0000310158us-gaap:PensionPlansDefinedBenefitMemberus-gaap:ForeignPlanMemberus-gaap:FairValueInputsLevel1Member2020-12-31

As filed with the Securities and Exchange Commission on February 27, 201925, 2021

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K
(MARK ONE)
 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2020

OR
For the Fiscal Year Ended December 31, 2018
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  to

For the transition period from to

Commission File No. 1-6571


Merck & Co., Inc.
2000 Galloping Hill Road
Kenilworth, N. J. 07033
(908) 740-4000
Incorporated in 2000 Galloping Hill Road
KenilworthNew Jersey
I.R.S. Employer
Identification No. 22-1918501
07033
(908) 740-4000
New Jersey22-1918501
(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 ClassTrading Symbol(s)Name of Each Exchange on which Registered
Common Stock ($0.50 par value)MRKNew York Stock Exchange
1.125% Notes due 2021MRK/21New York Stock Exchange
0.500% Notes due 2024MRK 24New York Stock Exchange
1.875% Notes due 2026MRK/26New York Stock Exchange
2.500% Notes due 2034MRK/34New York Stock Exchange
1.375% Notes due 2036MRK 36ANew York Stock Exchange
Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2019: 2,581,220,308.2021: 2,530,315,668.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 20182020 based on closing price on June 30, 2018: $161,991,000,000.2020: $195,461,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     YesNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YesNo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YesNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YesNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  

Documents Incorporated by Reference:
DocumentPart of Form 10-K
Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019,25, 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



Table of Contents
Table of Contents
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.7.
Item 7.
Item 7A.
Item 8.
(a)
(b)Item 9.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.



Table of Contents
PART I
 
Item 1.Business.
Item 1.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 fourtwo operating segments, which are the Pharmaceutical and Animal Health Healthcare Services and Alliancessegments, both of which are reportable segments.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities.
The Animal Health segment discovers, develops, manufactures and markets animal health products, includinga 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 species, which thespecies. 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 previously had a Healthcare Services segment providesthat provided services and solutions that focusfocused 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 includes resultsincluded activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.
The Company was incorporated in New Jersey in 1970.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.
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 (the 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 (ezetimibe) and Vytorin (ezetimibe/simvastatin), 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. See “Risk Factors - Risks Related to the Proposed Spin-Off of Organon.”

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Product Sales
Total Company sales, including sales of the Company’s top pharmaceutical products, as well as sales of animal health products, were as follows:
($ in millions)202020192018
Total Sales$47,994 $46,840 $42,294 
Pharmaceutical43,021 41,751 37,689 
Keytruda14,380 11,084 7,171 
Januvia/Janumet5,276 5,524 5,914 
Gardasil/Gardasil 9
3,938 3,737 3,151 
ProQuad/M-M-R II/Varivax
1,878 2,275 1,798 
Bridion1,198 1,131 917 
Pneumovax 23
1,087 926 907 
Isentress/Isentress HD857 975 1,140 
Simponi838 830 893 
RotaTeq797 791 728 
Alliance revenue - Lynparza(1)
725 444 187 
Implanon/Nexplanon680 787 703 
Zetia/Vytorin664 874 1,355 
Alliance revenue - Lenvima(1)
580 404 149 
Animal Health4,703 4,393 4,212 
Livestock2,939 2,784 2,630 
Companion Animals1,764 1,609 1,582 
Other Revenues(2)
270 696 393 
($ in millions)2018 2017 2016
Total Sales$42,294
 $40,122
 $39,807
Pharmaceutical37,689
 35,390
 35,151
Keytruda7,171
 3,809
 1,402
Januvia/Janumet5,914
 5,896
 6,109
Gardasil/Gardasil 9
3,151
 2,308
 2,173
ProQuad/M-M-R II/Varivax
1,798
 1,676
 1,640
Zetia/Vytorin1,355
 2,095
 3,701
Isentress/Isentress HD1,140
 1,204
 1,387
Bridion917
 704
 482
Pneumovax 23
907
 821
 641
NuvaRing902
 761
 777
Simponi893
 819
 766
Animal Health4,212
 3,875
 3,478
Livestock2,630
 2,484
 2,287
Companion Animals1,582
 1,391
 1,191
Other Revenues(1)
393
 857
 1,178
(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs.
(1)
Other revenues are primarily comprised of Healthcare Services segment revenue, third-party manufacturing sales, and miscellaneous corporate revenues, including revenue hedging activities.

(2)Other revenues are primarily comprised of third-party manufacturing sales and miscellaneous corporate revenues, including revenue hedging activities.
Pharmaceutical
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. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. Certain of the products within the Company’s franchises are as follows:
Oncology
Keytruda (pembrolizumab), the Company’s anti-PD-1 (programmed death receptor-1) therapy, as monotherapy for the treatment of certain patients with non-small-cell lungcervical cancer, (NSCLC), melanoma, classical Hodgkin Lymphoma (cHL), urothelialcutaneous squamous cell carcinoma (cSCC), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma, head and neck squamous cell carcinoma (HNSCC), gastric or gastroesophageal junction adenocarcinoma, andhepatocellular carcinoma (HCC), non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer, and in combination with chemotherapy in certain patients with NSCLC. Keytruda is also used in the United States for monotherapy treatment of certain patients with cervicalincluding MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma (PMBCL), hepatocellulartumor mutational burden-high (TMB-H) cancer, and urothelial carcinoma, including non-muscle invasive bladder cancer. Keytruda is also approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and Merkelnon-squamous NSCLC, in combination with chemotherapy for HNSCC, in combination with chemotherapy for triple-negative breast cancer, in combination with axitinib for renal cell carcinoma, and in combination with chemotherapylenvatinib for patients with squamous NSCLC; endometrial carcinoma; and Emend (aprepitant) for the prevention of certain chemotherapy-induced and post-operative nausea and vomiting; and Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors.vomiting. In addition, the Company recognizes alliance revenue related to sales of Lynparza (olaparib), an oral poly (ADP-ribose) polymerase (PARP) inhibitor, for certain types of advanced ovarian, breast, pancreatic, and breast cancer;prostate cancers; and Lenvima (lenvatinib) for certain types of thyroid cancer, hepatocellular carcinoma, and in combination with everolimus for certain patients with renal cell carcinoma, and in combination with Keytruda for certain patients with endometrial carcinoma.
Vaccines
Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to help prevent certain diseases
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caused by certain types of human papillomavirus (HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-RM−M−R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease; RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children; and Zostavax (Zoster Vaccine Live), aVaqta (hepatitis A vaccine, to help prevent shingles (herpes zoster).inactivated) indicated for the prevention of disease caused by hepatitis A virus in persons 12 months of age and older.
Hospital Acute Care
Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery; Noxafil (posaconazole), an antifungal agent for the prevention of certain invasive fungal infections; Invanz (ertapenem sodium)Prevymis (letermovir) for the prophylaxis of cytomegalovirus (CMV) reactivation and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant; Primaxin (imipenem and cilastatin) for injection, an antibiotic for the treatment of certain bacterial infections; Cancidas (caspofungin acetate) for injection, an anti-fungal agent for the treatment of certain fungal infections; Invanz (ertapenem) for injection, an antibiotic for the treatment of certain bacterial infections; Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms; Cancidas (caspofungin acetate), an anti-fungal product; Primaxin (imipenem and cilastatin sodium), an anti-bacterial product; and Zerbaxa (ceftolozane and tazobactam) is currently approved in the United States for the treatment of adult patients with complicated urinary tract infections caused by certain susceptible Gram-negative microorganisms,bacterial infections; and is also indicated, inZerbaxa (ceftolozane and tazobactam) for injection, a combination with metronidazole,antibacterial and beta-lactamase inhibitor for the treatment of adult patients with complicated intra-abdominal infections caused by certain susceptible Gram-negative and Gram-positive microorganisms.bacterial infections.
Immunology
Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases; and Remicade (infliximab), a treatment for inflammatory diseases, both of which the Company markets in Europe, Russia and Turkey.
Neuroscience
Belsomra (suvorexant), an orexin receptor antagonist indicated for the treatment of insomnia, characterized by difficulties with sleep onset and/or sleep maintenance.
Virology
Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection; and Zepatier (elbasvir and grazoprevir) for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with ribavirin in certain patient populations.

Cardiovascular
Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States); Atozet (ezetimibe and atorvastatin) (marketed in certain countries outside of the United States) and Rosuzet (ezetimibe and rosuvastatin) (marketed in certain countries outside of the United States), cholesterol modifying medicines; and Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension.
Diabetes
Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
Women’s Health
Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant; and NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product; and Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant.product.
Animal Health
The Animal Health segment discovers, develops, manufactures and markets animala wide range of veterinary pharmaceuticals, vaccines and health products, including pharmaceuticalmanagement solutions and vaccine products, for the prevention, treatmentservices, as well as an extensive suite of digitally connected identification, traceability and control of disease in all major livestock and companion animal species.monitoring products. Principal products in this segment include:
Livestock Products
Nuflor (Florfenicol) antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine (Flunixin meglumine) bovine and swine anti-inflammatory; Estrumate (cloprostenol sodium) for the treatment of fertility disorders in cattle; Matrix (altrenogest) fertility management for swine; Resflor (florfenicol and flunixin meglumine), a combination broad-spectrum antibiotic and non-steroidal anti-inflammatory
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drug for bovine respiratory disease; Zuprevo (Tildipirosin) for bovine respiratory disease; Zilmax (zilpaterol hydrochloride) and Revalor (trenbolone acetate and estradiol) to improve production efficiencies in beef cattle; Safe-Guard (fenbendazole) de-wormer for cattle; M+Pac (Mycoplasma Hyopneumoniae Bacterin) swine pneumonia vaccine; Porcilis (Lawsonia intracellularis baterin) and Circumvent (Porcine Circovirus Vaccine, Type 2, Killed Baculovirus Vector) vaccine lines for infectious diseases in swine; Nobilis/Innovax (Live Marek’s Disease Vector), vaccine lines for poultry; Paracox and Coccivac coccidiosis vaccines; Exzolt, a systemic treatment for poultry red mite infestations; Slice (Emamectin benzoate) parasiticide for sea lice in salmon; Aquavac (Avirulent Live Culture)/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor (Florfenicol) antibiotic for farm-raised fish.fish; and Allflex Livestock Intelligence solutions for animal identification, monitoring and traceability.
Companion Animal Products
Bravecto (fluralaner), a line of oral and topical parasitic control products, that kills fleas and ticks inincluding the original Bravecto (fluralaner) products for dogs and cats forthat last up to 12 weeks; Bravecto (fluralaner) One-Month, a monthly product for dogs, and Bravecto Plus (fluralaner/moxidectin), a two-month product for cats; Sentinel, a line of oral parasitic products for dogs including Sentinel Spectrum (milbemycin oxime, lufenuron, and praziquantel) and Sentinel Flavor Tabs (milbemycin oxime, lufenuron); Optimmune (cyclosporine), an ophthalmic ointment;Nobivac vaccine lines for flexible dog and cat vaccination; Otomax (Gentamicin sulfate, USP; Betamethasone valerate USP; and Clotrimazole USP ointment)/Mometamax (Gentamicin sulfate, USP, Mometasone Furoate Monohydrate and Clotrimazole, USP, Otic Suspension)/Posatex (Orbifloxacin, Mometasone Furoate Monohydrate and Posaconazole, Suspension) ear ointments for acute and chronic otitis; Caninsulin/Vetsulin (porcine insulin zinc suspension) diabetes mellitus treatment for dogs and cats; Panacur (fenbendazole)/Safeguard (fenbendazole) broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate (altrenogest) fertility management for horses; Prestige vaccine line for horses; and Scalibor (Deltamethrin)/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.sandflies; and Sure Petcare products for companion animal identification and well-being, including the microchip and pet recovery system Home Again.
For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

20182020 Product Approvals

Set forth below is a summary of significant product approvals received by the Company in 2018.
2020.
ProductDateApproval
Keytruda
Dificid (1)
December 2018January 2020
The Japanese Ministry of Health, Labor and Welfare (JMHLW) approved Keytruda for three expanded uses in unresectable, advanced or recurrent NSCLC, one in malignant melanoma, as well as a new indication in high microsatellite instability solid tumors.
December 2018
The U.S. Food and Drug Administration (FDA) approved Dificidas an oral suspension, and Dificid tablets for the treatment of Clostridioides (formerly Clostridium) difficile-associated diarrhea in children aged six months and older.
GardasilNovember 2020
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 additional indication, dosage and administrations of Gardasil 9 (marketed as Silgard 9) for the prevention of anal cancer (squamous cell cancer) and 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.
July 2020
Japan’s Pharmaceuticals and Medical Devices Agency (PMDA) approved Gardasil 9 for use in girls and women 9 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.
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.
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KeytrudaDecember 2020
NMPA approved Keytruda as monotherapy for the first-line treatment of patients with metastatic or with unresectable, recurrent HNSCC whose tumors express PD-L1 (Combined Positive Score CPS ≥20) as determined by a fully validated test.
November 2020
FDA 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 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 progressed after chemotherapy.

June 2020
FDA approved Keytruda as 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 recurrent locally advancedunresectable or metastatic Merkel cell carcinoma.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 no satisfactory alternative treatment options.
December 2018April 2020
The European Commission (EC)FDA 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 patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk, non-muscle invasive bladder cancer with carcinoma in situ with or without papillary tumors who are ineligible for or have elected not to undergo cystectomy.

Koselugo(2)
April 2020FDA approved the kinase inhibitor Koselugo for the adjuvant treatment of adultspediatric patients two years of age and older with stage III melanoma and lymph node involvementneurofibromatosis type 1 (NF1) who have undergone complete resection.symptomatic, inoperable plexiform neurofibromas (PN).
LenvimaNovember 20182020NMPA approved Lenvima as a monotherapy for the treatment of differentiated thyroid cancer.
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Lynparza(2)
December 2020
FDAPMDA approved KeytrudaLynparza for the treatment of patients with hepatocellular carcinoma who have been previously treatedBRCA gene-mutated (BRCAm) castration-resistant prostate cancer with sorafenib.distant metastasis.
October 2018December 2020
FDAPMDA approved Keytruda,Lynparza as maintenance treatment after platinum-based chemotherapy for patients with BRCAm curatively unresectable pancreas cancer.
December 2020PMDA 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 cancer who are in response (complete or partial) following completion of first-line platinum-based chemotherapy in combination with carboplatinbevacizumab and whose cancer is associated with HRD-positive status defined by either paclitaxel a breast cancer susceptibility gene 1/2 (BRCA1/2) mutation and/or nab-paclitaxel, for the first-line treatment of patients with metastatic squamous non-small cell lung cancer (NSCLC).genomic instability.
September 2018November 2020
EC approved Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of metastatic nonsquamous NSCLC in adults whose tumors have no EGFR or ALK positive mutations.
September 2018
EC approved Keytruda for the treatment of recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) in adults whose tumors express PD-L1 with a ≥ 50% TPS and progressing on or after platinum-containing chemotherapy.
August 2018
FDA approved Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of metastatic nonsquamous NSCLC patients with no EGFR or ALK genomic tumor aberrations.
July 2018
The China National Drug Administration (CNDA) approved KeytrudaLynparza as monotherapy for the treatment of adult patients with unresectable 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 melanoma following failureadenocarcinoma of one prior linethe pancreas and have not progressed after a minimum of therapy.16 weeks of platinum treatment within a first-line chemotherapy regimen.
June 2018May 2020
FDA approved KeytrudaLynparza for the treatment of adult and pediatric patients with refractory primary mediastinal large B-cell lymphoma (PMBCL),deleterious or who have relapsed after twosuspected deleterious germline or more prior lines of therapy.
June 2018
FDA approved Keytruda for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy whose tumors express PD-L1somatic homologous recombination repair (HRR) gene-mutated mCRPC, as determined by an FDA-approved test.test, who have progressed following prior treatment with enzalutamide or abiraterone.
Lynparza(1)
May 2020
December 2018
FDA approved Lynparza for usein combination with bevacizumab as a first-line maintenance treatment of certainadult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy.
July 2018
JMHLW approved Lynparza for use in patientschemotherapy and whose cancer is associated with unresectableHRD positive status defined by either a deleterious or recurrent suspected deleterious BRCA-mutated, human epidermal growth factor receptor 2 (HER2)-negative breast cancer who have received prior chemotherapy. mutation, and/or genomic instability, as determined by an FDA-approved test.
May 2018Recarbrio
June 2020
EC approved Lynparza for use as a maintenance therapy in patients with platinum-sensitive relapsed high grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who are in response (complete or partial) to platinum based chemotherapy regardless of BRCA mutation status.
January 2018
FDA approved Lynparza for use in patients with BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy.
January 2018
JMHLW approved Lynparza for use as a maintenance therapy in patients with platinum-sensitive relapsed ovarian cancer, regardless of BRCA mutation status.

Lenvima(2)
September 2018CNDA approved LenvimaRecarbrio for the treatment of certain patients 18 years of age and older with hepatocellular carcinoma.hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP).
August 2018
Steglatro(3)
FDAJuly 2020
NMPA approved LenvimaSteglatro 5 mg tablets for the treatment of certain patients with hepatocellular carcinoma.
August 2018EC approved Lenvima for the treatment of certain patients with hepatocellular carcinoma.
March 2018JMHLW approved Lenvima for the treatment of certain patients with unresectable hepatocellular carcinoma.
Gardasil 9
October 2018
FDA approved Gardasil 9 for an expanded age indication for use in women and men ages 27 to 45 for the prevention of certain cancers and diseases caused by the nine HPV types covered by the vaccine.
April 2018
CNDA approved Gardasil 9 for use in girls and women ages 16 to 26.
DelstrigoNovember 2018
EC approved Delstrigo (doravirine, lamivudine, and tenofovir disoproxil fumarate) for the treatment of adults infected with human immunodeficiency virus (HIV-1) without past or present evidence of resistance to the non-nucleoside reverse transcriptase inhibitor (NNRTI) class, lamivudine, or tenofovir.
August 2018
FDA approved Delstrigo for the treatment of HIV-1 infection in adult patients with no prior antiretroviral treatment experience.
PifeltroNovember 2018
EC approved Pifeltro (doravirine), in combination with other antiretroviral medicinal products, for the treatment of adults infected with HIV-1 without past or present evidence of resistance to the NNRTI class.
August 2018
FDA approved Pifeltro for the treatment of HIV-1 infection in adult patients with no prior antiretroviral treatment experience.
IsentressMarch 2018
EC approved Isentress for an extension to the existing indication to cover treatment of neonates. Isentress is now indicated in combination with other anti-retroviral medicinal products for the treatment of HIV-1 infection.
PrevymisJanuary 2018
EC approved Prevymis (letermovir) for the prophylaxis of cytomegalovirus (CMV) reactivation and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant.
Steglatro, Steglujan and Segluromet(3)
March 2018
EC approved Steglatro (ertugliflozin), Steglujan (ertugliflozin and sitagliptin) and Segluromet (ertugliflozin and metformin hydrochloride) for the treatment of adults aged 18 years and older with type 2 diabetes mellitus as an adjunct to diet and exercise to improve glycaemic control (as monotherapy in patients for whom the use of metformin is considered inappropriate due to intolerance or contraindications, and in addition to other medicinal products for the treatment of diabetes).
VaxelisDecember 2018
FDA approved Vaxelis (Diphtheria and Tetanus Toxoids and Acellular Pertussis Adsorbed, Inactivated Poliovirus, Haemophilus b Conjugate [Meningococcal Protein Conjugate] and Hepatitis B [Recombinant] Vaccine) for use in children from 6 weeks through 4 years of age (prior to the 5th birthday)diabetes.
(1)
(1) Dificid in the U.S. and Canada is a trademark of Cubist Pharmaceuticals LLC, an indirect wholly-owned subsidiary of Merck Sharp & Dohme Corp.
(2) In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza and Koselugo.
(3) Being commercialized and promoted in a worldwide, except Japan, collaboration with Pfizer Inc.

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In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza.
(2)
In March 2018, Merck and Eisai Co., Ltd. announced a strategic collaboration for the worldwide co-development and co-commercialization of Eisai’s Lenvima.
(3)
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.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers, and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation,

patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the payment of royalties or in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well-positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements and collaborations and has been refining its sales and marketing efforts to address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products as well as competitors’ products, effective promotional efforts and the frequent introduction of generic products by competitors.
Health Care Environment and Government Regulation
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access.
United States
In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal and state laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain state and federal entities such as the Department of Defense, Veterans Affairs, Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, theHealth Care Programs
The United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act (ACA))ACA). Various insurance market reforms have since 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% point70% of service discount tothe cost of the medicine, including biosimilar products, when Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $365 million, $385 million and $415 million was recorded by Merck as a reduction to revenue, which increased from 50% beginning in 2018, 2017 and 2016, respectively, related to the donut hole provision. 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,Merck recorded approximately $700 million, $615 million and $365 million as a reduction to revenue in 2020, 2019, and 2018, respectively, related to the 70% point of service discount will be extended to biosimilar products.donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $4.1 billion in 2018 and will decrease tohas been set at $2.8 billion in 2019 and is currently planned to remain at that amount thereafter.billion. 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. The Company recorded $124approximately $85 million, $210$112 million, and $193$124 million of costs within Selling, general and administrative
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expenses in 2018, 20172020, 2019 and 2016,2018, respectively, for the annual health care reform fee. In February 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implementsimplemented 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 materialMore recently, although CMS previously declined 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 ofdefine what constitutes a product ‘line extension’“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 delayhigher 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 the participation of the U.S. Territories in theCompany’s Medicaid Drug Rebate Program until April 1, 2020.rebates. The Company will evaluate the financial impact of these two elements when they become effective.and other provisions in this final rule could adversely impact the Company’s business, cash flow, results of operations, financial condition and prospects.

