decrease) increase in Sales as a result of AOCI reclassifications	(6)		255		(160)		—		—	—	6		(255)		160
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—		—		—		(4)		(4)	(4)	—		—		—
Amount of loss recognized in OCI on derivatives	—		—		—		—		—	—	(4)		(6)		(4)


		Amount of Derivative Pretax (Gain) Loss Recognized in Income
Years Ended December 31		2020		2019		2018
Derivatives Not Designated as Hedging Instruments	Income Statement Caption
Foreign exchange contracts (1)	Other (income) expense, net	$	(12)	$	174	$	(260)
Foreign exchange contracts (2)	Sales	13		1		(8)
Interest rate contracts (3)	Other (income) expense, net	9		0		0
Forward contract related to Seagen common stock	Research and development expenses	15		0		0