The Patient Protection and Affordable Care Act
There is significant uncertainty about the future of the ACA in particular and health care laws in general in the United States. In December 2018, a Texas federal district court struck down the ACA on the grounds that the individual health insurance mandate is unconstitutional. The United States Supreme Court heard arguments in this case on November 10, 2020.
The Company is participating in the health care debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement ofchanges to the ACA, such actions could have a material adverse effect on the Company’s business, cash flow, results of operations, financial positioncondition and prospects.
Other Legislative Changes
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. A number of states have passed pharmaceutical price and cost transparency laws. These laws typically require manufacturers to report certain product price information or other financial data to the state. In the case of a California law,Some laws also require manufacturers also are required to provide advance notification of price increases. The Company expects that states will continue their focus on pharmaceutical price transparency and that this focus will continue to exert pressure on product pricing.
Drug Pricing
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. Inmargins, including, in the United States these include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (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.
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 pharmacy benefit managers (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. This rulemaking also established, effective January 1, 2021, a new safe harbor for point of sale discounts at the pharmacy counter and a new safe harbor for certain services arrangements between pharmaceutical manufacturers and PBMs.
CMS also recently issued an Interim Final Rule (the MFN Rule) that alters how physicians will be reimbursed under the Medicare program for physician administered drugs. Pursuant to the MFN Rule, which was intended to be effective January 1, 2021, rather than use the current Average Sales Price (ASP)-based payment framework for certain physician-administered drugs, the MFN Rule would 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 50 Part B reimbursed products, which includes Keytruda, sold in 22 member countries of the Organisation for Economic Co-operation and Development (OECD). Several organizations, including two
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trade groups of which Merck is a member, have filed suit challenging this regulation. Those lawsuits remain pending with a preliminary injunction having been entered in one of the cases. At this time, the Company cannot predict with any certainty if or when the MFN Rule will go into effect. 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 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. A trade organization, in which Merck is a member, brought suit, which remains pending in federal district court, challenging the commercial importation rule. These proposed changes could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.
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. As an example, health care reform is contributinghas contributed to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
In addition, in the effort to contain the U.S. federal deficit, theThe pharmaceutical industry also could be considered a potential source of savings via other legislative and administrative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controlscontrols.
There was active consideration of drug-pricing related legislation in the Medicare prescription drug program (Part D). In addition,last Congress, may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. Itand it remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reductionlegislative proposals that would directly or indirectly affect the Company.
In the U.S. private sector, consolidation and integration among health care providers is a major factor in the competitive marketplace for pharmaceutical products. Health plans and pharmacy benefit managersPBMs have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary inclusion. Failure to obtain timely or adequate pricing or formulary placement for Merck’s products or obtaining such placement at unfavorable pricing could adversely impactaffect revenue. In addition to formulary tier co-pay differentials, private health insurance companies and self-insured employers have been raising co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products. Private health insurance companies also are increasingly imposing utilization management tools, such as clinical protocols, requiring prior authorization for a branded product if a generic product is available or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine. These same management tools are also used in treatment areas in which the payerpayor has taken the position that multiple branded products are therapeutically comparable. As the U.S. payerpayor market concentrates further and as more drugs become available in generic form, pharmaceutical companies may face greater pricing pressure from private third-party payers.payors.
In order to provide information about the Company’s pricing practices, the Company annually posts on its website its Pricing Transparency Report for the United States. The report provides the Company’s average annual list price, and net price increases, and average discounts 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. 
European Union
Efforts toward health care cost containment also remain intense in the European countries.Union (EU). The Company faces competitive pricing pressure resulting from generic and biosimilar drugs. In addition, a majority of countries in Europethe EU attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand.drugs. Reference pricing may either compare a product’s prices in other markets (external reference pricing), or compare a product’s price with those of other products in a national class (internal reference pricing). The authorities then use the price data from those markets to set new local prices for brand-name drugs, including the Company’s.Company’s drugs. Guidelines for examining reference pricing are usually set in local markets and can be changed
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pursuant to local regulations. Some EU Member States have established free-pricing systems, but regulate the pricing for drugs through profit control plans. Others seek to negotiate or set prices based on the cost-effectiveness of a product or an assessment of whether it offers a therapeutic benefit over other products in the relevant class. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In some EU Member States, cross-border imports from low-priced markets also exert competitive pressure that may reduce pricing within an EU Member State.

In addition, in Japan,Additionally, EU Member States have the pharmaceutical industry is subjectpower to government-mandated biennial price reductionsrestrict the range of pharmaceutical products for which their national health insurance systems provide reimbursement. In the EU, pricing and certain vaccines, which occurred in 2018. Furthermore,reimbursement plans vary widely from Member State to Member State. Some EU Member States provide that drug products may be marketed only after a reimbursement price has been agreed. Some EU Member States may require the government can order repricings for classescompletion of drugs if it determinesadditional studies that it is appropriate under applicable rules.
Certain markets outsidecompare the cost-effectiveness of the United States have also implemented other cost management strategies, such asa particular product candidate to already available therapies or so-called health technology assessments (HTA), in order to obtain reimbursement or pricing approval. The HTA of pharmaceutical products is becoming an increasingly common part of the pricing and reimbursement procedures in most EU Member States. The HTA process, which is governed by the national laws of these countries, involves the assessment of the cost-effectiveness, public health impact, therapeutic impact and/or the economic and social impact of use of a given pharmaceutical product in the national health care system of the individual country is conducted. Ultimately, HTA measures the added value of a new health technology compared to existing ones. The outcome of HTAs regarding specific pharmaceutical products will often influence the pricing and reimbursement status granted to these pharmaceutical products by the regulatory authorities of individual EU Member States. A negative HTA of one of the Company’s products may mean that the product is not reimbursable or may force the Company to reduce its reimbursement price or offer discounts or rebates.
A negative HTA by a leading and recognized HTA body could also undermine the Company’s ability to obtain reimbursement for the relevant product outside a jurisdiction. For example, EU Member States that have not yet developed HTA mechanisms may rely to some extent on the HTA performed in other countries with a developed HTA framework, to inform their pricing and reimbursement decisions. HTA procedures require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
To obtain reimbursement or pricing approval in some EU Member States, the Company may be required to conduct studies that compare the cost-effectiveness of the Company’s product candidates to other therapies that are considered the local standard of care. There can be no assurance that any EU Member State will allow favorable pricing, reimbursement and market access conditions for any of the Company’s products, or that it will be feasible to conduct additional cost-effectiveness studies, if required.
Brexit
In 2016, the United States, HTAs are alsoKingdom (UK) held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” As a result of that referendum and subsequent negotiations, the UK left the EU on January 31, 2020. A transitional period applied from January 31, 2020 until December 31, 2020, and during this period the EU and UK operated as if the UK was an EU Member State, and the UK continued to participate in the EU Customs Union allowing for the freedom of movement for people and goods.
It was announced on December 24, 2020, that the EU and the UK agreed to a Trade and Cooperation Agreement (TCA). The TCA sets out the new arrangements for trade of goods, including medicines and vaccines, which allows goods to continue to flow between the EU and the UK. On December 29, 2020, the Council of the EU adopted the decision to sign the TCA and for the TCA to be provisionally applied from January 1, 2021. The UK and EU signed the TCA on December 30, 2020. In order for the TCA to be ratified and formally come into effect, the Council of the EU must unanimously approve the TCA and the European Parliament must consent to it, which the Company believes will occur. As a result of the TCA, the Company believes that its operations will not be materially adversely affected by Brexit.

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Japan
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-pricings 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 April 2021 and is expected to impact many Company products.
China
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 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 current in-line products, and the absence of trade impediments or adverse pricing controls. In recent years, the Chinese government has introduced and implemented a number of structural reforms to accelerate the shift to innovative products and reduce costs. Since 2017, there have been multiple new policies introduced by the government to improve access to new innovation, reduce the complexity of regulatory filings, and accelerate the review and approval process. This has led to a significant increase in the number of new products being used byapproved each year. Additionally, in 2017, the Chinese government and private payers.updated the National Reimbursement Drug List (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 volume based procurement (VBP). 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 have 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.
Emerging Markets
The Company’s focus on emerging markets, in addition to China, has continued. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures such asimpacting intellectual property, including in exceptional cases, threats of compulsory licenses, that aim to put pressure on the price of innovative pharmaceuticals and constrainor result in constrained market access.access to innovative medicine. The Company anticipates that pricing pressures and market access challenges will continue in 2019the future to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, changes in trade sanctions and embargoes, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, credit worthiness of health care partners, such as hospitals, due to COVID-19, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and
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its business practices to better meet customer needs and believes that it is well-positioned to respond to the evolving health care environment and market forces.
Regulation
The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which has accelerated the regulatory review process for medicines with this designation. The FDA has also undertaken efforts to bring generic competition to market more efficiently and in a more timely manner.
The European Union (EU)EU has adopted directives and other legislation concerning the classification, approval for marketing, labeling, advertising, manufacturing, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketingsafety monitoring of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. In particular, EU regulators may approve products subject to a number of post-authorization conditions. Examples of typical post-authorization commitments include additional pharmacovigilance, the conduct of clinical trials, the establishment of patient registries, physician or patient education and controlled distribution and prescribing arrangements. Non-compliance with post-authorization conditions, pharmacovigilance and other obligations can lead to regulatory action, including the variation, suspension or withdrawal of the marketing authorizations, or other enforcement or regulatory actions, including the imposition of financial penalties. The Company’s policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.
The Company’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 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 current in-line products, and the absence

of trade impediments or adverse pricing controls. In recent years, the Chinese government has introduced and implemented a number of structural reforms to accelerate the shift to innovative products and reduce costs. Since 2017, there have been multiple new policies introduced by the government to improve access to new innovation, reduce the complexity of regulatory filings, and accelerate the review and approval process. This has led to a significant expansion of the new products being approved each year. Additionally, in 2017, the government updated the National Reimbursement Drug List for the first time in eight years. While the mechanism for drugs being added to the list evolves, it is likely that in the future, inclusion will require a price negotiation which could impact the outlook in the market for selected brands. While pricing pressure has always existed in China, health care reform has led to the acceleration of generic substitution, through a pilot tendering process for mature products that have generic substitutes with a Generic Quality Consistency Evaluation approval.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)
Access to Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its productsmedicines, vaccines, and to quality health care around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reachingthrough innovative social investments, including philanthropic programs.programs and impact investing, Merck is also helping to strengthen health systems and build capacity, particularly in under-resourced communities. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicinemedicines and vaccines. In 2011, Merck launchedhas funded “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent grantmaking organization, which has partnered with a variety of organizations dedicated to improving global health.
Privacy and Data Protection
The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including the new EU General Data Protection Regulation, (GDPR) which went into effect onin May 25, 2018 and imposes penalties of up to 4% of global revenue.
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The GDPR and related implementing laws in individual EU Member States govern the collection and use of personal health data and other personal data in the EU. The GDPR increased responsibility and liability in relation to personal data that the Company processes. It also imposes a number of strict obligations and restrictions on the ability to process (which includes collection, analysis and transfer of) personal data, including health data from clinical trials and adverse event reporting. The GDPR also includes requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals prior to processing their personal data or personal health data, notification of data processing obligations to the national data protection authorities, and the security and confidentiality of the personal data. Further, the GDPR prohibits the transfer of personal data to countries outside of the EU that are not considered by the EC to provide an adequate level of data protection, including to the United States, except if the data controller meets very specific requirements. Following the Schrems II decision of the Court of Justice of the European Union on July 16, 2020, there is considerable uncertainty as to the permissibility of international data transfers under the GDPR. In light of the implications of this decision, the Company may face difficulties regarding the transfer of personal data from the EU to third countries.
Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States may result in significant monetary fines and other administrative penalties as well as civil liability claims from individuals whose personal data was processed. Data protection authorities from the different EU Member States may still implement certain variations, enforce the GDPR and national data protection laws differently, and introduce additional national regulations and guidelines, which adds to the complexity of processing personal data in the EU. Guidance developed at both EU level and at the national level in individual EU Member States concerning implementation and compliance practices is often updated or otherwise revised.
There is, moreover, a growing trend towards required public disclosure of clinical trial data in the EU which adds to the complexity of obligations relating to processing health data from clinical trials. Failing to comply with these obligations could lead to government enforcement actions and significant penalties against the Company, harm to its reputation, and adversely impact its business and operating results. The uncertainty regarding the interplay between different regulatory frameworks further adds to the complexity that the Company faces with regard to data protection regulation.
Additional laws and regulations enacted in the United States (such as the California Consumer Privacy Act), Europe, Asia and Latin America, increaseshave increased enforcement and litigation activity in the United States and other developed markets, and increasesas well as increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with and approved byfacilitate the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. Privacy Shield Program, and the Binding Corporate Rules in the EU.transfer of personal information across international borders.
Distribution
The Company sells its 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 managersPBMs and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.

Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of its products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for, or intermediates useful in, the manufacture of products, or the uses of products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.
The Food and Drug Administration Modernization Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Current U.S. patent law
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provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent rights.term.
Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key patent protection in the United States, the EU, Japan and JapanChina (including the potential for patent term extensions (PTE) and SPCs where indicated) for the following marketed products:

ProductYear of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)(2)
Year of Expiration (China)
Januvia202320222025-20262022
Janumet20232023N/A2022
Janumet XR2023N/AN/A2022
Isentress2024
2023(3)
2022-20262022
Simponi
N/A(4)
2024(5)
N/A(4)
N/A(4)
Lenvima(6)
2025(3) (with pending PTE)
2021 (patents), 2026(3) (SPCs)
20262021
Adempas(7)
2026(3)
2028(3)
2027-20282023
Bridion
2026(3) (with pending PTE)
20232024Expired
Nexplanon2027 (device)2025 (device)N/A2025
Bravecto2027 (with pending PTE)2025 (patents), 2029 (SPCs)20292033
Gardasil2028
2021(3)
ExpiredN/A
Gardasil 9
2028
2025 (patents), 2030(3) (SPCs)
N/A2025
Keytruda2028
2028 (patents), 2030(3) (SPCs)
2032-20332028
Lynparza(8)
2028(3) (with pending PTE)
2024 (patents), 2029(3) (SPCs)
2028-20292024
Zerbaxa
2028(3)
2023 (patents), 2028(3) (SPCs)
2028 (with pending PTE)N/A
Sivextro20282024 (patents), 2029 (SPCs)20292024
Belsomra
2029(3)
N/A2031N/A
Prevymis
2029(3) (with pending PTE)
2024 (patents), 2029(3) (SPCs)
2029N/A
Segluromet(9)
2031 (with pending PTE)2029 (patents), 2034 (SPCs)
N/A(10)
N/A
Steglatro(9)
2031(3) (with pending PTE)
2029 (patents), 2034(3) (SPCs)
N/A(10)
2029
Steglujan(9)
2031 (with pending PTE)
2029 (patents), 2034 (SPCs)
N/A(10)
N/A
Verquvo(7)
2031 (with pending PTE)
N/A(11)
N/A(11)
N/A(11)
Delstrigo2032 (with pending PTE)2031 (patents), 2033 (SPCs)N/AN/A
Pifeltro2032 (with pending PTE)2031 (patents), 2033 (SPCs)20362031
Recarbrio
2033(3) (with pending PTE)
N/AN/AN/A
Note:    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 10. “Contingencies and Environmental Liabilities” below.
N/A:    Currently no marketing approval.
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ProductYear of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)(3)
EmendExpired20192019
Emend for Injection
2019
2020(2)
2020
Noxafil20192019N/A
Vaxelis(4)
2020 (method of making)
2021(5) (SPCs)
Not Marketed
Januvia
2022(2)
2022(2)
2025-2026
Janumet
2022(2)
2023N/A
Janumet XR
2022(2)
N/AN/A
Isentress2024
2022(2)
2022
Simponi
N/A(6)
2025(7)
N/A(6)
Lenvima(8)
2025(2) (with pending PTE)
2021 (patents), 2026(2) (SPCs)
2026
Adempas(9)
2026(2)
2028(2)
2027-2028
Bridion
2026(2) (with pending PTE)
20232024
Nexplanon2027 (device)2025 (device)Not Marketed
Bravecto2027 (with pending PTE)2025 (patents), 2029 (SPCs)2029
Gardasil2028
2021(2)
Expired
Gardasil 9
2028
2025 (patents), 2030(2) (SPCs)
N/A
Keytruda2028
2028 (patents), 2030(2) (SPCs)
2032
Lynparza(10)
2028(2) (with pending PTE)
2024 (patents), 2029(2) (SPCs)
2028-2029 (with pending PTE)
Zerbaxa
2028(2) (with pending PTE)
2023 (patents), 2028(2) (SPCs)
N/A
Sivextro
2028(2)
2024 (patents), 2029(2) (SPCs)
2029 (with pending PTE)
Belsomra
2029(2)
N/A2031
Prevymis
2029(2) (with pending PTE)
2024 (patents), 2029(2) (SPCs)
2029 (with pending PTE)
Steglatro(11)
2031(2) (with pending PTE)
2029 (patents), 2034(2) (SPCs)
N/A
Steglujan(11)
2031 (with pending PTE)
2029 (patents), 2034 (SPCs)N/A
Segluromet(11)
2031 (with pending PTE)2029 (patents), 2034 (SPCs)N/A
Delstrigo2032 (with pending PTE)
2031(12)
N/A
Pifeltro2032 (with pending PTE)
2031(12)
N/A
(1)The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the United Kingdom (Major EU Markets). If SPC applications have been filed but have not been granted in all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.
(2)    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.
(3)Eligible for 6 months Pediatric Exclusivity.
(4)    The Company has no marketing rights in the U.S., Japan or China.
(5)    Expiration of the distribution agreement with Janssen Pharmaceuticals, Inc.
(6)    Part of a global strategic oncology collaboration with Eisai.
(7)Being commercialized in a worldwide collaboration with Bayer AG.
(8)    Part of a global strategic oncology collaboration with AstraZeneca.
(9)    Being commercialized and promoted in a worldwide, except Japan, collaboration with Pfizer Inc.
(10)    The Company has no marketing rights in Japan.
(11)    The Company has no marketing rights in the EU, Japan or China.
The Company also has the following key U.S. patent protection for drug candidates under review or in Phase 3 development:
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 SPC applications have been filed but have not been granted in 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)
Being commercialized in a U.S.-based joint partnership with Sanofi Pasteur.2034
(5)
SPCs are granted in four Major EU Markets and pending in one, based on a patent that expired in 2016.
(6)
The Company has no marketing rights in the U.S. and Japan.
(7)
Includes Pediatric Exclusivity, which is granted in four Major EU Markets and pending in one.
(8)
Being developed and commercialized in a global strategic oncology collaboration with Eisai.
(9)
Being commercialized in a worldwide collaboration with Bayer AG.
(10)
Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.
(11)
Being developed and promoted in a worldwide, except Japan, collaboration with Pfizer.
(12)
SPC applications to be filed by May 2019.

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.)
V920 (ebola vaccine)2023
MK-7655A (relebactam + imipenem/cilastatin)2029
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.)
MK-1242 (vericiguat)(1)
2031
MK-7264 (gefapixant)2027
V114 (pneumoconjugate vaccine)2031
(1)
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 20182020 on patent and know-how licenses and other rights amounted to $135$185 million. Merck also incurred royalty expenses amounting to $1.3$2.0 billion in 20182020 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, 2018,2020, approximately 14,50016,750 people were employed in the Company’s research activities. 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 preclinicalpre-clinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on preclinicalpre-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 preclinicalpre-clinical testing with that compound. PreclinicalPre-clinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinicalpre-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. PreclinicalPre-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) statusmust 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 PharmaceuticalsMinistry of Health, Labour and Medical Devices AgencyWelfare 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.
KeytrudaMK-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 approved anti-PD-1 therapyorally administered soluble guanylate cyclase (sGC) stimulator under review in clinical development for expanded indicationsthe EU and in different cancer types.
In February 2019,Japan to reduce the FDA acceptedrisk of cardiovascular death and granted Priority Review forheart failure hospitalization following a supplemental BLA for Keytrudaworsening heart failure event in patients with symptomatic chronic heart failure with reduced ejection fraction, in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma. This supplemental BLA isother heart failure therapies. The applications are based on findingsresults from the Phase 3 KEYNOTE-426 trial, which demonstrated that KeytrudaVICTORIA trial. Vericiguat was approved by the FDA in combination with axitinib, as compared to sunitinib, significantly improved overall survival (OS)January 2021 and progression-free survival (PFS)will be marketed in the first-lineUnited 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 advanced renal cell carcinoma. These data were presented at the American Society for Clinical Oncology (ASCO) Genitourinary Cancers Symposium in

February 2019. The supplemental BLA also included supporting datapediatric 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 1b KEYNOTE-0352 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 June 20, 2019. MerckJuly 18, 2021. The EMA is also reviewing an application for licensure of V114 in adults. Additionally, the Company has filedseveral 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. 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 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 (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 KEYNOTE-426the KEYNOTE-355 trial.
In July 2020, the FDA accepted for standard review a supplemental BLA for Keytruda for the treatment of patients with regulatory authorities worldwide.
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 2019,2021, 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 in combination with carboplatin and either paclitaxel or nab-paclitaxel, as monotherapy for the first-line treatment of metastatic squamous NSCLC in adults.adult and pediatric patients aged 3 years and older with relapsed or refractory cHL who have failed an earlier line of therapy. This recommendation is based on results from the pivotal Phase 3 KEYNOTE-407KEYNOTE-204 trial, in which enrolled patients regardless of PD-L1 tumor expression status. The trial showedKeytruda monotherapy demonstrated a significant improvement in OS and PFS for patients taking Keytruda in combination with chemotherapy (carboplatin and either paclitaxel or nab-paclitaxel) compared with chemotherapy alone. Ifbrentuximab 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 would mark the first approval in Europe for an anti-PD-1 therapy in combination with chemotherapy for adults with metastatic squamous NSCLC. In October 2018,indication by the FDA approved Keytrudain combination with carboplatin-paclitaxel or nab-paclitaxel as a first-line treatment for metastatic squamous NSCLC, regardless of PD-L1 expression.October 2020.
In December 2018, the FDA extended the action date for the supplemental BLA seeking approval for Keytruda is also under review as monotherapy for the first-line treatment of locally advancedadult patients with metastatic MSI-H or metastatic NSCLCdMMR colorectal cancer in patients whose tumors express PD-L1 (TPS ≥1%) without EGFR or ALK genomic tumor aberrations. The supplemental BLA isJapan based on resultsthe result of the Phase 3 KEYNOTE-042 trial where KEYNOTE-177 trial. Keytruda monotherapy demonstrated a significant improvement in OS compared with chemotherapy in was approved for this patient population. The Company submitted additional data and analyses toindication by the FDA which constituted a major amendmentin June 2020 and extendedby the PDUFA date by three months to April 11, 2019. Merck continues to work closely with the FDA during the review of this supplemental BLA.EU in January 2021.
In February 2019,January 2021, the FDA accepted and granted Priority Review for a supplemental BLA for seeking use of Keytruda as monotherapy for the treatment of patients with locally advanced small-cell lung cancer (SCLC) whose disease has progressed after twocSCC that is not curable by surgery or more lines of prior therapy. This supplemental BLA, which is seeking accelerated approval for this new indication, isradiation based on data from the SCLC cohortsresults of the Phase 2 KEYNOTE-158 and Phase 1b KEYNOTE-028 trials.KEYNOTE-629 trial. The FDA set a PDUFA date of June 17, 2019. Keytruda is also being studied in combination with chemotherapy in the ongoing Phase 3 KEYNOTE-604 study in patients with newly diagnosed extensive stage SCLC.September 9, 2021.
In February 2019,December 2020, the FDA accepted and granted priority review for a supplemental BLA for Keytruda as monotherapy or in combination with platinum and 5-fluorouracil chemotherapy for the first-line treatment of patients with recurrentlocally advanced unresectable or metastatic HNSCC.carcinoma of the esophagus and gastroesophageal junction. This supplemental BLA is based in part on data from the pivotal Phase 3 KEYNOTE-048KEYNOTE-590 trial, where in which Keytruda plus chemotherapy demonstrated a significant improvementimprovements in OS compared with the standardprimary endpoints of care, as monotherapy in patients whose tumors expressed PD-L1 with Combined Positive Score (CPS)≥20overall survival (OS) and CPS≥1 and in combination withPFS versus chemotherapy in the total patient population.these patients regardless of PD-L1 expression status and tumor histology. These data were presented at the European Society forof Medical Oncology (ESMO) 2018 Congress.Virtual Congress 2020. The FDA granted Priority Review to the supplemental BLA and set a PDUFA date of June 10, 2019. KEYNOTE-048 also serves asApril 13, 2021. In December 2020, the confirmatory trial for KEYNOTE-012,CHMP of the EMA announced the start of a Phase 1b study which supportedprocedure to extend the previous accelerated approval for Keytruda as monotherapy for theindication to include in combination with chemotherapy, first-line treatment of patients with recurrentlocally advanced unresectable or metastatic HNSCC with disease progressioncarcinoma of the esophagus or HER-2 negative gastroesophageal junction adenocarcinoma in adults for Keytruda, based on or after platinum-containing chemotherapy.the results from KEYNOTE-590. Keytruda is also under review for this indication in Japan.
In November 2018, Merck announced that the Phase 3 KEYNOTE-181 trial investigating Keytruda as monotherapy in the second-line treatment of advanced or metastatic esophageal or esophagogastric junction carcinoma met a primary endpoint of OS in patients whose tumors expressed PD-L1 (CPS ≥10). In this pivotal study, treatment with Keytruda resulted in a statistically significant improvement in OS compared to chemotherapy (paclitaxel, docetaxel or irinotecan) in patients with CPS ≥10, regardless of histology. The primary endpoint of OS was also evaluated in patients with squamous cell histology and in the entire intention-to-treat study population. While directionally favorable, statistical significance for OS was not met in these two patient groups. Per the statistical analysis plan, the key secondary endpoints of PFS and objective response rate (ORR) were not formally tested, as OS was not reached in the full intention-to-treat study population. These results were presented in January 2019 at the ASCO Gastrointestinal Cancers Symposium and have been submitted for regulatory review.
Additionally, Keytruda has received Breakthrough Therapy designation from the FDA in February 2020 for the combination of Keytruda with Padcev (enfortumab vedotin-ejfv), in the first-line setting for the treatment of high-risk early-stage triple-negative breastpatients with unresectable locally advanced or metastatic urothelial cancer in combination with neoadjuvantwho 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 October 2018,January 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 Phase 3 KEYNOTE-122 trial 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 unresectable HCC with no prior systemic therapy; and 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 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 resultsnew investigational data from an interim analysisthe 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 KEYNOTE-057, a Phase 2Medicine. The trial evaluating evaluated the combinations of Keytruda plus Lenvima, and Lenvima plus everolimus versus sunitinib for previously treatedthe first-line treatment of patients with high-risk non-muscle invasive bladder cancer. An interim analysis ofadvanced 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 study’s primary endpoint showed a complete response rate of nearly 40% at three months with Keytruda in patients whose disease was unresponsiveintent to Bacillus Calmette-Guérin therapy, the current standard of care for this disease,submit marketing authorization applications based on these results.
In December 2020, Merck and who were ineligible for or who refused to undergo radical cystectomy. These results, as well as other study findings, were presented at the ESMO 2018 Congress.
In February 2019, MerckEisai announced that the pivotal Phase 3 KEYNOTE-240KEYNOTE-775/Study 309 trial evaluating the investigational use of Keytruda, plus best supportive care,Lenvima met its dual primary endpoints of OS and 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 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 intent to
20

submit marketing authorization applications based on these results, and plan to present these results at an upcoming medical meeting. KEYNOTE-775/Study 309 is the confirmatory trial for KEYNOTE-146/Study 111, which supported accelerated approval by the FDA in 2019 of the Keytruda plus Lenvima combination for the treatment of patients with advanced hepatocellularendometrial carcinoma that is not MSI-H or dMMR, who were previously treated withhave disease progression following prior systemic therapy didand are not meet its co-primary endpointscandidates for curative surgery or radiation.
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 OS and PFS compared with placebo plus best supportive care. In the final analysis of the study, there was an improvement in OS for patients treated with Keytruda compared to placebo, however these OS results did not meet statistical significance per the pre-specified statistical plan. Results for PFS were also directionally favorable in the Keytruda arm compared with placebo but did not reach statistical significance. The key secondary endpoint of ORR was not formally tested, since superiority was not reached for OS or PFS. Results will be presented at an upcoming medical meeting and have been shared with the FDA for discussion.
The Keytruda clinical development program consists of more than 900 clinical trials, including more than 600 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, cervical, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC,urothelial cancer, biliary tract cancer, colorectal cancer, gastric cancer, glioblastoma, ovarian PMBCL, prostate, renal, small-cell lungcancer, and triple-negative breast, manyTNBC).
MK-6482, belzutifan, is an investigational hypoxia-inducible factor-2α (HIF-2α) inhibitor being evaluated for the treatment of 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 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 arewere presented at the 2020 ASCO Annual Meeting. Additionally, Phase 2 data showing anti-tumor responses in VHL disease patients with ccRCC and other tumors were presented at the ESMO Virtual Congress 2020.
In February 2021, Merck and Eisai began a Phase 3 trial examining Lenvima in combination with belzutifan in previously treated patients with metastatic RCC.
MK-7119, Tukysa, is a small molecule tyrosine kinase inhibitor, for the treatment of HER2-positive cancers. In 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 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 32 clinical development. Further trials are being planned for breast cancer and other cancers.solid tumors. The collaboration will pursue a broad joint development program evaluating ladiratuzumab vedotin as monotherapy and in combination with Keytruda in TNBC, hormone receptor-positive breast cancer and other LIV-1-expressing solid tumors.
MK-7339, Lynparza, 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 Lynparzaprostate cancers being co-developed for multiple cancer types.types as part of a collaboration with AstraZeneca.
MK-7264, gefapixant, is an investigational, orally administered, selective P2X3 receptor antagonist, for the treatment of refractory or unexplained chronic cough. In April 2018,September 2020, Merck and AstraZeneca announced that the EMA validated for review the MAA for Lynparza for use in patients with deleterious or suspected deleterious BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. This was the first regulatory submission for a PARP inhibitor in breast cancer in Europe.
Lynparza tablets are also under review in the EU as a maintenance treatment in patients with newly-diagnosed, BRCA-mutated advanced ovarian cancer who were in complete or partial response following first-line standard platinum-based chemotherapy. This submission was based on positive results from thetwo ongoing pivotal Phase 3 SOLO-1 trial. The trial showed a statistically-significanttrials (COUGH-1 and clinically-meaningful improvement in PFS for Lynparza compared to placebo, reducingCOUGH-2) evaluating the riskefficacy and safety of disease progression or death by 70% in patients with newly-diagnosed, BRCA-mutated advanced ovarian cancer who were in complete or partial response to platinum-based chemotherapy.
gefapixant. In December 2018, Merck and AstraZeneca announced positive results from the randomized, open-label, controlled, Phase 3 SOLO-3 trial of Lynparza tablets in patients with relapsed ovarian cancer after two or more lines of treatment. The trial was conducted as a post-approval commitment in agreement with the FDA. Results from the trial showed BRCA-mutated advanced ovarian cancerthese studies, adult patients treated with Lynparza following two or more prior lines of chemotherapygefapixant 45 mg twice daily demonstrated a statistically significant reduction in 24-hour cough frequency versus placebo at 12 weeks (COUGH-1) and clinically meaningful24 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 presented at the Virtual European Respiratory Society International Congress 2020. Merck plans to share data from COUGH-1 and COUGH-2 with regulatory authorities worldwide.
MK-7110 (also known as CD24Fc) is an investigational treatment for patients hospitalized with COVID-19. Merck obtained MK-7110 through the acquisition of OncoImmune. In September 2020, OncoImmune reported topline findings from an interim efficacy analysis of a Phase 3 study evaluating MK-7110. An interim analysis of data from 203 participants (75% of the 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 the primary endpoint of ORR and the key secondary endpoint of PFSclinical status compared to chemotherapy. Merck and AstraZeneca plan to discuss theseplacebo, as defined by the protocol. The risk of death or respiratory failure was reduced by more than 50%. Full results from this Phase 3 study, which were consistent with the FDA.topline results, were received in February 2021 and will be submitted for publication in the future. MK-7110 is also being studied in a Phase 3 trial for the treatment of graft versus host disease.
MK-7655AMolnupiravir(also known as MK-4482) is an orally available antiviral candidate for the treatment of 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 relebactam, anislatravir, the company’s investigational beta-lactamaseoral nucleoside reverse transcriptase translocation inhibitor (NRTTI), and imipenem/cilastatin (an approved carbapenem antibiotic). In February 2019, Merck announced that the FDA accepted for Priority Review an NDA for MK-7655Adoravirine (Pifeltro) being evaluated for the treatment of complicated urinary tract infectionsHIV-1 infection. In October 2020, Merck announced Week 96 data from the Phase 2b trial (NCT03272347) evaluating the efficacy and complicated intra-abdominal infections caused by certain susceptible Gram-negative bacteriasafety of MK-8591A in treatment-naïve adults with limited orHIV-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 alternative therapies available. The PDUFA date is July 16, 2019. 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 April 2018,November 2020, Merck announced thata 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 MK-7655A demonstrated a favorable overall responseonce-monthly islatravir and is anticipated to begin in early 2021. Merck will be funding the IMPOWER 22 clinical trial in the treatment of certain imipenem-non-susceptible bacterial infections, the primary endpoint,United States. Merck also plans to conduct additional studies in HIV prevention with lower treatment-emergent nephrotoxicity (kidney toxicity),islatravir in once-monthly oral PrEP. These studies will include IMPOWER 24, a secondary endpoint, compared to a colistin (colistimethate sodium) plus imipenem/cilastatin regimen. The FDA had previously 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.
V920 (rVSV∆G-ZEBOV-GP, live attenuated), is an investigational Ebola Zaire disease vaccine candidate being studied in large scaleglobal Phase 2/3 clinical trials. In December 2015, Merck announced thattrial to evaluate islatravir as a once-monthly oral agent for PrEP at sites across the application for Emergency Use Assessmentworld and Listing (EUAL) for V920 was accepted for reviewamong other key populations impacted 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 WHO decision to grant V920 EUAL status will be based on data regarding quality, safety,epidemic, including men who have sex with men 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. transgender women.
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 November 2018, Merck announced that it has started the submission of a rolling BLA to the FDA for V920. This rolling submission was made pursuant to the FDA’s Breakthrough Therapy designation. Merck expects the rolling submission of the BLA to be completed in 2019. The Company also intends to file V920 with the EMA in 2019.
In February 2019, Merck announced thatJanuary 2021, the FDA accepted for Priority Reviewstandard review a supplemental NDA for ZerbaxaSteglatro (ertugliflozin) to treat adultincorporate 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 nosocomial pneumonia, including ventilator-associated pneumonia, caused by certain susceptible Gram-negative microorganisms.type 2 diabetes and atherosclerotic CV disease. The PDUFA datestudy met the primary endpoint of non-inferiority on major adverse CV events (MACE), which is June 3, 2019. Zerbaxa is also under reviewa composite of CV death, nonfatal myocardial infarction or nonfatal stroke, compared to placebo. The key secondary endpoints of superiority for this indication by the EMA. Zerbaxa is currently approved in the United StatesSteglatro versus placebo for the treatment of adult patients with complicated urinary tract infections caused by certain susceptible Gram-negative microorganisms, and is also indicated, in combination with metronidazole, for the treatment of adult patients with complicated intra-abdominal infections caused by certain susceptible Gram-negative and Gram-positive microorganisms.
In additiontime to the candidates under regulatory review,first occurrence of the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.
MK-7264, gefapixant, is a selective, non-narcotic, orally-administered P2X3-receptor agonist being investigated in Phase 3 trials for the treatmentcomposite of refractory, chronic cough and in a Phase 2 trial for the treatment of women with endometriosis-related pain.
Lenvima, is an orally available tyrosine kinase inhibitor currently approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell carcinoma. In March 2018, Merck and Eisai entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Per the agreement, the companies will jointly initiate clinical studies evaluating the Keytruda/Lenvima combination to support 11 potential indications in six types of cancer (endometrial cancer, NSCLC, hepatocellular carcinoma, head and neck cancer, bladder cancer and melanoma), as well as a basket trial targeting multiple cancer types. The FDA granted Breakthrough Therapy designation for Keytruda in combination with Lenvima for the potential treatment of patients with advanced and/CV death or metastatic renal cell carcinoma and for the potential treatment of certain patients with advanced and/or metastatic non-microsatellite instability high/proficient mismatch repair endometrial carcinoma.
MK-1242, vericiguat, is an investigational treatmenthospitalization for heart failure, being studiedtime 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 patients suffering from chronichospitalization for heart failure was observed with reduced ejection fracture (Phase 3Steglatro. 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 trial)development programs for its COVID-19 vaccine candidates, V590 and V591, following Merck’s review of findings from chronic heart failure with preserved ejection fracture (Phase 2Phase 1 clinical trial). The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer.
V114 is an investigational polyvalent conjugate vaccinestudies for the prevention of pneumococcal disease.vaccines. In June 2018, Merck initiatedthese studies, both V590 and V591 were generally well tolerated, but the first Phase 3 study in the adult population for the prevention of invasive pneumococcal disease. Currently five Phase 3 adult studies are ongoing, including studies in healthy adults 50 years of age or older, adults with risk factors for pneumococcal disease,immune responses were inferior to those infected with HIV,seen following natural infection and those who are recipients of allogeneic hematopoietic stem cell transplant. In October 2018, Merck began the first Phase 3 study in the pediatric population. Currently, three studies are ongoing, including studies in healthy infants and in children afflicted with sickle cell disease. In January 2019, Merck announced that V114 received Breakthrough Therapy designation from the FDAreported for the prevention of invasive pneumococcal disease caused by the vaccine serotypes in pediatric patients 6 weeks to 18 years of age.

As a result of changes in the herpes zoster vaccine environment, Merck is ending development of V212, its investigational vaccine for the prevention of shingles in immunocompromised patients.other SARS-CoV-2/COVID-19 vaccines.
The chart below reflects the Company’s research pipeline as of February 22, 2019.2021. 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 cancer and certain other indications)cancer) and additional claims, line extensions or formulations for in-line products are not shown.
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Table of Contents
Phase 2Phase 3 (Phase 3 Entry Date)entry date)Under Review
CancerCancerNew Molecular Entities/Vaccines
MK-3475 KeytrudaAntiviral COVID-19
MK-3475 KeytrudaMK-4482 (molnupiravir)(1)
Bacterial Infection
Cancer
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
MK-3475 Keytruda
Advanced Solid Tumors
MK-4280(2)
     Hematological Malignancies
     Non-Small-Cell Lung
MK-4830
Non-Small-Cell Lung
MK-5890(2)
     Non-Small-Cell Lung
MK-6440 (ladiratuzumab vedotin)(1)(3)
Advanced Solid Tumors
Breast (October 2015)
MK-7655A relebactam+imipenem/cilastatin
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 Carcinoma
Head and Neck
Melanoma
Solid Tumors
Chikungunya virus
V184
Cytomegalovirus
V160
HIV-1 Prevention
MK-8591 (islatravir)
Nonalcoholic Steatohepatitis NASH
MK-3655
Overgrowth Syndrome
MK-7075 (miransertib)
Pneumococcal Vaccine Adult
V116
Respiratory Syncytial Virus
MK-1654
Schizophrenia
MK-8189

Cancer
MK-3475 Keytruda
Biliary Tract (September 2019)
Cervical (October 2018) (EU)
(U.S.)
ProstateColorectal (November 2015)Ebola Vaccine
MK-7902 Lenvima(1)Cutaneous Squamous Cell (August 2019) (EU)
Esophageal (December 2015)
V920(4) (U.S.)Endometrial (August 2019) (EU)
Biliary Tract
Gastric (May 2015) (EU)
Non-Small-Cell Lung
Hepatocellular (May 2016) (EU)
Certain Supplemental Filings
V937 Cavatak
Mesothelioma (May 2018)Cancer
MelanomaNasopharyngeal (April 2016)
MK-3475 Keytruda
MK-7690Ovarian (December 2018)
    First-Line Advanced Renal Cell CarcinomaProstate (May 2019)
Colorectal(2)
Renal (October 2016) (EU)(KEYNOTE-426) (U.S.)
MK-7339 Lynparza(1)
Small-Cell Lung (May 2017) (EU)
First-Line Metastatic Squamous Non-Small-MK-6482 (belzutifan)
Advanced Solid Tumors
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)(1)(2)
Cell Lung Cancer (KEYNOTE-407) (EU)
Cytomegalovirus Vaccine
Bladder (May 2019)
Endometrial (June 2018)
(EU)
First-Line Metastatic Non-Small-Cell Lung
V160
MK-7339 Lynparza(1)
Cancer (KEYNOTE-042) (U.S.) (EU)
Diabetes MellitusPancreaticGastric (December 2014)2020)
    Third-Line Advanced Small-Cell Lung
MK-8521(3)
Prostate (April 2017)Cancer (KEYNOTE-158) (U.S.)
HIV-1 InfectionCough
First-Line Head and Neck Cancer(February 2020)
MK-8591
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)

(KEYNOTE-048) (U.S.)
New Molecular Entities/Vaccines
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin) (JPN)
Heart Failure
MK-1242 (vericiguat)(1) (EU) (JPN)
Pediatric Neurofibromatosis Type-1
Heart FailureType 1
MK-5618 (selumetinib)(1) (EU)
Pneumococcal Infection Adult
V-114 (U.S.) (EU)


Certain Supplemental Filings
Cancer
MK-3475 Keytruda
    Alternative Dosing Regimen Metastatic Triple-Negative Breast Cancer
         (KEYNOTE-355) (EU) (JPN)
• Early-Stage Triple-Negative Breast Cancer
         (KEYNOTE-522) (U.S.)
• Refractory Classical Hodgkin Lymphoma
         (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)
MK-5618 (selumetinib)Footnotes:
(1)
MK-1242 (vericiguat) (September 2016)(1)
(Q6W) (EU)
Respiratory Syncytial VirusPneumoconjugate Vaccine
MK-7339 Lynparza(1)
MK-1654V114 (June 2018)
Second-Line Metastatic Breast Cancer (EU)
Schizophrenia
First-Line Advanced Ovarian Cancer (EU)
MK-8189
HABP/VABP(5)
MK-7625A Zerbaxa (U.S.)
Footnotes:
(1)    Being developed in a collaboration.
(2) Being developed in combination withKeytruda.
(3) Being developed as monotherapy and in combination with Keytruda.
(3)    Development is currently on hold.(4) In July 2020, the FDA issued a CRL for Merck’s and Eisai’s applications. Merck and Eisai intend to submit additional data when available to the FDA.
(4)    Rolling submission.
(5)    HABP - Hospital-Acquired Bacterial
Pneumonia / VABP - Ventilator-Associated
Bacterial Pneumonia

EmployeesHuman Capital
As of December 31, 2018,2020, the Company had approximately 69,00074,000 employees worldwide, with approximately 25,40027,000 employed in the United States, including Puerto Rico.Rico, and approximately 26,000 third-party contractors globally. Approximately 73,000 of the 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 worldwidethe Company’s employees of the Company are represented by various collective bargaining groups.
Restructuring ActivitiesThe 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.
In 2010Talent Acquisition
The Company uses a comprehensive approach to ensure recruiting, retention and 2013,leadership development goals are systematically executed throughout the Company commenced actionsand 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 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)
202020192018
Women in the workforce49%49%49%
Women in the workforce in the U.S.50%50%NR
Women on the Board of Directors46%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 Directors23%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 female50%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 global restructuringthe 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 streamlineinspire 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 cost structure.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 actions under theseCompany’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, resources to prioritize physical and 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 eliminationCompany’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 positions in sales, administrativebecoming the world’s premier research-based biopharmaceutical company, it needs to continuously develop its diverse and headquarters organizations,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 the sale or closure of certain manufacturingproviding technical and research andfunctional training to all employees.

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, 2018, Merck has eliminated approximately 45,510 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.
Environmental Matters
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. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for
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remediation and environmental liabilities were $16$11 million in 2018,2020 and are estimated at $57$46 million in the aggregate for the years 20192021 through 2023.2025. 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 $71 million and $82$67 million at both December 31, 20182020 and 2017, 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 $60approximately $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 2018, 57% of sales in 2017 and 54% of sales in 2016.2018.
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.
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 http://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 the Office of the Secretary, Merck & Co., Inc., 2000 Galloping Hill Road, 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 shareholder who requests it from the Company.

Item 1A.Risk Factors.
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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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 wouldcould 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 successfully launched commercially successful replacement products.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 affect product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those 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 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 positioncondition and prospects. For example, pursuant to an agreement with athe 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 Zetiacompetition began in December 2016. In addition, the Company lost U.S. patent protection for Vytorin in April 2017. As a result, the2019. The Company experienced a significantrapid and rapid losssubstantial decline in U.S. NuvaRing sales in 2020 as a result of sales of Zetiathis generic competition. In addition, Januvia and VytorinJanumet will lose market exclusivity in the United States in 2017, which continuedJanuary 2023. Januvia will lose market exclusivity in 2018. Furthermore, the patentsEU in September 2022. Finally, the SPC that provide U.S. and EUprovides market exclusivity for Noxafil will expireJanumet in July 2019 and December 2019, respectively, and the EU expires in April 2023. The Company anticipates a significantsales of Januvia and Janumet in these markets will decline in U.S. and EU Noxafil 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 impactadverse 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 Keytruda,Januvia, Janumet, Gardasil/Gardasil 9,Januvia, Janumet,and 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, sales
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Table of Zepatier were materially unfavorably affected by increasing competition and declining patient volumes. Sales of Zostavax were also materially unfavorably affected due to competition. The Company expects that competition will continue to adversely affect the sales of these products.Contents
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 lostlose patent protection.
Like other major pharmaceutical companies, inIn order to remain competitive, the Company, like other major pharmaceutical companies, must continue to launch new 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 positioncondition 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 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 positioncondition 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 activities,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 research, preclinical testing, clinical trialsthe Medicare Prescription Drug Improvement and Modernization Act of 2003 and the manufacturingACA, and marketing(iii) state activities aimed at increasing price transparency, including new laws as noted above in Item 1. “Competition and the Health Care Environment.” Changes to the health care system enacted as part of its products, are subject to extensive regulation by numerous federal, state and local governmental authoritieshealth care reform in the United States, includingas 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 FDA,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 managed care organization.
In order to provide information about the Company’s pricing practices, the Company annually posts on its website its Pricing Transparency Report for the United States. 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 foreign regulatory authorities,45.5% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, 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 requirementsChina have increased the amount of time and money necessary to develop new products and bring them to marketpervasive government involvement in the United States. Regulation outside the United States also is primarily focused on drug safety and effectivenessfunding health care and, in many cases, reductionthat regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in the cost of drugs. The FDA and foreign regulatory authorities 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 ifthose markets, the Company is successfulsubject 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 notApril 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 products in that jurisdiction. 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 reachesproducts or by reducing the market, certain developments following regulatory approval may decrease demand for the Company’s products, includingwhich 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.
resultsAs discussed above in post-approval Phase 4 trials or other studies;

“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 efficacyU.S. health care system as part of pharmaceutical productshealth 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 have2020 was negatively affected the salesby 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 litigationactions, and even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, followingadditional actions in the wakefuture, will continue to negatively affect revenue performance.
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If credit and other significant safety issues, health authorities such aseconomic conditions worsen, the FDA, the EMAresulting 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 positioncondition and prospects.
The Company faces intense competition from competitors’ 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 positioncondition 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 global COVID-19 pandemic is having an adverse impact on the Company’s business, operations and financial performance. The Company facesis 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’s business and financial results were negatively impacted by the outbreak of COVID-19 in 2020. The continued pricing pressureduration and severity of the COVID-19 pandemic is uncertain, rapidly changing and difficult to predict. The degree to which COVID-19 impacts the Company’s results in 2021 will depend on future developments, beyond the Company’s 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 operating conditions can resume.
In 2020, the 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 reduced access to health care providers given social distancing measures, which negatively affected vaccine and oncology sales in particular. The estimated overall negative impact of the COVID-19 pandemic to 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, 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 assumption is that ongoing residual negative impacts will persist, particularly during the first half of 2021 and most notably 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 affectvaccine sales, with 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 relatedimpact expected 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 new laws as noted above in Item 1. “Competition and the Health Care Environment — Health Care Environment and Government Regulations.” Changes to the health care system enacted as part of health care reformbe more acute in the United States,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 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 other areas due to the COVID-19 pandemic. Despite the Company’s 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 increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid,governmental and private sector beneficiaries, could result in further pricing pressures.third-party actions taken to contain or prevent its spread, treat the virus and mitigate its public health and economic effects. In addition, in the U.S., larger customers may, in theany future ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also competepandemic, epidemic or similar public health threat could present similar risks 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 annually posts on its website its Pricing Transparency Report for the United States. 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.
Outside the United States, numerous major markets, including the EU, Japan and China 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 2018, the Company’s revenue was reduced by $365 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 $4.1 billion in 2018 and will be $2.8 billion in 2019. 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 2018, the Company recorded $124 million of costs for this annual fee.
In 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 business, cash flow, results of operations, financial positioncondition and prospects.
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.
In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. Due to the cyber-attack, 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 Cost of sales, as well as expenses related to remediation efforts in Selling, general 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, 2018 sales were unfavorably affected in certain markets by approximately $150 million from the cyber-attack.
The Company has insurance coverage insuring against costs resulting from cyber-attacks and has received proceeds. However, there are disputes with certain of the insurers about the availability of some of the insurance coverage for claims related to the 2017 cyber-attack.
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 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.
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 position and prospects of the Company; these laws and regulations include (i) additional healthcare 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 healthcare professionals; (ix) environmental regulations; and (x) the potential impact of importation restrictions, embargoes, trade sanctions and legislative and/or other regulatory changes.
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 pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial position 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. The Company anticipates these pricing actions will continue to negatively affect revenue performance in 2019.
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 impactadverse 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.
In 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 that referendum, the British government has been in the process of negotiating the terms of the UK’s future relationship with the EU. While the Company has taken actions and made certain contingency plans for scenarios in which the UK and the EU do not reach a mutually satisfactory understanding as to that relationship, it is not possible at this time to predict whether there will be any such understanding, or if such an understanding is reached, whether its terms will vary in ways that result in greater restrictions on imports and exports between the UK and EU countries, increased regulatory complexities, and/or cross border labor issues that could materially adversely impact the Company’s business operations in the UK.

Failure to attract and retain highly qualified personnel could affect 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 byFor example, in 2020 the Company in June 2017 led toissued a disruptionproduct 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 Healthcare“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 healthcarehealth 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, 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 positioncondition 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 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, interest rates and inflation could negatively affect the Company’s business, cash flow, results of operations, financial positioncondition and 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 CompanyCertain 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 subjectcease to evolving and complex tax lawsexist 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 expects that reasonable alternatives to LIBOR will be 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 be 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.also require the amendment of contracts that 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 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 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 impactmaterial 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 impactaffect 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 productionthe manufacture of vaccinesits animal health products at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccinesproducts 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 impactmaterial 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 withrelated 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 preclinicalpre-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 certainmost 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 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, 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 vehicleschannels 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 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 headquarteredCompany 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 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, CaliforniaCalifornia; 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 $4.7 billion in 2020, $3.5 billion in 2019 and $2.6 billion in 2018, $1.9 billion in 2017 and $1.6 billion in 2016.2018. In the United States, these amounted to $2.7 billion in 2020, $1.9 billion in 2019 and $1.5 billion in 2018, $1.2 billion in 2017 and $1.0 billion in 2016.2018. Abroad, such expenditures amounted to $2.0 billion in 2020, $1.6 billion in 2019, and $1.1 billion in 2018, $728 million in 2017 and $594 million in 2016.2018.
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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. PlantsThe 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. In addition, in October 2018, the Company announced it plans to invest approximately $16 billion on new capital projects from 2018-2022. The focus of this investment will primarily be on increasing manufacturing capacity across Merck’s key businesses.
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, 2019)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).
NameAgeOffices and Business Experience
Kenneth C. Frazier6466Chairman, President and Chief Executive Officer (since December 2011)
Sanat Chattopadhyay5961Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Frank Clyburn5456Executive Vice President, Chief Commercial Officer (since January 2019); President, Global Oncology Business Unit (October 2013-December 2018); President, Primary Care and Women’s Health Business Line (September 2011-October 2013)
Robert M. Davis5254Executive Vice President, Global Services, and Chief Financial Officer (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice President and President, Medical Products, Baxter International, Inc. (October 2010-March 2014)
Richard R. DeLuca, Jr.5658Executive Vice President and President, Merck Animal Health (since September 2011)
Michael W. Fleming62Senior 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. Gerberding6265Executive 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)
Rita A. Karachun5557Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller (November 2009-March 2014)
Dean Li
58President, Merck Research Laboratories (since 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
Steven C. Mizell


5860Executive Vice President, Chief Human Resources Officer Human Resources (since October 2018)December 2016); Executive Vice President, Chief Human Resources Officer (December 2016-October 2018) and Executive Vice President, Human Resources, Monsanto Company (August 2011-December 2016)
Michael T. Nally4345Executive Vice President, Chief Marketing Officer (since January 2019); President, Global Vaccines, Global Human Health (September 2016-January 2019); Managing Director, United Kingdom and Ireland, Global Human Health (January 2014-September 2016); Managing Director, Sweden, Global Human Health (November 2011-January 2014)
Roger M. Perlmutter, M.D., Ph.D.Jennifer Zachary6643Executive Vice President, General Counsel and President, Merck Research LaboratoriesCorporate Secretary (since April 2013)
Jim Scholefield56Executive Vice President, Chief Information and Digital Officer (since October 2018)January 2020); Chief Information Officer, Nike, Inc (July 2015-October 2018); Chief Technology Officer, The Coca-Cola Company, (November 2010-June 2015)
Jennifer Zachary41Executive Vice President and General Counsel (since April 2018)(April 2018-January 2020); Partner, Covington & Burling LLP (January 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.

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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.


As of January 31, 2019,2021, there were approximately 115,320104,900 shareholders of record of the Company’s Common Stock.


Issuer purchases of equity securities for the three months ended December 31, 20182020 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.




45

      ($ 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 59,154,075 $70.56 
$12,709(2)
November 1 — November 30 5,279,715 $74.64 $12,315
December 1 — December 31 4,788,526 $76.30 $11,949
Total 69,222,316 $71.27 $11,949
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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 November 2017 to purchase up to $10 billion in Merck shares. In October 2018, the Board of Directors authorized additional purchases of up to $10 billion of Merck’s common stock for its treasury. Shares are approximated.
(2)
Amount includes $1.0 billion being held back pending final settlement under the accelerated share repurchase agreements discussed below.

Performance Graph
The following graph assumes a $100 investment on December 31, 2013,2015, 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$18012%
PEER GRP.**1579%
S&P 50020315%
 
End of
Period Value
 
2018/2013
CAGR**
MERCK$179 12%
PEER GRP.**142 7%
S&P 500150 8%
mrk-20201231_g1.jpg

201520162017201820192020
MERCK100.0115.1113.4158.9194.3180.1
PEER GRP.100.096.9116.1124.1147.2157.2
S&P 500100.0112.0136.4130.4171.4203.0
chart-c37e259168895f1daaca01.jpg*    Compound Annual Growth Rate
**    Peer group average was calculated on a market cap weighted basis.
 201320142015201620172018
MERCK100.00117.10112.40129.40127.40178.70
PEER GRP.100.00111.40114.80111.20133.00142.20
S&P 500100.00113.70115.20129.00157.20150.30

*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.

46
Item 6.Selected Financial Data.                        

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following selected financial data shouldsection 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 readfound 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)
 
2018 (1)
 
2017 (2)(3)
 
2016 (2)(4)
 
2015 (2)(5)
 
2014 (2)(6)
Results for Year:         
Sales$42,294
 $40,122
 $39,807
 $39,498
 $42,237
Cost of sales13,509
 12,912
 14,030
 15,043
 16,903
Selling, general and administrative10,102
 10,074
 10,017
 10,508
 11,816
Research and development9,752
 10,339
 10,261
 6,796
 7,290
Restructuring costs632
 776
 651
 619
 1,013
Other (income) expense, net(402) (500) 189
 1,131
 (12,068)
Income before taxes8,701
 6,521
 4,659
 5,401
 17,283
Taxes on income2,508
 4,103
 718
 942
 5,349
Net income6,193
 2,418
 3,941
 4,459
 11,934
Less: Net (loss) income attributable to noncontrolling interests(27) 24
 21
 17
 14
Net income attributable to Merck & Co., Inc.6,220
 2,394
 3,920
 4,442
 11,920
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$2.34
 $0.88
 $1.42
 $1.58
 $4.12
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$2.32
 $0.87
 $1.41
 $1.56
 $4.07
Cash dividends declared5,313
 5,177
 5,135
 5,115
 5,156
Cash dividends declared per common share$1.99
 $1.89
 $1.85
 $1.81
 $1.77
Capital expenditures2,615
 1,888
 1,614
 1,283
 1,317
Depreciation1,416
 1,455
 1,611
 1,593
 2,471
Average common shares outstanding (millions)2,664
 2,730
 2,766
 2,816
 2,894
Average common shares outstanding assuming dilution (millions)2,679
 2,748
 2,787
 2,841
 2,928
Year-End Position:         
Working capital$3,669
 $6,152
 $13,410
 $10,550
 $14,198
Property, plant and equipment, net13,291
 12,439
 12,026
 12,507
 13,136
Total assets82,637
 87,872
 95,377
 101,677
 98,096
Long-term debt19,806
 21,353
 24,274
 23,829
 18,629
Total equity26,882
 34,569
 40,308
 44,767
 48,791
Year-End Statistics:         
Number of stockholders of record115,800
 121,700
 129,500
 135,500
 142,000
Number of employees69,000
 69,000
 68,000
 68,000
 70,000
(1)
Amounts for 2018 include a charge related to the formation of a collaboration with Eisai Co., Ltd.
(2)
Amounts have been recast as a result of the adoption, on January 1, 2018, of a new accounting standard related to the classification of certain defined benefit plan costs. There was no impact to net income as a result of adopting the new accounting standard.
(3)
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.
(4)
Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to Keytruda.
(5)
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.
(6)
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 fourtwo operating segments, which are the Pharmaceutical Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical and Animal Health segments, both of which are the only reportable segments.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. 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. In 2017, Merck began 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 Animal Health segment discovers, develops, manufactures and markets animal health products, includinga 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 species, which thespecies. 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 previously had a Healthcare Services segment providesthat provided services and solutions that focusfocused 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 includesincluded activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 20182018.
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
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)
$5.9414 %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 non-GAAP net income and EPS (see “Non-GAAP Income and Non-GAAP EPS” below).
Executive Summary
Worldwide sales were $48.0 billion in 2020, an increase of 2% compared with 2019, or 4% excluding the unfavorable effect from foreign exchange. The sales increase was driven primarily by oncology, certain hospital acute care products and 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 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 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, sales of which were negatively affected in 2020 by patients’ inability to access health care providers, fewer well visits, and social distancing measures. However, in the latter part of the 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.
Merck actively monitors the business development landscape for growth opportunities that meet the Company’s strategic criteria. To expand its oncology presence, Merck completed the acquisitions of ArQule, Inc. (ArQule), a biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of 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 patients with 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 small molecule tyrosine kinase inhibitor for the treatment of 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 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 patients hospitalized with COVID-19; and 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 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 93 to the consolidated financial statements).
Overview
The Company’s performance during 2018 demonstrates execution of its innovation strategy, with revenue growth in oncology, vaccines, hospital acute care and animal health, focused investmentDuring 2020, the Company received numerous regulatory approvals within oncology. Keytruda received approval in the research and development pipeline, and disciplined allocation of resources. Additionally, Merck completed several business development transactions, expanded its capital expenditures program primarily to increase future manufacturing capacity, and returned capital to shareholders.
Worldwide sales were $42.3 billion in 2018, an increase of 5% compared with 2017. Strong growthUnited States as monotherapy in the oncology franchise reflects the performancetherapeutic areas of Keytrudacutaneous 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, as well as alliance revenue related to Lynparza and Lenvima resulting from Merck’s business development activities. Also contributing to revenue growth were higher sales of vaccines, driven primarily by Gardasil/Gardasil 9, and growth in the hospital acute care franchise, largely attributable to Bridion and Noxafil. Higher sales of animal health products, reflecting increases in companion animal and livestock products both from in-line and recently launched products, also contributed to revenue growth. Growth in these areas was partially offset by competitive pressures on Zepatier and Zostavax, as well as the ongoing effects of generic and biosimilar competition that resulted in sales declines for products including Zetia, Vytorin, and Remicade.
Augmenting Merck’s portfolio and pipeline with external innovation remains an important component of the Company’s overall strategy. In 2018, Merck continued executing on this strategy by entering into a strategic collaboration with Eisai Co., Ltd. (Eisai) for the worldwide co-development and co-commercialization of Lenvima. Lenvima is an orally available tyrosine kinase inhibitor discovered by Eisai, which is approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell carcinoma. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. In addition, Merck acquired Viralytics Limited (Viralytics), a company focused on oncolytic immunotherapy treatments for a range of cancers. Also, the Company announced an agreement to acquire Antelliq Group (Antelliq), a leader in digital animal identification, traceability and monitoring solutions.

During 2018, the Company advanced its leadership in oncology through focused commercial execution, the achievement of important regulatory milestones and the presentation of clinical data. Keytruda continues its global launch with multiple new indicationsacross several tumor types, including approval from the U.S. Food and Drug Administration (FDA) for the treatment of certain patients with cervical cancer, primary mediastinal large B-cell lymphoma (PMBCL), a type of non-Hodgkin lymphoma, hepatocellular carcinoma, Merkel cell carcinoma, and in combination with chemotherapy for the treatment of certain patients with squamous non-small-cell lungtriple-negative breast cancer (NSCLC)(TNBC). Also during 2018,Merck also received approval in the European Commission (EC) approved United 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 head and neck squamous cell carcinoma (HNSCC), for the adjuvant treatment of melanoma, and in combination with chemotherapy for the first-line treatment of certain patients with nonsquamous NSCLC. This was the first approval in Europe for an anti-PD-1 therapy in combination with chemotherapy. Also in 2018, Keytruda was approved inboth China and Japan for the treatment of certain patients with melanoma. Additionally, Merck recently announced the receipt of five new approvals for Keytruda in Japan, including three expanded uses in advanced NSCLC, one in adjuvant melanoma, as well as a new indication in advanced microsatellite instability-high (MSI-H) tumors. Keytruda also continues to launch in many other international markets.
In 2018, esophageal squamous cell carcinoma (ESCC). Lynparza, which is being developed in a collaboration with AstraZeneca PLC (AstraZeneca), received FDA approval for use in certain patientsthe United States: in combination with metastatic breast cancer who have been previously treated with chemotherapy, and for usebevacizumab as a first-line maintenance treatment of certain adult patients with certain types of advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to chemotherapy. Additionally, Lenvima was approved in the United States, European Union (EU), Japanfirst-line platinum-based chemotherapy; and China for the treatment of certain adult patients with hepatocellular carcinoma. The FDAmetastatic 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 ECBRCA1/2 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 two new HIV-1 medicines: Delstrigoin 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.
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 reduce the risk of cardiovascular death and heart failure hospitalization following a once-daily fixed-dose combination tablet of doravirine, lamivudine and tenofovir disoproxil fumarate; and Pifeltro (doravirine), a new non-nucleoside reverse transcriptase inhibitor to be administeredhospitalization for heart failure or need for outpatient intravenous diuretics in combinationadults. Verquvo is being jointly developed with other antiretroviral medicines.Bayer AG (Bayer).
Merck continues to invest in its pipeline, with an emphasis on being a leader in immuno-oncology and expanding in other areas such as vaccines and hospital acute care. In addition to the recent regulatory approvals discussed above, the Company has continued to advanceadvanced its late-stage pipeline with several regulatory submissions. Keytruda is under review in the United States in combination with axitinib, a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma for which it has been granted Priority Review by the FDA; in the EU for the first-line treatment of certain patients with metastatic squamous NSCLC; in the United States and in the EU as monotherapy for the first-line treatment of certain patients with locally advanced and/or metastatic NSCLC; in the United States as monotherapyinternationally for the treatment of certain patients with advanced small-cell lungTNBC, classical Hodgkin Lymphoma (cHL), colorectal cancer, (SCLC);cSCC, esophageal and gastric cancer. Lenvima is under review in the United StatesJapan as monotherapy or in combination with chemotherapy for the first-line treatment of certain patients with recurrent or metastatic HNSCC for which it has been granted Priority Review by the FDA. Additionally, MK-7655A, the combination of relebactam and imipenem/cilastatin, has been accepted for Priority Reviewthymic cancer. V114, an investigational 15-valent pneumococcal conjugate vaccine, is under priority review by the FDA for the treatmentprevention of complicated urinary tract infections and complicated intra-abdominal infections caused by certain susceptible Gram-negative bacteriainvasive pneumococcal disease in adults with limited or no alternative therapies available. Merck has18 years of age and older. The European Medicines Agency (EMA) is also startedreviewing an application for licensure of V114 in adults. The Company is involved in litigation challenging the submissionvalidity of a rolling Biologics License Application (BLA)several Pfizer Inc. patents that relate to pneumococcal vaccine technology in the FDA for V920, an investigational Ebola Zaire disease vaccine candidate.United States and several foreign jurisdictions.
The Company’s Phase 3 oncology programs include Keytruda in the therapeutic areas of breast,biliary tract, cervical, colorectal, esophageal,cutaneous squamous cell, endometrial, gastric, hepatocellular, mesothelioma, nasopharyngeal, ovarian, renalprostate and small-cell lung cancers; Lynparza as monotherapy for pancreaticcolorectal cancer and prostate cancer;in combination with Keytruda for non-small-cell lung and small-cell lung cancers; and Lenvima in combination with Keytruda for bladder, endometrial, cancer. 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, including V114, an investigational polyvalent conjugate vaccine for the prevention of pneumococcal disease that received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease caused by the vaccine serotypes in pediatric patients 6 weeks to 18 years of age; MK-7264, gefapixant, a selective, non-narcotic, orally-administered, investigational P2X3-receptor agonistantagonist being developed for the treatment of refractory, chronic cough; and MK-1242, vericiguat,MK-7110, an investigational treatment for heart failurepatients 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 V114, which is being developedevaluated for the prevention of pneumococcal disease in a collaboration (see “Research and Development” below).pediatric patients.
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The Company is allocating resources to effectively support its commercial opportunities in the near term while making the necessary investments to support long-term growth. Research and development expenses in 20182020 reflect higher costs related to business development activity, higher clinical development spending and increased investment in discovery research and early drug development.

In October 2018,November 2020, Merck’s Board of Directors approved a 15%an increase to the Company’s quarterly dividend, raising it to $0.55$0.65 per share from $0.48$0.61 per share on the Company’s outstanding common stock. Also in October 2018, Merck’s Board of Directors approved a $10 billion share repurchase program and the Company entered into $5 billion of accelerated share repurchase (ASR) agreements. During 2018,2020, the Company returned $14.3$7.5 billion to shareholders through dividends and share repurchases.
Earnings per common share assuming dilutionManagement
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 (MRL)—will begin reporting to Mr. Davis.
COVID-19
Overall, in response to the COVID-19 pandemic, Merck remains focused on protecting the safety of its employees, ensuring that its supply of medicines and vaccines reaches its patients, contributing its scientific expertise to the development of 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 common shareholders (EPS)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, in particular for 2018its 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.
Operating expenses were $2.32 compared with $0.87positively affected in 2017. EPS in both years reflect the impact of acquisition2020 by approximately $600 million primarily due to lower promotional and divestiture-relatedselling costs, as well as restructuring costslower research and certain other items. Certain other itemsdevelopment expenses, net of investments in 2018 include a charge relatedCOVID-19-related antiviral and vaccine research programs.
Merck believes that global health systems and patients have largely adapted to the formationimpacts of COVID-19, but the collaborationCompany’s assumption is that ongoing residual negative impacts will persist, particularly during the first half of 2021 and most notably with Eisai andrespect to vaccine sales, with the impact expected to be more acute in 2017 include a provisional net tax charge relatedthe United States. For the full year of 2021, Merck assumes an unfavorable impact to revenue of approximately 2% due to the enactmentCOVID-19 pandemic, all of U.S. tax legislation and a charge relatedwhich relates to Pharmaceutical segment sales. In addition, for the full year of 2021, with respect to the formationCOVID-19 pandemic, Merck expects a net negative impact to operating expenses, as spending on the development of a collaboration with AstraZeneca. Non-GAAP EPS, which exclude these items, were $4.34its COVID-19 antiviral programs is expected to exceed the favorable impact of lower spending in 2018 and $3.98 in 2017 (see “Non-GAAP Income and Non-GAAP EPS” below).other areas due to the COVID-19 pandemic.
Pricing
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, pricing pressure continues on many of the Company’s products. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s revenue performance in 20182020 was negatively
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affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect revenue performance in 2019.performance.
Cyber-attack
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. Due to a backlog of orders for certain products as a result of the cyber-attack, the Company was unable to fulfill orders for certain products in certain markets, which had an unfavorable effect on sales in 2018 and 2017 of approximately $150 million and $260 million, respectively. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Cost of sales, as well as expenses related to remediation efforts in Selling, general and administrative expenses and Research and development expenses, which aggregated approximately $285 million in 2017, net of insurance recoveries of approximately $45 million. Costs in 2018 were immaterial.
As referenced above, the Company has insurance coverage insuring against costs resulting from cyber-attacks and has received insurance proceeds. However, there are disputes with certain of the insurers about the availability of some of the insurance coverage for claims related to this incident.
Operating Results
Sales
($ 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 
International26,967 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 $42.3 billiongrew 2% in 2018, an increase of 5% compared with 2017. Sales growth was driven primarily by2020 due to higher sales in the oncology franchise reflecting strong growth of Keytruda, as well as increased alliance revenue related tofrom Lynparza and Lenvima. Also contributing to revenue growth were higher sales of certain vaccines, driven primarily by human papillomavirus (HPV) vaccine including Gardasil/Gardasil 9 and Pneumovax 23, as well as higherincreased sales in theof certain hospital acute care franchise, largely attributable to Bridionproducts, including Prevymis and Noxafil.Bridion. Higher sales of animal health products also drove revenue growth in 2018.2020.
Sales growth in 20182020 was partially offset by declines in the virology franchise driven primarily by lower sales of hepatitis C virus (HCV) treatment Zepatier, as well as lower sales of shingles (herpes zoster) vaccine Zostavax. The ongoing effects of generic and biosimilar competition for certain products including women’s health product NuvaRing, hospital acute care products Noxafil and Cubicin, oncology products Emend/Emend for Injection, cardiovascular products Zetia and Vytorin, and immunology product Remicade, as well as lower sales of products within the diversified brands franchise, also partially offset revenue growth in 2018.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. Lower sales of pediatric vaccines, including ProQuad, M-M-R II, and Varivax, as well as lower sales of diabetes products Januvia and Janumet, and virology products Zepatier and Isentress/Isentress HD also partially offset revenue growth in 2020. As discussed above, the COVID-19 pandemic negatively affected sales in 2020.
Sales in the United States were $18.2 billiongrew 2% in 2018, growth of 5% compared with 2017. The increase was2020 primarily driven primarily by higher sales of Keytruda, Gardasil/Gardasil 9, NuvaRing, and Bridion, as well asincreased alliance revenue

from Lynparza and Lenvima, and higher sales of animal health products. GrowthRevenue growth was partiallylargely offset by lower sales of ZepatierNuvaRing, ZetiaJanuvia, Noxafil, Emend/Emend for Injection, M-M-R II, Janumet, Vytorin, Zostavax, Januvia, Janumet, Invanz,Varivax and products within the diversified brands franchise.Implanon/Nexplanon.
International sales were $24.1 billiongrew 2% in 2018, an2020. The increase of 6% compared with 2017. The increasein international sales primarily reflects growth in Keytruda, Gardasil/Gardasil 9, Januvia, Janumet and Atozet,increased alliance revenue from Lynparza, as well as higher sales ofPneumovax 23, Prevymis, Januvia and animal health products. Sales growth was partially offset by lower sales of Zepatier, RemicadeVytorin, ZetiaNoxafil, VytorinZetia,Remicade, Emend/Emend for Injection and products within the diversified brands franchise.franchise, particularly Singulair and Nasonex. International sales represented 57%56% of total sales in both 20182020 and 2017.
Worldwide sales were $40.1 billion in 2017, an increase of 1% compared with 2016. Sales growth in 2017 was driven primarily by higher sales of Keytruda, Zepatier 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. Higher sales of Pneumovax 23, Adempas, and animal health products also contributed to revenue growth in 2017. These increases were largely offset by the effects of generic competition for certain products including Zetia, which lost U.S. market exclusivity in December 2016, Vytorin, which lost U.S. market exclusivity in April 2017, Cubicin due to U.S. patent expiration in June 2016, and Cancidas, 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 franchise, as well as lower combined sales of the diabetes franchise of Januvia and Janumet, and declines in sales of Isentress/Isentress HD also partially offset revenue growth. Additionally, sales in 2017 were reduced by $125 million due to a borrowing the Company made from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile of doses of Gardasil 9 as discussed below. Also, 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 $260 million.2019.
See Note 1918 to the consolidated financial statements for details on sales of the Company’s products. A discussion of performance for select products in the franchises follows.
Pharmaceutical Segment
Oncology
($ 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 
Emend145 (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 commercialization costs (see Note 4 to the consolidated financial statements).
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Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved in the United States and in the EU as monotherapy for the treatment of certain patients with NSCLC,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, classical HodgkinMerkel cell carcinoma, MSI-H or dMMR cancer including MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma (cHL)(PMBCL), HNSCCTMB-H cancer, and urothelial carcinoma a typeincluding NMIBC. Keytruda is also approved for the treatment of bladder cancer, andcertain patients: in combination with chemotherapy for certain patients withmetastatic squamous and nonsquamous NSCLC. Keytruda is also approved in the United States as monotherapy for the treatment of certain patients with gastric or gastroesophageal junction adenocarcinoma and MSI-H or mismatch repair deficient cancer. In addition, the FDA recently approved Keytruda for the treatment of certain patients with cervical cancer, PMBCL, hepatocellular carcinoma, Merkel cell carcinoma, andNSCLC, in combination with chemotherapy for patientsHNSCC, in combination with squamous NSCLC (see below). Keytruda is approvedchemotherapy for TNBC, in Japancombination with axitinib for the treatment of certain patients with NSCLC, both as monotherapyRCC, and in combination with chemotherapy, melanoma, cHL, MSI-H tumors, and urothelialLenvima for endometrial carcinoma. Additionally, Keytruda has been approved in China for the treatment of certain patients with melanoma. Keytruda is also approved in many other international markets. The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).types.
In August 2018, the FDA approved an expanded label for Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of patients with metastatic nonsquamous NSCLC, with no EGFR or ALK genomic tumor aberrations, based on results of the KEYNOTE-189 trial. Keytruda in combination with pemetrexed and carboplatin was first approved in 2017 under the FDA’s accelerated approval process for the first-line treatment of patients with metastatic nonsquamous NSCLC, based on tumor response rates and progression-free survival (PFS) data from a Phase 2 study (KEYNOTE-021, Cohort G1). In accordance with the accelerated approval process, continued approval was contingent upon verification and description of clinical benefit, which was demonstrated in KEYNOTE-189 and resulted in the FDA converting the accelerated approval to full (regular) approval. Also, in September 2018, the EC approved Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of metastatic nonsquamous NSCLC in adults whose tumors have no EGFR or ALK positive mutations.
In June 2018, the FDA approved Keytruda for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy whose tumors express PD-L1 as determined by an FDA-

approved test. Also in June 2018, the FDA approved Keytruda for the treatment of adult and pediatric patients with refractory PMBCL, or who have relapsed after two or more prior lines of therapy.
In September 2018, the EC approved Keytruda as monotherapy for the treatment of recurrent or metastatic HNSCC in adults whose tumors express PD-L1 with a tumor proportion score (TPS) of ≥50%, and who progressed on or after platinum-containing chemotherapy, based on data from the Phase 3 KEYNOTE-040 trial.
In October 2018, the FDA approved Keytruda, in combination with carboplatin and either paclitaxel or nab-paclitaxel, for the first-line treatment of patients with metastatic squamous NSCLC based on results from the KEYNOTE-407 trial. This approval marks the first time an anti-PD-1 regimen has been approved for the first-line treatment of squamous NSCLC regardless of tumor PD-L1 expression status.
In November 2018, the FDA approved Keytruda for the treatment of patients with hepatocellular carcinoma who have been previously treated with sorafenib based on data from the KEYNOTE-224 trial.
In December 2018, the FDA approved Keytruda for the treatment of adult and pediatric patients with recurrent locally advanced or metastatic Merkel cell carcinoma, based on the results of the Cancer Immunotherapy Trials Network’s CITN-09/KEYNOTE-017 trial.
Also in December 2018, the EC approved Keytruda for the adjuvant treatment of adults with stage III melanoma and lymph node involvement who have undergone complete resection. Keytruda was approved for this indication by the FDA in February 2019. These approvals were based on data from the pivotal Phase 3 EORTC1325/KEYNOTE-054 trial, conducted in collaboration with the European Organisation for Research and Treatment of Cancer.
Global sales of Keytruda were $7.2 billion grew 30% in 2018, $3.8 billion in 2017 and $1.4 billion in 2016. The year-over-year increases were2020 driven by volume growthhigher demand as the Company continues to launch Keytruda with multiple new indications globally.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 reflectingas monotherapy, and in combination with chemotherapy for both the continued adoption of Keytrudanonsquamous and squamous metastatic NSCLC, along with uptake in the first-line settingRCC, 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 NSCLC whoseTMB-H solid tumors, as determined by an FDA-approved test, that have high PD-L1 expression,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 wellmonotherapy 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 the uptake of Keytruda in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, monotherapy for the first-line treatment of patients with unresectable or metastatic nonsquamous NSCLC withMSI-H or without PD-L1 expression. Other indications contributing to sales growth include HNSCC, bladder, and melanoma. RecentlydMMR colorectal cancer based on results from the KEYNOTE-177 trial.
In October 2020, the FDA approved indications, including squamous NSCLC and MSI-H cancer, also contributed to growth in 2018. Sales growth in international markets reflects continued uptakean expanded label for Keytruda as monotherapy for the treatment of NSCLC as the Company has secured reimbursement in most major markets. Sales growth in international markets in 2018 also includes contributionsadult patients with relapsed or refractory cHL based on results from the more recentlyKEYNOTE-204 trial. The FDA also approved indications as described above, includingan updated pediatric indication for Keytruda for the treatment of HNSCC, bladder cancerpediatric 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 NSCLCpatients 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 EU, multiple new indicationssecond-line treatment of patients with locally advanced or metastatic ESCC whose
52

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 Japan,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 melanomapatients 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 China.addition to the current dose of 200 mg Q3W.
In January 2017, Merck entered into2021, Keytruda was approved by the European Commission (EC) as a settlement andfirst-line treatment in adult patients with MSI-H or dMMR colorectal cancer based on the results of the KEYNOTE-177 study.
The Company is a party to certain third-party license agreementagreements pursuant to resolve worldwide patent infringement litigation related to Keytruda. Pursuant to the settlement,which the Company will paypays royalties on sales of Keytruda. Under the terms of the more significant of these agreements, Merck pays a royalty of 6.5% on networldwide sales of Keytruda in 2017 through 2023;2023 to one third party; this royalty will decline to 2.5% for 2024 through 2026 and 2.5%will terminate thereafter. The Company pays an additional 2% royalty on networldwide sales of Keytruda in 2024 through 2026.
Global sales to another third party, the termination date of Emend, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $522 million in 2018, a decline of 6% compared with 2017 including a 1% favorable effect from foreign exchange. The decline primarily reflects lower demandwhich varies by country; this royalty will expire in the United States due to competition. Worldwide sales of Emend were $556 million in 2017, an increase of 1% compared with 2016. The patent that provided U.S. market exclusivity for Emend expired in 20152024 and the patent that provides market exclusivity in most major European markets will expire in May 2019. The patent that provides U.S. market exclusivity for Emend for Injection expires in September 2019 and the patent that provides market exclusivity in major European markets expires in February 2020 (although six-month pediatric exclusivity may extend this date).2025. The Company anticipates thatroyalties are included in Cost of sales of Emend in these markets will decline significantly after these patent expiries..
Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca entered into in July 2017 (see Note 4 to the consolidated financial statements), is currently approved for the treatment of certain types of advanced ovarian, breast, pancreatic and breast cancer. Merck recorded allianceprostate cancers. Alliance revenue of $187 million in 2018 and $20 million in 2017 related to Lynparza. The revenue increase reflectsLynparza grew 63% in 2020 due to continued uptake across the approval of newmultiple approved indications as well as a full year of activity in 2018. the United States, the EU, China and Japan.
In January 2018,May 2020, the FDA approved Lynparza for use in patientscombination with BRCA-mutated, human epidermal growth factor receptor 2 (HER2)-negative metastatic breast cancer who have been previously treated with chemotherapy,

triggering a $70 million capitalized milestone payment from Merck to AstraZeneca. Lynparza was also approved in Japan in July 2018 for use in patients with unresectable or recurrent BRCA-mutated, HER2-negative breast cancer who have received prior chemotherapy. Additionally, Lynparza was approved for usebevacizumab as a maintenance therapy in patients with platinum-sensitive relapsed ovarian cancer, regardless of BRCA mutation status in Japan in January 2018 and in the EU in May 2018. In December 2018, the FDA approved Lynparza for use asfirst-line maintenance treatment of certain adult patients with deleterious or suspected deleterious germline or somatic BRCA-mutated 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 SOLO-1 clinical trial, triggeringpancreas and have not progressed after a $70 million capitalized milestone paymentfirst-line chemotherapy regimen. This approval was based on the results from Merck to AstraZeneca.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 receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai entered into in March 2018 (see Note 4 to the consolidated financial statements), is approved for the treatment of certain types of thyroid cancer, hepatocellular carcinoma, andHCC, in combination with everolimus for certain patients with renal cell carcinoma. Merck recorded alliance revenueRCC, and in combination with Keytruda for the
53

treatment of certain patients with hepatocellular carcinomaendometrial carcinoma. Alliance revenue related to Lenvima grew 44% in 2020 due to higher demand in the United States, China and the EU.
In November 2020, China’s NMPA approved Lenvima as a monotherapy for the treatment of differentiated thyroid cancer.
Global sales of 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 China, triggering capitalized milestone paymentsDecember 2019, respectively. U.S. market exclusivity for the oral formulation of $250 millionEmend previously expired in 2015.
In April 2020, the aggregateFDA 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 Merckthe National Cancer Institute (NCI) Cancer Therapy Evaluation Program (CTEP)-sponsored Phase 2 SPRINT Stratum 1 trial coordinated by the NCI’s Center for 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 Eisai.the consolidated financial statements).
Vaccines
On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which developed and marketed vaccines in Europe. Accordingly, vaccine sales in 2018 and 2017 include sales of Merck vaccines in the European markets that were previously part of 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 were reflected in equity income from affiliates included in Other (income) expense, net. Supply sales to SPMSD, however, are included in vaccine sales in periods prior to 2017. Incremental vaccine sales resulting from the termination of the SPMSD joint venture were approximately $400 million in 2017, of which approximately $215 million relate to Gardasil/Gardasil 9.
($ 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 
ProQuad678 (10)%(10)%756 27 %29 %593 
M-M-R II
378 (31)%(31)%549 28 %29 %430 
Varivax823 (15)%(15)%970 25 %28 %774 
Pneumovax 23
1,087 17 %18 %926 %%907 
Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of HPV, were $3.2 billiongrew 5% in 2018, growth of 37% compared with 2017 including a 1% favorable effect from foreign exchange. Sales growth was driven2020 primarily bydue to higher sales in the Asia Pacific region, particularlyvolumes in China reflecting continued uptake since launch, as well as higher demand in certain European markets. The sales increase was also attributable toand the replenishment in 20182020 of doses borrowed from the CDCU.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile in 2017 as discussed below. In April 2018, China’s Food and Drug Administration approved Gardasil 9 for use in girls and women ages 16 to 26. In October 2018, the FDA approved an expanded age indication for use in women and men ages 27 to 45 for the prevention of certain cancers and diseases caused by the nine HPV types covered by the vaccine.
During 2017, the Company made a request to borrow doses of Gardasil 9 from the CDC Pediatric Vaccine Stockpile, which the CDC granted.2019. The Company’s decision to borrow the doses from the CDC was driven in part by the temporary shutdown resulting from the cyber-attack that occurred in June 2017, 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 a portion 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 replenished the remaining borrowed doses in 2018 resultingresulted in the recognition of sales of $125$120 million in 2018 and a reversal2020, which, when combined with the reduction of the related liability.
Global sales of Gardasil/Gardasil 9 were $2.3 billion$120 million 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, as well as higher demand in the Asia Pacific region2019 due in part to the launchborrowing, resulted in China, partially offset by lowera favorable impact to sales of $240 million in the United States.2020. Lower salesdemand in the United States reflectand Hong Kong, SAR, PRC attributable to the timingCOVID-19 pandemic partially offset the increase in sales of public sector purchasesGardasil/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 CDC stockpile borrowingPMDA in Japan for use in 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 approved in 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 described above.Silgard 9.
The Company is a party to certain third-party license agreements with respect to Gardasil/Gardasil 9 pursuant to which the Company pays royalties on worldwide sales of Gardasil/Gardasil 9. Under the terms of the more significant of these agreements, Merck pays a 7% royalty on worldwide sales of Gardasil/Gardasil9 sales.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 United States to another third party (these royalty obligations expire in December 2028). The royalties which vary by country and range from 7% to 13%, are included in Cost of sales.
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Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $593 milliondeclined 10% in 2018, an increase of 12% compared with 2017,2020 driven primarily by higher volumes

and pricinglower demand in the United States and volume growthresulting from fewer measles outbreaks in certain European markets. 2020 compared with 2019, coupled with the unfavorable impact of the COVID-19 pandemic, partially offset by higher pricing.
Worldwide sales of ProQuad were $528 million in 2017, an increase of 7% compared with $495 million in 2016. Sales growth in 2017 was driven primarily by higher pricing and volumes in the United States, as well as volume growth in international markets, particularly in Europe. Foreign exchange favorably affected global sales performance by 1% in 2017.
Worldwide sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $430 milliondeclined 31% in 2018, an increase of 13% compared with 2017, driven primarily by volume growth in Latin America. Global sales of M-M-R II were $382 million in 2017, an increase of 8% compared with $353 million in 2016. Sales growth in 2017 was largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Foreign exchange favorably affected global sales performance by 1% in 2018 and unfavorably affected global sales performance by 1% in 2017.
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $774 million in 2018, an increase of 1% compared with 2017, reflecting volume growth in Latin America and the Asia Pacific region, along with higher pricing in the United States, largely offset by volume declines in Turkey from the loss of a government tender due to competition. Worldwide sales of Varivax were $767 million in 2017, a decline of 3% compared with $792 million in 2016. The sales decline in 2017 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 that was partially offset by higher pricing. Higher sales in Europe resulting from the termination of the SPMSD joint venture partially offset the sales decline in 2017.
Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, were $907 million in 2018, an increase of 10% compared with 2017. Sales growth was driven primarily by higher pricing in the United States and volume growth in Europe. Global sales of Pneumovax 23 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. Foreign exchange unfavorably affected sales performance by 1% in 2017.
Global sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $728 million in 2018, an increase of 6% compared with 2017, driven primarily by the launch in China. Worldwide sales of RotaTeq 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.
Worldwide sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $217 million in 2018, a decline of 68% compared with 2017, driven by lower volumes in most markets, particularly in the United States. Lower demand in the United States reflects the launch of a competing vaccine that received a preferential recommendation from the CDC’s Advisory Committee on Immunization Practices in October 2017 for the prevention of shingles over Zostavax. The declines were partially offset by higher demand in certain European markets. The Company anticipates competition will continue to have an adverse effect on sales of Zostavax in future periods. Global sales of Zostavax were $668 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was2020 driven primarily by lower demand in the United States reflectingresulting from fewer measles outbreaks in 2020 compared with 2019, coupled with the approvalunfavorable impact of the COVID-19 pandemic. Lower demand in Brazil also contributed to the M-M-R II sales decline in 2020.
Global sales of Varivax,a competing vaccine as noted above,to help prevent chickenpox (varicella), declined 15% in 2020 driven primarily by lower demand in the United States resulting from the COVID-19 pandemic, partially offset by higher pricing. The Varivax sales decline was also attributable to lower government tenders in Brazil.
Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, grew 17% in 2020 primarily due to higher volumes in the EU and in the United States attributable in part to heightened awareness of pneumococcal vaccination. Higher pricing in the United States also contributed to Pneumovax 23 sales growth in Europe resulting from the termination of the SPMSD joint venture and volume growth in the Asia Pacific region.
In 2018, the FDA approved Vaxelis (Diphtheria and Tetanus Toxoids and Acellular Pertussis Adsorbed, Inactivated Poliovirus, Haemophilus b Conjugate [Meningococcal Protein Conjugate] and Hepatitis B [Recombinant] Vaccine) for use in children from 6 weeks through 4 years of age (prior to the 5th birthday). Vaxelis, which is currently being marketed in Europe, was developed as part of a joint-partnership between Merck and Sanofi. Merck and Sanofi are working to maximize production of Vaxelis to allow for a sustainable supply to meet anticipated U.S. demand. Commercial supply will not be available prior to 2020.
Hospital Acute Care
($ 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 
Noxafil329 (50)%(50)%662 (11)%(7)%742 
Prevymis281 70 %69 %165 128 %131 %72 
Cubicin152 (41)%(40)%257 (30)%(28)%367 
Zerbaxa130 8 %10 %121 39 %42 %87 
Global sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, were $917 milliongrew 6% in 2018, growth2020 due to higher demand globally, particularly in the United States. However, fewer elective surgeries as a result of 30% compared with 2017, driven primarily by volume growththe COVID-19 pandemic unfavorably affected demand in 2020.
Worldwide sales of Noxafil, an antifungal agent for the prevention of certain invasive fungal infections, declined 50% in 2020 due to generic competition in the United States and certain European markets. Worldwide sales of Bridion were $704 million in 2017, growth of 46% compared with 2016, driven by strong global demand, particularly in the United States.

Worldwide sales of Noxafil, for the prevention of invasive fungal infections, were $742 million in 2018, an increase of 17% compared with 2017 including a 2% favorable effect from foreign exchange. Sales growth primarily reflects higher demand in the United States, certain European markets and China. Global sales of Noxafil 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.EU. The patent that providesprovided U.S. market exclusivity for certain forms of Noxafil expires representing the majority of U.S. Noxafil sales expired in July 2019. Additionally, the patent for Noxafil will expire expired in a number of major European markets in December 2019. TheAs a result, the Company anticipatesis experiencing volume and pricing declines in Noxafil sales of Noxafil in these markets will decline significantly thereafter.as a result of generic competition and expects the declines to continue.
Worldwide sales of Prevymis, a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew 70% in 2020 due to continued uptake since launch in the EU and in the United States. Prevymis was approved by the EC in January 2018 and by the FDA in November 2017.
Global sales of Invanz,Cubicin for injection, an antibiotic for the treatment of certain bacterial infections, were $496 milliondeclined 41% in 2018, a decline of 18% compared with 2017 including a 1% unfavorable effect from foreign exchange. The sales decline was driven by lower volumes2020 primarily due to ongoing generic competition in the EU and in the United States. The patent that provided U.S. market exclusivity
In December 2020, the Company temporarily suspended sales of Zerbaxa, a combination antibacterial and beta-lactamase inhibitor for Invanz expired in November 2017the treatment of certain bacterial infections, and generic competition began insubsequently issued a product recall, following the second halfidentification of 2018.product sterility issues. As a result, the Company recorded an intangible asset impairment charge related to Zerbaxa (see Note 8 to the consolidated financial statements). The Company is experiencingdoes not anticipate that Zerbaxa will return to the market before 2022.
In June 2020, the FDA approved a significant decline in U.S. Invanz sales as a resultsupplemental New Drug Application (NDA) for Recarbrio (imipenem, cilastatin, and relebactam) for the treatment of this generic competitionpatients 18 years of age and expects the decline to continue. Worldwide salesolder with hospital-acquired
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Global sales of Cubicin, an I.V. antibiotic for complicated skinbacterial pneumonia and skin structure infections or bacteremia whenventilator-associated bacterial pneumonia caused by designatedcertain susceptible organisms, were $367 million in 2018, a decline of 4% compared with 2017 including a 1% favorable effect from foreign exchange. Worldwide sales of Cubicin were $382 million in 2017, a decline of 65% compared with 2016, resulting from generic competition in the United States following expiration of the U.S. composition patent for Cubicin in June 2016.
Global sales of Cancidas, an anti-fungal product sold primarily outside of the United States, were $326 million in 2018, a decline of 23% compared with 2017, and were $422 million in 2017, a decline of 24% compared with 2016. Foreign exchange favorably affected global sales performance by 2% in 2018. The sales declines were driven primarily by generic competition in certain European markets. The EU compound patent for Cancidas expired in April 2017. Accordingly, the Company is experiencing a significant decline in Cancidas sales in these European markets and expects the decline to continue.Gram-negative microorganisms.
Immunology
($ in millions)2020% Change% Change
Excluding Foreign
Exchange
2019% Change% Change
Excluding Foreign
Exchange
2018
Simponi$838 1 %1 %$830 (7)%(2)%$893 
Remicade330 (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 $893 millionnearly flat in 2018, growth of 9% compared with 2017 including a 4% favorable effect from foreign exchange.2020. Sales of Simponiwere $819 million in 2017, growth of 7% compared with 2016 including a 1% favorable effect from foreign exchange. Sales growth in both years was driven by higher demand in Europe. The Company anticipates sales of Simponi will be are being unfavorably affected in future periods by the recent 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 $582 milliondeclined 20% in 2018, a decline of 31% compared with 2017, and were $837 million2020 driven by ongoing biosimilar competition in 2017, a decline of 34% compared with 2016. Foreign exchange favorably affected sales performance by 2%the Company’s marketing territories in 2018.Europe. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.
VirologyThe Company’s marketing rights with respect to these products will revert to Janssen Pharmaceuticals, Inc. in the second half of 2024.
Virology
($ 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 
Zepatier167 (55)%(54)%370 (19)%(16)%455 
Worldwide sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $1.1 billiondeclined 12% in 2018, a decline of 5% compared with 2017, and were $1.2 billion in 2017, a decline of 13% compared with 2016. Foreign exchange favorably affected global sales performance by 1% in 2017. The sales declines2020 primarily reflectdue to competitive pressure in the United States and Europe.in the EU. The Company expects competitive pressures for Isentress/Isentress HD to continue.
In August 2018, the FDA approved two new HIV-1 medicines: Delstrigo, a once-daily fixed-dose combination tablet of doravirine, lamivudine and tenofovir disoproxil fumarate; and Pifeltro (doravirine), a new non-nucleoside reverse transcriptase inhibitor to be administered in combination with other antiretroviral medicines. Both Delstrigo and Pifeltro are indicated for the treatment of HIV-1 infection in adult patients with no prior antiretroviral treatment experience. Delstrigo and Pifeltro were also approved by the EC in November 2018. In January 2019, the FDA accepted for review supplemental New Drug Applications (NDA) for Pifeltro and Delstrigo seeking approval for

use in patients living with HIV-1 who are switching from a stable antiretroviral regimen and whose virus is suppressed. The Prescription Drug User Fee Act (PDUFA) date for the supplemental NDAs is September 20, 2019.
Global sales of Zepatier, a treatment for adult patients with certain types of chronic hepatitis C virus (HCV)genotype (GT) 1 or GT4 infection, were $455 milliondeclined 55% in 2018, a decline of 73% compared with 2017. The sales decline was2020 driven primarily by the unfavorable effects of increasinglower demand globally due to competition and declining patient volumes, particularly incoupled with the United States, Europe and Japan. The Company anticipates that salesimpact of Zepatier in the future will continue to be adversely affected by competition and lower patient volumes. Worldwide salesCOVID-19 pandemic.
Cardiovascular
($ 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 
Atozet453 16 %16 %391 13 %18 %347 
Rosuzet130 8 %9 %120 107 %115 %58 
Alliance revenue - Adempas (1)
281 38 %38 %204 47 %47 %139 
Adempas220 3 %2 %215 13 %17 %190 
(1) Alliance revenue represents Merck’s share of Zepatier were $1.7 billion in 2017 compared with $555 million in 2016. Sales growth in 2017 was driven primarily by higherprofits from sales in Europe,Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 4 to the United States and Japan following product launch in 2016.consolidated financial statements).
Cardiovascular
Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), and Vytorin (marketed outside the United States as Inegy), as well as Atozet and Rosuzet (both marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $1.8 billiondeclined 24% in 2018, a decline of 26% compared with 2017 including a 3% favorable effect from foreign exchange. The sales decline was2020 driven primarily by lower demandsales of Ezetrol in Japan and Ezetrol and Inegy in the United States and Europe. Zetia and Vytorin lostEU. The patent that provided market exclusivity for Ezetrolin the United StatesJapan expired in December 2016September 2019 and generic competition began in June 2020. The
56

EU patents for Ezetrol and Inegy expired in April 2018 and April 2017,2019, respectively. Accordingly, the Company experienced a rapid and substantial decline in U.S. Zetia and Vytorin sales as a result of generic competition and has lost nearly all U.S. sales of these products. In addition, the Company lost market exclusivity in major European markets for Ezetrol in April 2018 and has also lost market exclusivity in certain European markets for Inegy (see Note 11 to the consolidated financial statements). Accordingly, the Company is experiencing significant sales declines in these markets as a result of generic competition and expects the declines to continue. These declines were partially offset by higher sales in Japan due in part to the launch of Atozet. Combined worldwide sales of the ezetimibe family were $2.4 billion in 2017, a decline of 39% compared with 2016. The sales decline in 2020 was driven byalso attributable to lower volumes and pricing following loss of Zetia and Vytorinexclusivity in Australia. Higher demand for Ezetrol in China partially offset the sales decline in 2020. Merck lost market exclusivity in the United States for Zetia in 2016 and Vytorin in 2017 and subsequently lost nearly all U.S. sales of these products as a result of generic competition duecompetition.
Sales of Atozet (marketed outside of the United States), a medicine for lowering LDL cholesterol, grew 16% in 2020, primarily driven by higher demand in most markets, particularly in the EU, Japan and other countries in the Asia Pacific region.
Zetia, Vytorin, Atozet and Rosuzet will be contributed to Organon in connection with the loss of U.S. market exclusivity as described above.
Pursuant to a collaboration with Bayer AG (Bayer)spin-off (see Note 41 to the consolidated financial statements), Merck has lead commercial rights for .
Adempas, a cardiovascular drug for the treatment of pulmonary arterial hypertension, in countries outsideis part of a worldwide collaboration with Bayer to market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 4 to 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.consolidated financial statements). Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories. Merck recorded revenue related to Adempas of $329 millionterritories, which grew 38% in 2018, an increase of 10% compared with 2017, reflecting higher2020, as well as sales in Merck’s marketing territories, partially offset by lower profit sharing from Bayer due in part to lower pricing in the United States. Revenue related to Adempas was $300 million in 2017, an increase of 78% compared with 2016, reflecting both higher sales in Merck’s marketing territories, as well as the recognition of higher profit sharing from Bayer. Foreign exchange favorably affected global sales performance bywhich grew 3% in 20182020.
In January 2021, the FDA approved Verquvo (vericiguat), an sGC stimulator, to reduce the risk of cardiovascular death and by 1%heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in 2017.adults with symptomatic chronic heart failure and reduced ejection fraction. The approval was based on the results of the pivotal Phase 3 VICTORIA trial and follows a priority regulatory review. Verquvo is part of the same worldwide clinical development collaboration with Bayer that includes Adempas referenced above.
Diabetes
($ 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 adults with type 2 diabetes, were $5.9 billiondeclined 4% in 2018, essentially flat compared with 2017. Global combined sales2020 as a result of Januvia and Janumet were $5.9 billion in 2017, a decline of 3% compared with 2016. Foreign exchange favorably affected sales performance by 1% in both 2018 and 2017. Sales performance in both periods was driven primarily by ongoingcontinued pricing pressure particularly in the United States, partially offset by higher demand in mostcertain international markets.markets, particularly in China. The Company expects U.S. pricing pressure to continue.Januvia and Janumet will lose market exclusivity in the United States in January 2023. The supplementary patent certificates that provide market exclusivity for Januvia and Janumet in the EU expire in September 2022 and April 2023, respectively. The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after loss of market exclusivity.
Women’s Health 
($ in millions)2020% Change% Change
Excluding Foreign
Exchange
2019% Change% Change
Excluding Foreign
Exchange
2018
Implanon/Nexplanon680 (14)%(13)%787 12 %14 %703 
NuvaRing236 (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 in the EU resulting from the COVID-19 pandemic.
Worldwide sales of NuvaRing, a vaginal contraceptive product, were $902 milliondeclined 73% in 2018, an increase of 19% compared with 2017 including a 1% favorable effect from foreign exchange. Sales growth was driven primarily by higher pricing2020 due to generic competition in the United States. The patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and generic competition began in December 2019. Accordingly, the Company anticipatesis experiencing a significantrapid and substantial decline in U.S. NuvaRing sales and expects the decline to continue.
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Implanon/Nexplanon and NuvaRing will be contributed to Organon in future periods asconnection with the spin-off (see Note 1 to the consolidated financial statements).
Biosimilars
($ 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 resultbiosimilar to Remicade (infliximab) for the treatment of generic competition. Global salescertain inflammatory diseases; Ontruzant (trastuzumab-dttb), a biosimilar to Herceptin (trastuzumab) for the treatment of NuvaRing were $761 millionHER2-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 2017, a decline2020 was primarily due to continued post-launch uptake of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by lower salesRenflexis in the United States reflecting lower volumes that were partially offset by higher pricing, and lower demandCanada and the launch of Ontruzant in Europe.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 Segment
Global sales
($ in millions)2020% Change% Change
Excluding Foreign
Exchange
2019% Change% Change
Excluding Foreign
Exchange
2018
Livestock$2,939 6 %9 %$2,784 %11 %$2,630 
Companion Animal1,764 10 %11 %1,609 %%1,582 
Sales of Animal Health products were $4.2 billion in 2018, an increase of 9% compared with 2017, reflecting growth from both in-line and recently launched companion animal and livestock products. Higher sales of companion animal products reflect growth in the Bravecto line of products that kill fleas and ticks in dogs and cats for up to 12 weeks, as well as higher sales of companion animal vaccines. Growth in livestock products reflects highergrew 6% in 2020 predominantly due to an additional five months of sales of ruminant, poultry and swine products. Worldwide sales of Animal Health products were $3.9 billion in 2017, an increase2020 related to the April 2019 acquisition of 11% compared with 2016, primarily reflecting higher sales of companion animal products, largely driven by growth in Bravecto, reflecting both growth in the oral formulation and continued uptake in the topical formulation, which was launched in 2016. Animal Health sales growth in 2017 was also driven by higher sales of ruminant, poultry and swine products.
In December 2018, the Company signed an agreement to acquire Antelliq, a leader in digital animal identification, traceability and monitoring solutions (see Note 3 to the consolidated financial statements). Sales of companion animal products grew 10% in 2020 driven primarily by higher demand for the Bravecto line of products for parasitic control, as well as higher demand for companion animal vaccines.
Costs, Expenses and Other
($ in millions)2018 Change 2017 Change 2016($ in millions)2020% Change2019% Change2018
Cost of sales$13,509
 5 % $12,912
 -8 % $14,030
Cost of sales$15,485 10 %$14,112 %$13,509 
Selling, general and administrative10,102
  % 10,074
 1 % 10,017
Selling, general and administrative10,468 (1)%10,615 %10,102 
Research and development9,752
 -6 % 10,339
 1 % 10,261
Research and development13,558 37 %9,872 %9,752 
Restructuring costs632
 -19 % 776
 19 % 651
Restructuring costs578 (9)%638 %632 
Other (income) expense, net(402) -20 % (500) *
 189
Other (income) expense, net(886)*139 *(402)
$33,593
  % $33,601
 -4 % $35,148
$39,203 11 %$35,376 %$33,593 
* Greater than 100%.Calculation not meaningful.

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Cost of Sales
Cost of sales was $13.5$15.5 billion in 2018, $12.92020 compared with $14.1 billion in 2017 and $14.0 billion in 2016. Costs in 2018 include a $423 million charge related to the termination of a collaboration agreement with Samsung Bioepis Co., Ltd. (Samsung) for insulin glargine (see Note 3 to the consolidated financial statements). Also in 2018, the Company recorded $188 million of cumulative amortization expense for amounts capitalized in connection with the recognition of liabilities for potential future milestone payments related to collaborations (see Note 4 to the consolidated financial statements).2019. Cost of sales includes expenses for the amortization of intangible assets recorded in connection with business acquisitions, collaborations, and licensing arrangements, which totaled $2.7$1.8 billion in 2018, $3.12020 compared with $2.0 billion in 20172019, respectively. Additionally, costs in 2020 and $3.7 billion in 2016. Costs in 2017 and 2016 also2019 include intangible asset impairment charges of $58$1.6 billion and $705 million and $347 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. 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 Zerbaxa (see Note 8 to the consolidated financial statements). Also included in cost of sales are expenses associated with restructuring activities which amounted to $21 million, $138 million and $181$175 million in 2018, 2017 and 2016, 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 68.1%67.7% in 20182020 compared with 67.8%69.9% in 2017 and 64.5% in 2016. The year-over-year improvements in gross margin reflect a lower net impact from the amortization of intangible assets and intangible asset impairment charges related to business acquisitions, as well as restructuring costs as noted above, which reduced gross margin by 6.3 percentage points in 2018, 8.3 percentage points in 2017 and 10.6 percentage points in 2016.2019. The gross margin improvementdecline in 2018 compared with 2017 also2020 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, andlower amortization of unfavorable manufacturing variances recorded in 2017, resulting in part from the June 2017 cyber-attack. The gross margin improvement in 2018 was partially offset by a charge associated with the termination of a collaboration agreement

with Samsung, as well as the unfavorable effects of pricing pressureintangible assets and cumulative amortization expense for potential future milestone payments related to collaborations as noted above. The gross margin improvement in 2017 compared with 2016 also reflects the favorable effects of product mix. Manufacturing-related costs associated with the cyber-attack partially offset the gross margin improvement in 2017.lower restructuring costs.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $10.1$10.5 billion in 2018, essentially flat compared with 2017, reflecting higher administrative costs and the unfavorable effect of foreign exchange, offset by lower selling and promotional expenses. SG&A expenses were $10.1 billion in 2017, an increase2020, a decline of 1% compared with 2016. Higher2019. The decline was driven primarily by lower administrative, selling and promotional costs, including costs associated with the Company operating its vaccines businesslower 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 expensesCOVID-19 pandemic, and the favorable effect of foreign exchange.exchange, partially offset by higher costs related to the spin-off of Organon and a contribution to the Merck Foundation. SG&A expenses in 20162020 include $710 million of costs related to the spin-off of Organon. SG&A expenses in 2020 and 2019 include restructuring costs of $95$47 million and $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. SG&A expenses also include acquisition and divestiture-related costs of $32 million, $44 million and $78 million in 2018, 2017 and 2016, respectively, consisting of integration, transaction, and certain other costs related to business acquisitions and divestitures.
Research and Development
Research and development (R&D) expenses were $9.8$13.6 billion in 2018, a decline2020, an increase of 6%37% compared with 2017.2019. The decreaseincrease was driven primarily reflects lower expenses in 2018 forby higher upfront and license option payments related to acquisitions and collaborations, including a $2.7 billion charge in 2020 related to the formationacquisition of oncology collaborations,VelosBio (see Note 3 to the consolidated financial statements), as well as higher expenses related to clinical development 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 a reduction in expenses associated with a decrease inlower costs resulting from the estimated fair value measurementCOVID-19 pandemic, net of liabilities for contingent consideration, partially offset by higher clinical development spending on COVID-19-related vaccine and investment in discovery and early drug development, as well as higher expenses related to other business development activities, including a charge in 2018 for the acquisition of Viralytics. R&D expenses were $10.3 billion in 2017, an increase of 1% compared with 2016. The increase was driven primarily by a charge in 2017 related to the formation of a collaboration with AstraZeneca, an unfavorable effect from changes in the estimated fair value measurement of liabilities for contingent consideration, and higher clinical development spending, largely offset by lower IPR&D impairment charges and lower restructuring costs.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 $5.1$6.6 billion in 2018, $4.62020 compared with $6.1 billion in 2017 and $4.4 billion in 2016.2019. 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 $2.8$2.7 billion $2.9 billionin 2020 and $2.6 billion for 2018, 2017 and 2016, respectively.in 2019. Additionally, R&D expenses in 20182020 include a $1.4$2.7 billion charge related tofor the formationacquisition of VelosBio (noted above), a collaboration with Eisai (see Note 4 to the consolidated financial statements), as well as a $344$462 million charge for the acquisition of Viralytics (seeOncoImmune and charges of $826 million related to transactions with Seagen. R&D expenses in 2019 include a $993 million charge for the acquisition of Peloton. See Note 3 to the consolidated financial statements). R&D expenses in 2017 include a $2.35 billion charge related to the formation of a collaboration with AstraZeneca (see Note 4 to the consolidated financial statements).statements for more information on these transactions. R&D expenses also include IPR&D impairment charges of $152 million, $483$90 million and $3.6 billion$172 million in 2018, 20172020 and 2016,2019, respectively (see 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 20182020 and 2016,2019, the Company recorded a net reduction in expenses of $54$95 million and $402$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). During 2017, the Company recorded charges of $27 million to increase the estimated fair value of liabilities for contingent consideration. R&D expenseschanges in 2016 also reflect $142 million of accelerated depreciation and asset abandonment costs associated with restructuring activities.

these estimates.
Restructuring Costs
In 2010 and 2013, the Company commenced actions underearly 2019, Merck approved a new global restructuring programs designed to streamline its cost structure. The actions under these programs includeprogram (Restructuring Program) as part of a worldwide initiative focused on further optimizing the elimination of positions in sales, administrativeCompany’s manufacturing and headquarters organizations,supply network, 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 improveoverall operating model, it subsequently identified additional actions under the efficiencyRestructuring 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 $632 million, $776 million and $651$578 million in 2018, 20172020 and 2016, respectively. In 2018, 2017 and 2016, separation$638 million in 2019. Separation costs of $473 million, $552 million and $216 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 2,160 positions in 2018, 2,450 positions in 2017 and 2,625 positions in 2016 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 Cost of sales, Selling, general and administrative expenses and Research and development as discussed above.costs. The Company recorded aggregate pretax costs of $658$883 million in 2018,2020 and $927 million in 2017 and $1.1 billion in 20162019 related to restructuring program activities (see Note 5 to the consolidated financial statements). The Company has substantially completed the actions under these programs.
Other (Income) Expense, Net
Other (income) expense, net, was $402$886 million of income in 2018, $500 million of income in 2017 and $1892020 compared with $139 million of expense in 2016.2019, primarily due to higher income from investments in equity securities, net, largely related to Moderna, Inc. For details on the components of Other (income) expense, net, see Note 1514 to the consolidated financial statements.
Segment Profits
($ in millions)202020192018
Pharmaceutical segment profits$29,722 $28,324 $24,871 
Animal Health segment profits1,650 1,609 1,659 
Other non-reportable segment profits1 (7)103 
Other(22,582)(18,462)(17,932)
Income Before Taxes$8,791 $11,464 $8,701 
Segment Profits     
($ in millions)2018 2017 2016
Pharmaceutical segment profits$24,292
 $22,495
 $22,141
Animal Health segment profits1,659
 1,552
 1,357
Other non-reportable segment profits103
 275
 146
Other(17,353)
(17,801)
(18,985)
Income before taxes$8,701
 $6,521
 $4,659
Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as SG&A and R&D expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as SG&A and R&D expenses directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred inby MRL, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for
60

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, (amortizationincluding the amortization of purchase accounting adjustments, intangible asset impairment charges, and expense or income related to 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 charge related to the termination of a collaboration agreement with Samsung for insulin glargine in 2018, a loss on the extinguishment of debt in 2017, and a charge related to the settlement of worldwide Keytruda patent litigation and gains on divestitures in 2016, 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. In the first quarter of 2018, the Company adopted a new accounting standard related to the classification of certain defined benefit plan costs, which resulted in a change to the measurement of segment profits (see Note 19 to the consolidated financial statements). Prior period amounts have been recast to conform to the new presentation.

Pharmaceutical segment profits grew 8%5% in 20182020 compared with 20172019 driven primarily reflectingby higher sales, andas well as lower selling and promotional costs. Pharmaceutical segment profits grew 2% in 2017 compared with 2016 primarily reflecting higher sales and the favorable effects of product mix. Animal Health segment profits grew 7%3% in 2018 and 14% in 20172020 driven primarily by higher sales and lower promotional and selling costs, partially offset by increased sellinghigher R&D costs and promotional costs.the unfavorable effect of foreign exchange.
Taxes on Income
The effective income tax rates of 28.8%19.4% in 2018, 62.9%2020 and 14.7% in 2017 and 15.4% in 20162019 reflect the impacts of acquisition and divestiture-related costs and restructuring costs, andpartially offset by the beneficial impact of foreign earnings.earnings, including product mix. The effective income tax rate in 2018 includes measurement-period adjustments2020 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 provisional amounts recordedsettlement of certain federal income tax matters (see Note 15 to the consolidated financial statements) and the reversal of tax reserves established in 2017connection 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 the acquisition of 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), including $124 million related to the transition tax (see Note 1615 to the consolidated financial statements). In addition, the effective income tax rate for 2018 reflects the unfavorable impacts of a $1.4 billion pretax charge recorded in connection with the formation of a collaboration with Eisai and a $423 million pretax charge related to the termination of a collaboration agreement with Samsung for which no tax benefits were recognized. The effective income tax rate for 2017 includes a provisional net charge of $2.6 billion related to the enactment of the TCJA. The effective income tax rate for 2017 also reflects the unfavorable impact of a $2.35 billion 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 tax 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.
Net Income (Loss) Income Attributable to Noncontrolling Interests
Net income (loss) income attributable to noncontrolling interests was $(27)$15 million in 20182020 compared with $24$(66) million in 2017 and $21 million in 2016.2019. The loss in 20182019 was driven primarily reflectsby the portion of goodwill impairment charges related to certain businessbusinesses in the Healthcare Services segment that arewere attributable to noncontrolling interests.
Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $6.2$7.1 billion in 2018, $2.42020 and $9.8 billion in 2017 and $3.9 billion in 2016.2019. EPS was $2.32$2.78 in 2018, $0.872020 and $3.81 in 2017 and $1.41 in 2016.2019.
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. SeniorIn 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)202020192018
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 costs883 927 658 
Other items:
Charge for the acquisition of VelosBio2,660 — — 
Charges for the formation of collaborations (2)
1,076 — 1,400 
Charge for the acquisition of OncoImmune462 — — 
Charge for the discontinuation of COVID-19 vaccine development programs305 — — 
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 taxes17,861 16,120 14,535 
Taxes on income as reported under GAAP1,709 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 income2,764 2,715 2,883 
Non-GAAP net income15,097 13,405 11,652 
Less: Net income (loss) attributable to noncontrolling interests as reported under GAAP15 (66)(27)
Acquisition and divestiture-related costs attributable to noncontrolling interests (89)(58)
Non-GAAP net income attributable to noncontrolling interests15 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 difference3.16 1.38 2.02 
Non-GAAP EPS assuming dilution$5.94 $5.19 $4.34 
($ in millions except per share amounts)2018 2017 2016
Income before taxes as reported under GAAP$8,701
 $6,521
 $4,659
Increase (decrease) for excluded items:     
Acquisition and divestiture-related costs3,066
 3,760
 7,312
Restructuring costs658
 927
 1,069
Other items:     
Charge related to the formation of an oncology collaboration with Eisai1,400
 
 
Charge related to the termination of a collaboration with Samsung423
 
 
Charge for the acquisition of Viralytics344
 
 
Charge related to the formation of an oncology collaboration with AstraZeneca
 2,350
 
Charge related to the settlement of worldwide Keytruda patent litigation

 
 625
Other(57) (16) (67)
Non-GAAP income before taxes14,535
 13,542
 13,598
Taxes on income as reported under GAAP2,508
 4,103
 718
Estimated tax benefit on excluded items (1)
535
 785
 2,321
Net tax charge related to the enactment of the TCJA (2)
(160) (2,625) 
Net tax benefit from the settlement of certain federal income tax issues
 234
 
Tax benefit related to the settlement of a state income tax issue
 88
 
Non-GAAP taxes on income2,883

2,585

3,039
Non-GAAP net income11,652
 10,957
 10,559
Less: Net (loss) income attributable to noncontrolling interests as reported under GAAP(27) 24
 21
Acquisition and divestiture-related costs attributable to noncontrolling interests(58) 
 
Non-GAAP net income attributable to noncontrolling interests31

24

21
Non-GAAP net income attributable to Merck & Co., Inc.$11,621

$10,933

$10,538
EPS assuming dilution as reported under GAAP$2.32
 $0.87
 $1.41
EPS difference (3)
2.02
 3.11
 2.37
Non-GAAP EPS assuming dilution$4.34
 $3.98
 $3.78
(1)
The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.
(2)(1)Amount in 2017 was provisional2020 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.
(2)Amount in 2020 includes $826 million related to transactions with Seagen (see Note 163 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)
(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.
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 typicallyaspects. 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 2020 are charges for the acquisitions of VelosBio and OncoImmune, charges related to collaborations, including transactions with Seagen (see Note 3 to the consolidated financial statements), a 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 finalization of U.S. treasury regulations related to the TCJA, a net tax benefit related to the settlement of certain federal income tax matters, and a tax benefit related to the reversal of tax reserves established in connection with the 2014 divestiture of MCC (see Note 15 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2018 is a charge related to the formation of a collaboration with Eisai (see Note 4 to the consolidated financial statements), a charge related to the termination of a collaboration agreement with Samsung for insulin glargine (see Note 3 to the consolidated financial statements), a charge for the acquisition of Viralytics (see Note 3 to the consolidated financial statements), and measurement-period adjustments related to the provisional amounts recorded for the TCJA (see Note 1615 to the consolidated financial statements). Excluded
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 incomeresults 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 EPSresults will exclude gains and losses on investments in 2017 is a charge relatedequity securities. Prior period amounts will be recast to conform to the formation of a collaboration with AstraZeneca (see Note 4 to the consolidated financial statements), as well as a provisional net tax charge related to the enactment of the TCJA, a net tax benefit related to the settlement of certain federal income tax issues and a tax benefit related to the settlement of a state income tax issue (see Note 16 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2016 is a charge to settle worldwide patent litigation related to Keytruda.new presentation.
Research and Development
A chart reflecting the Company’s current research pipeline as of February 22, 2019 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 February 2019, the FDA accepted and granted Priority Review for a supplemental BLA for Keytruda in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced renal cell carcinoma. This supplemental BLA is based on findings from the Phase 3 KEYNOTE-426 trial, which demonstrated that Keytruda in combination with axitinib, as compared to sunitinib, significantly improved overall survival (OS) and PFS in the first-line treatment of advanced renal cell carcinoma. These data were presented at the American Society for Clinical Oncology (ASCO) Genitourinary Cancers Symposium in February 2019. The supplemental BLA also included supporting data from the Phase 1b KEYNOTE-035 trial. The FDA set a PDUFA date of June 20, 2019. Merck has filed data from KEYNOTE-426 with regulatory authorities worldwide.
In February 2019, the Committee for Medicinal Products for Human Use of the European Medicines Agency (EMA) adopted a positive opinion recommending Keytruda, in combination with carboplatin and either paclitaxel or nab-paclitaxel, for the first-line treatment of metastatic squamous NSCLC in adults. This recommendation is based on results from the pivotal Phase 3 KEYNOTE-407 trial, which enrolled patients regardless of PD-L1 tumor expression status. The trial showed a significant improvement in OS and PFS for patients taking Keytruda in combination with chemotherapy (carboplatin and either paclitaxel or nab-paclitaxel) compared with chemotherapy alone. If approved, this would mark the first approval in Europe for an anti-PD-1 therapy in combination with chemotherapy for adults with metastatic squamous NSCLC. In October 2018, the FDA approved Keytruda in combination with carboplatin-paclitaxel or nab-paclitaxel as a first-line treatment for metastatic squamous NSCLC, regardless of PD-L1 expression.
In December 2018, the FDA extended the action date for the supplemental BLA seeking approval for Keytruda as monotherapy for the first-line treatment of locally advanced or metastatic NSCLC in patients whose tumors express PD-L1 (TPS ≥1%) without EGFR or ALK genomic tumor aberrations. The supplemental BLA is based on results of the Phase 3 KEYNOTE-042 trial where Keytruda monotherapy demonstrated a significant improvement in OS compared with chemotherapy in this patient population. The Company submitted additional data and analyses to

the FDA, which constituted a major amendment and extended the PDUFA date by three months to April 11, 2019. Merck continues to work closely with the FDA during the review of this supplemental BLA.
In February 2019, the FDA accepted and granted Priority Review for a supplemental BLA for Keytruda as monotherapy for the treatment of patients with advanced SCLC whose disease has progressed after two or more lines of prior therapy. This supplemental BLA, which is seeking accelerated approval for this new indication, is based on data from the SCLC cohorts of the Phase 2 KEYNOTE-158 and Phase 1b KEYNOTE-028 trials. The FDA set a PDUFA date of June 17, 2019. Keytruda is also being studied in combination with chemotherapy in the ongoing Phase 3 KEYNOTE-604 study in patients with newly diagnosed extensive stage SCLC.
In February 2019, the FDA accepted a supplemental BLA for Keytruda as monotherapy or in combination with platinum and 5-fluorouracil chemotherapy for the first-line treatment of patients with recurrent or metastatic HNSCC. This supplemental BLA is based in part on data from the pivotal Phase 3 KEYNOTE-048 trial where Keytruda demonstrated a significant improvement in OS compared with the standard of care, as monotherapy in patients whose tumors expressed PD-L1 with Combined Positive Score (CPS)≥20 and CPS≥1 and in combination with chemotherapy in the total patient population. These data were presented at the European Society for Medical Oncology (ESMO) 2018 Congress. The FDA granted Priority Review to the supplemental BLA and set a PDUFA date of June 10, 2019. KEYNOTE-048 also serves as the confirmatory trial for KEYNOTE-012, a Phase 1b study which supported the previous accelerated approval for Keytruda as monotherapy for the treatment of patients with recurrent or metastatic HNSCC with disease progression on or after platinum-containing chemotherapy.
In November 2018, Merck announced that the Phase 3 KEYNOTE-181 trial investigating Keytruda as monotherapy in the second-line treatment of advanced or metastatic esophageal or esophagogastric junction carcinoma met a primary endpoint of OS in patients whose tumors expressed PD-L1 (CPS ≥10). In this pivotal study, treatment with Keytruda resulted in a statistically significant improvement in OS compared to chemotherapy (paclitaxel, docetaxel or irinotecan) in patients with CPS ≥10, regardless of histology. The primary endpoint of OS was also evaluated in patients with squamous cell histology and in the entire intention-to-treat study population. While directionally favorable, statistical significance for OS was not met in these two patient groups. Per the statistical analysis plan, the key secondary endpoints of PFS and objective response rate (ORR) were not formally tested, as OS was not reached in the full intention-to-treat study population. These results were presented in January 2019 at the ASCO Gastrointestinal Cancers Symposium and have been submitted for regulatory review.
Additionally, Keytruda has received Breakthrough Therapy designation from the FDA for the treatment of high-risk early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
In October 2018, Merck announced the first presentation of results from an interim analysis of KEYNOTE-057, a Phase 2 trial evaluating Keytruda for previously treated patients with high-risk non-muscle invasive bladder cancer. An interim analysis of the study’s primary endpoint showed a complete response rate of nearly 40% at three months with Keytruda in patients whose disease was unresponsive to Bacillus Calmette-Guérin therapy, the current standard of care for this disease, and who were ineligible for or who refused to undergo radical cystectomy. These results,internationally, as well as other study findings, were presented at the ESMO 2018 Congress.
In February 2019, Merck announced that the pivotal Phase 3 KEYNOTE-240 trial evaluating Keytruda, plus best supportive care, for the treatment of patients with advanced hepatocellular carcinoma who were previously treated with systemic therapy, did not meet its co-primary endpoints of OS and PFS compared with placebo plus best supportive care. In the final analysis of the study, there was an improvement in OS for patients treated with Keytruda compared to placebo, however these OS results did not meet statistical significance per the pre-specified statistical plan. Results for PFS were also directionally favorable in the Keytruda arm compared with placebo but did not reach statistical significance. The key secondary endpoint of ORR was not formally tested, since superiority was not reached for OS or PFS. Results will be presented at an upcoming medical meeting and have been shared with the FDA for discussion.

The Keytruda clinical development program consists of more than 900 clinical trials, including more than 600 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, cervical, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative breast, many of which are currently in Phase 3late-stage clinical development. Further trials are being planned for other cancers.
Lynparza, 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).
In April 2018, Merck and AstraZeneca announced that the EMA validated for review the Marketing Authorization Application for Lynparza for use in patients with deleterious or suspected deleterious BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. This was the first regulatory submission for a PARP inhibitor in breast cancer in Europe.
Lynparza tablets are also under review in the EU as a maintenance treatment in patients with newly-diagnosed, BRCA-mutated advanced ovarian cancer who were in complete or partial response following first-line standard platinum-based chemotherapy. This submission was based on positive results from the pivotal Phase 3 SOLO-1 trial. The trial showed a statistically-significant and clinically-meaningful improvement in PFS for Lynparza compared to placebo, reducing the risk of disease progression or death by 70% in patients with newly-diagnosed, BRCA-mutated advanced ovarian cancer who were in complete or partial response to platinum-based chemotherapy.
In December 2018, Merck and AstraZeneca announced positive results from the randomized, open-label, controlled, Phase 3 SOLO-3 trial of Lynparza tablets in patients with relapsed ovarian cancer after two or more lines of treatment. The trial was conducted as a post-approval commitment in agreement with the FDA. Results from the trial showed BRCA-mutated advanced ovarian cancer patients treated with Lynparza following two or more prior lines of chemotherapy demonstrated a statistically significant and clinically meaningful improvement in the primary endpoint of ORR and the key secondary endpoint of PFS compared to chemotherapy. Merck and AstraZeneca plan to discuss these results with the FDA.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). In February 2019, Merck announced that the FDA accepted for Priority Review an NDA for MK-7655A for the treatment of complicated urinary tract infections and complicated intra-abdominal infections caused by certain susceptible Gram-negative bacteria in adults with limited or no alternative therapies available. The PDUFA date is July 16, 2019. In April 2018, Merck announced that a pivotal Phase 3 study of MK-7655A demonstrated a favorable overall response in the treatment of certain imipenem-non-susceptible bacterial infections, the primary endpoint, with lower treatment-emergent nephrotoxicity (kidney toxicity), a secondary endpoint, compared to a colistin (colistimethate sodium) plus imipenem/cilastatin regimen. The FDA had previously 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.
V920 (rVSV∆G-ZEBOV-GP, live attenuated), is an investigational Ebola Zaire disease vaccine candidate being studied in large scale Phase 2/3 clinical trials. 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 WHO 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 November 2018, Merck announced that it has started the submission of a rolling BLA to the FDA for V920. This rolling submission was made pursuant to the FDA’s Breakthrough Therapy designation. Merck expects the rolling submission of the BLA to be completed in 2019. The Company also intends to file V920 with the EMA in 2019.

In February 2019, Merck announced that the FDA accepted for Priority Review a supplemental NDA for Zerbaxa to treat adult patients with nosocomial pneumonia, including ventilator-associated pneumonia, caused by certain susceptible Gram-negative microorganisms. The PDUFA date is June 3, 2019. Zerbaxa is also under review for this indication by the EMA. Zerbaxa is currently approved in the United States for the treatment of adult patients with complicated urinary tract infections caused by certain susceptible Gram-negative microorganisms, and is also indicated, in combination with metronidazole, for the treatment of adult patients with complicated intra-abdominal infections caused by certain susceptible Gram-negative and Gram-positive microorganisms.
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-7264, gefapixant, is a selective, non-narcotic, orally-administered P2X3-receptor agonist being investigated in Phase 3 trials for the treatment of refractory, chronic cough and in a Phase 2 trial for the treatment of women with endometriosis-related pain.
Lenvima, is an orally available tyrosine kinase inhibitor currently approved for certain types of thyroid cancer, hepatocellular carcinoma, and in combination for certain patients with renal cell carcinoma. In March 2018, Merck and Eisai entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (see Note 4 to the consolidated financial statements). Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Per the agreement, the companies will jointly initiate clinical studies evaluating the Keytruda/Lenvima combination to support 11 potential indications in six types of cancer (endometrial cancer, NSCLC, hepatocellular carcinoma, head and neck cancer, bladder cancer and melanoma), as well as a basket trial targeting multiple cancer types. The FDA granted Breakthrough Therapy designation for Keytruda in combination with Lenvima for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma and for the potential treatment of certain patients with advanced and/or metastatic non-microsatellite instability high/proficient mismatch repair endometrial carcinoma.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in patients suffering from chronic heart failure with reduced ejection fracture (Phase 3 clinical trial) and from chronic heart failure with preserved ejection fracture (Phase 2 clinical trial). The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer (see Note 4 to the consolidated financial statements).
V114 is an investigational polyvalent conjugate vaccine for the prevention of pneumococcal disease. In June 2018, Merck initiated the first Phase 3 study in the adult population for the prevention of invasive pneumococcal disease. Currently five Phase 3 adult studies are ongoing, including studies in healthy adults 50 years of age or older, adults with risk factors for pneumococcal disease, those infected with HIV, and those who are recipients of allogeneic hematopoietic stem cell transplant. In October 2018, Merck began the first Phase 3 study in the pediatric population. Currently, three studies are ongoing, including studies in healthy infants and in children afflicted with sickle cell disease. In January 2019, Merck announced that V114 received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease caused by the vaccine serotypes in pediatric patients 6 weeks to 18 years of age.
As a result of changes in the herpes zoster vaccine environment, Merck is ending development of V212, its investigational vaccine for the prevention of shingles in immunocompromised patients.
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 prioritizingA chart reflecting the Company’s current research pipeline as of February 22, 2021 and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patientsrelated discussion is set forth in Item 1. “Business — Research 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.Development” above.

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, 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, 2018,2020, the balance of IPR&D was $1.1 billion.$3.2 billion (see Note 8 to the consolidated financial statements).
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 2018, 2017,2020, 2019, and 20162018 the Company recorded IPR&D impairment charges within Research and development expenses of $152$90 million, $483$172 million and $3.6 billion,$152 million, respectively (see Note 8 to the consolidated financial statements).
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 March 2018,January 2020, Merck acquired ArQule, a publicly traded biopharmaceutical company focused on 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 novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies. The transaction was accounted for as an acquisition of a business. The 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 Eisai announcedRidgeback Bio, a strategicclosely held biotechnology company, closed a collaboration for the worldwide co-development and co-commercialization of Lenvima,agreement to develop molnupiravir (MK-4482, also known as EIDD-2801), an orally available tyrosine kinase inhibitor discovered by Eisai. Underantiviral candidate in clinical development for the agreement,treatment of patients with COVID-19. Merck and Eisai willgained exclusive worldwide rights to develop and commercialize Lenvima jointly,molnupiravir and related molecules. Under the terms of the agreement, Ridgeback Bio received an upfront payment and also is eligible to receive future contingent payments dependent upon the achievement of certain developmental and 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 Phase 2/3 clinical trials in both as monotherapythe hospital and outpatient settings. The primary completion date for the Phase 2/3 studies is June 2021. The Company anticipates interim efficacy data in combination with Merck’s anti-PD-1 therapy, Keytruda.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 for breast cancer and other solid tumors. Under the terms of the agreement, Merck made an upfront payment to Eisai of $750$600 million and a $1.0 billion equity investment in 5 million shares of Seagen common stock at a price of $200 per share. Merck recorded $616 million 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 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 makebe eligible to receive future contingent regulatory approval milestone payments and tiered royalties. OncoImmune’s lead therapeutic candidate MK-7110 (also known as CD24Fc) is being evaluated for the treatment of uppatients 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 $650the 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 for certain option rights through 2021 (ofa 20% ownership interest in the new entity, which $325was valued at $33 million will be paidresulting in March 2019, $200a $17 million is expected to be paid in 2020 and $125 million is expected to be paid in 2021).premium. Merck also recognized other net liabilities of $22 million. The Company recorded a charge of $1.4 billion in Research and development expenses of $462 million in 20182020 related to this transaction.
In December 2020, Merck announced it had entered into an agreement with the upfront paymentU.S. Government to support the development, manufacture and future option payments. In addition,initial distribution of MK-7110 upon approval or Emergency Use Authorization (EUA) from the FDA by June 30, 2021. Under the agreement, provides for EisaiMerck was to receive up to $385approximately $356 million associated with the achievementfor manufacturing and supply of certain clinical and regulatory milestones and up to $3.97 billion for the achievementapproximately 60,000-100,000 doses of milestones associated with sales of Lenvima (see Note 4MK-7110 to the consolidated financial statements).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 June 2018,December 2020, Merck acquired Viralytics Limited (Viralytics)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 Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to Cavatak (V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21)antibody-drug conjugate targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1for the treatment of patients with hematologic malignancies and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the Keytruda and Cavatak combination in melanoma, prostate, lung and bladder cancers.solid tumors. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $34$180 million (primarily cash) at the acquisition date and Research

and development expenses of $344 million$2.7 billion in 20182020 related to the transaction. There are no future contingent payments associated with the acquisition.
In February 2019,2021, Merck and Immune DesignPandion Therapeutics, Inc. (Pandion) entered into a definitive agreement under which Merck will acquire Immune DesignPandion, a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases, for $5.85$60 per share in cash forrepresenting an approximate total equity value of $300 million. Immune Design$1.85 billion. Pandion is advancing a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’spipeline of precision immune system to fight disease. Immune Design’s proprietary technologies, GLAAS and ZVex, are engineered to activate themodulators targeting critical immune system’s natural ability to generate and/or expand antigen-specific cytotoxic immune cells to fight cancer and other chronic diseases.control nodes. Under the terms of the acquisition agreement, Merck, through a subsidiary, will initiate a tender offer to acquire all outstanding shares of Immune Design.Pandion. The closing of the tender offer will beis subject to certain conditions, including the tender of shares representing at least a majority of the total number of Immune Design’s outstandingPandion’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 expected to close early in the second quarterfirst half of 2019.2021.
Capital Expenditures
Capital expenditures were $4.7 billion in 2020, $3.5 billion in 2019 and $2.6 billion in 2018, $1.9 billion in 2017 and $1.6 billion in 2016.2018. Expenditures in the United States were $2.7 billion in 2020, $1.9 billion in 2019 and $1.5 billion in 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 more than $20 billion in new capital projects from 2020-2024.
Depreciation expense was $1.7 billion in 2020, $1.7 billion in 2019 and $1.4 billion in 2018, of which $1.2 billion in 20172020, $1.2 billion in 2019 and $1.0 billion in 2016. In October 2018, the Company announced it plans to invest approximately $16 billion on new capital projects from 2018-2022. The focus of this investment will primarily be on increasing manufacturing capacity across Merck’s key businesses.
Depreciation expense was $1.4 billion in 2018, $1.5 billion in 2017 and $1.6 billion in 2016. In each of these years, $1.0 billion of the depreciation expense appliedrelated to locations in the United States. Total depreciation expense in 20172020 and 20162019 included accelerated depreciation of $60$268 million and $227$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)2018 2017 2016($ in millions)202020192018
Working capital$3,669
 $6,152
 $13,410
Working capital$437 $5,263 $3,669 
Total debt to total liabilities and equity30.4% 27.8% 26.0%Total debt to total liabilities and equity34.7 %31.2 %30.4 %
Cash provided by operations to total debt0.4:1
 0.3:1
 0.4:1
Cash provided by operations to total debt0.3:10.5:10.4:1
The decline in working capital in 20182020 compared with 2017 reflects the utilization of cash and short-term borrowings to fund $5.0 billion of ASR agreements, a $1.25 billion payment to redeem debt in connection with the exercise of a make-whole provision as discussed below, as well as a $750 million upfront payment2019 is primarily related to the formation of a collaboration with Eisai discussed above. The decline in working capital in 2017 compared with 2016 primarily reflects the reclassification of $3.0 billion of notes due in the first half of 2018 from long-term debt toincreased short-term debt $1.85 billionsupporting the funding of upfrontbusiness 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 $10.9$10.3 billion in 2018, $6.52020 compared with $13.4 billion in 2017 and $10.42019, reflecting higher payments related to collaborations which were $2.9 billion in 2016. The lower cash provided by operating activities2020 compared with $805 million 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 previously disclosed settlement of worldwide Keytruda patent litigation.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 byused in investing activities was $4.3$9.4 billion in 20182020 compared with $2.7$2.6 billion in 2017.2019. The increase in cash provided by investing activities was driven primarily by lower purchases of securities and other investments, partially offset by higher capital expenditures, lower proceeds from the sales of securities and other investments, and a $350 million milestone payment in 2018 related to a collaboration with Bayer (see Note 4 to the consolidated financial statements). Cash provided by investing activities was $2.7 billion in 2017 compared with ahigher use

of cash in investing activities of $3.2 billion in 2016. The change was driven primarilyfor acquisitions and higher capital expenditures, partially offset 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.investments.
Cash used in financing activities was $13.2$2.8 billion in 20182020 compared with $10.0$8.9 billion in 2017.2019. The increase inlower use of cash used in financing activities was driven primarily by highera 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, (largely under ASR agreements as discussed below),partially offset by higher payments on debt and payment of contingent consideration related to a prior year business acquisition, partially offset by an increase in short-term borrowings. Cash used in financing activities was $10.0 billion in 2017 compared with $9.0 billion in 2016. The increase in cash used in financing activities was driven primarily by(see below), lower proceeds from the issuance of debt in 2016, as well as(see below), higher purchases of treasury stockdividends paid to shareholders and lower proceeds from the exercise of stock optionsoptions.
The Company has accounts receivable factoring agreements with financial institutions in 2017, partially offset by lowercertain countries to sell accounts receivable (see Note 6 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, 2020 and 2019 the Company had collected $102 million and $256 million, respectively, on debtbehalf of the financial institutions, which was remitted to them in 2017.January 2021 and 2020, respectively. The net cash flows from these collections are reported as financing activities in the Consolidated Statement of Cash Flows.

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The Company’s contractual obligations as of December 31, 20182020 are as follows:
Payments Due by Period
($ in millions)Total20212022—20232024—2025Thereafter
Purchase obligations (1)
$3,458 $977 $1,232 $668 $581 
Loans payable and current portion of long-term debt6,432 6,432 — — — 
Long-term debt25,437 — 4,000 3,863 17,574 
Interest related to debt obligations10,779 759 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 2019 2020—2021 2022—2023 Thereafter
Purchase obligations (1)
$2,349
 $886
 $1,011
 $407
 $45
Loans payable and current portion of long-term debt5,309
 5,309
 
 
 
Long-term debt19,882
 
 4,237
 4,000
 11,645
Interest related to debt obligations7,680
 662
 1,163
 932
 4,923
Unrecognized tax benefits (2)
44
 44
 
 
 
Transition tax related to the enactment of the TCJA (3)
4,899
 275
 873
 1,217
 2,534
Leases997
 188
 348
 218
 243
 $41,160
 $7,364
 $7,632
 $6,774
 $19,390
(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)
As of December 31, 2018, the Company’s Consolidated Balance Sheet reflects liabilities for unrecognized tax benefits, interest and penalties of $2.3 billion, including $44 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 2019 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 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 paymentsor acquisitions as they are not considered contractual obligations as they are contingent uponuntil the successful achievement of developmental, regulatory approval andor commercial milestones. At December 31, 2018,2020, the Company has recognized liabilities for contingent sales-based milestone payments related to collaborations with AstraZeneca and Eisai and Bayerwhere payment remains subject to the achievement of the related sales milestone aggregating $1.0 billion (see Note 4 to the consolidated financial statements). Also excludedExcluded from research and development obligations are potential future funding commitments of up to approximately $40$52 million for investments in research venture capital funds. Loans payable and current portion of long-term debt reflects $149$73 million of long-dated notes that are subject to repayment at the option of the holders. Required funding obligations for 20192021 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. However, the Company currently anticipates contributing approximately $50$300 million to its U.S. pension plans, $150$170 million to its international pension plans and $15$35 million to its other postretirement benefit plans during 2019.2021.
In December 2018, the Company exercised a make-whole provision on its $1.25 billion, 5.00% notes due 2019 and repaid this debt.
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 credit facility that matures in June 2023.2024. 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 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.
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 October 2018, Merck announced that itsNovember 2020, Merck’s Board of Directors approveddeclared a 15% increase to the Company’s quarterly dividend raising it to $0.55 per share from $0.48of $0.65 per share on the Company’s outstanding common stock. Paymentstock that was madepaid in January 2019.2021. In January 2019,2021, the Board of Directors declared a quarterly dividend of $0.55$0.65 per share on the Company’s common stock for the second quarter of 20192021 payable in April 2019.2021.
In November 2017,October 2018, Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions, on or off an exchange, or in privately negotiated transactions. In October 2018, Merck’s Board of Directors authorized an additional $10 billion of treasury stock purchases with no time limit for completion and the Company entered into ASR agreements of $5 billion as discussed below. The Company spent $9.1$1.3 billion to purchase 16 million shares of its common stock for its treasury during 2018.2020 under this program. In March 2020, the Company temporarily suspended its share repurchase program. As of December 31, 2018,2020, the Company’s remaining share repurchase authorization was $11.9$5.9 billion. The Company purchased $4.0$4.8 billion and $3.4$9.1 billion of its common stock during 20172019 and 2016,2018, respectively, under authorized share repurchase programs.
On October 25,In 2018, the Company entered into ASRaccelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers)(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 on October 29,in 2018, which were funded with existing cash and investments, as well as short-term borrowings. The numberUpon settlement of shares of Merck’s common stock that Merck may receive, or may be required to remit, upon final settlement under the ASR agreements will be based uponin 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. Final settlement ofdiscount, bringing the transactiontotal shares received by Merck under the ASR agreements is expectedthis program to occur in the first half of 2019, but may occur earlier at the option of the Dealers, or later under certain circumstances. If Merck is obligated to make adjustment payments to the Dealers under the ASR agreements, Merck may elect to satisfy such obligations in cash or in shares of Merck’s common stock.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 toof 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 volatilitychanges 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 $441$593 million and $400$456 million at December 31, 20182020 and 2017,2019, 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 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, 20182020 and 2017, 2019, Income before taxes would have declined by approximately $134$99 million and $92$110 million in 20182020 and 2017,2019, 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.
The economy of Argentina was determined to be hyperinflationary in 2018; consequently, in accordance with U.S. GAAP, the Company began remeasuring its monetary assets and liabilities for those operations in earnings. The impact to the Company’s results was immaterial.
The Company also 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. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within Other ComprehensiveIncome (Loss) (OCI), and remain in Accumulated Other Comprehensive Income(Loss) (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 component)components). Changes in fair value of the excluded components are recognized in OCI. In accordance with the new guidance adopted on January 1, 2018 (see Note 2 to the consolidated financial statements), theThe Company has elected to recognizerecognizes in earnings the initial value of the excluded componentcomponents 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.
In May 2018, four interest rate swaps with notional amounts aggregating $1.0 billion matured. These swaps effectively converted the Company’s $1.0 billion, 1.30% fixed-rate notes due 2018 to variable rate debt. In December 2018, in connection with the early repayment of debt, the Company settled three interest rate swaps with notional amounts aggregating $550 million. These swaps effectively converted a portion of the Company’s $1.25 billion, 5.00% notes due 2019 to variable rate debt. At December 31, 2018,2020, the Company was a party to 1914 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.
($ in millions)2020
Debt InstrumentPar Value of DebtNumber of Interest Rate Swaps HeldTotal Swap Notional Amount
3.875% notes due 2021 (1)
$1,150 $1,150 
2.40% notes due 20221,000 1,000 
2.35% notes due 20221,250 1,250 
($ in millions)2018
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.85% notes due 2020$1,250
 5
 $1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 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 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 December 31, 20182020 and 20172019 would have positively affected the net aggregate market value of these instruments by $1.2$2.6 billion and $1.3$2.0 billion, respectively. A one percentage point decrease at December 31, 20182020 and 20172019 would have negatively affected the net aggregate market value by $1.4$3.1 billion and $1.5$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 PoliciesEstimates
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 fair value 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 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
On January 1, 2018, the Company adopted a new standard on revenue recognition (see Note 2 to the consolidated financial statements). Changes to the Company’s revenue recognition policy as a result of adopting the new guidance are described below.
Recognition of revenue requires evidence of a contract, probable collection of sales proceeds and completion of substantially all performance obligations. 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. Certain Merck entities, including U.S. entities, have contract terms under which control of the goods passes to the customer upon shipment; however, either pursuant to the terms of the contract or as a business practice, Merck retains responsibility for goods lost or damaged in transit. Prior to the adoption of the new standard, Merck would recognize revenue for these entities upon delivery of the goods. Under the new guidance, the Company is now recognizing revenue at time of shipment for these entities.
For businesses within the Company’s Healthcare Services segment and 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 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 through an intermediary wholesaler. The contracted customer generally purchases product from the wholesaler at its contracted price plus a 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 patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. The Company uses historical customer segment utilization mix, 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.
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 2018, 20172020, 2019 or 2016.2018.
Summarized information about changes in the aggregate customer discount accrual related to U.S. sales is as follows:
($ in millions)20202019
Balance January 1$2,436 $2,630 
Current provision13,144 11,999 
Adjustments to prior years(16)(230)
Payments(12,454)(11,963)
Balance December 31$3,110 $2,436 
($ in millions)2018 2017
Balance January 1$2,551
 $2,945
Current provision10,837
 11,001
Adjustments to prior years(117) (286)
Payments(10,641) (11,109)
Balance December 31$2,630
 $2,551
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 $245$249 million and $2.4$2.9 billion, respectively, at December 31, 20182020 and were $198$233 million and $2.4$2.2 billion, respectively, at December 31, 2017.2019.
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 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 0.6% in 2020, 1.1% in 2019 and 1.6% in 2018, 2.1% in 2017 and 1.4% in 2016.2018. 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 net 36 days from receipt of invoice and for U.S. animal health customers are typically net 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 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 December 31, 20182020 and 20172019 were $7$279 million and $80$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, 20182020 and 20172019 of approximately $245$250 million and $160$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 $16$11 million in 2018,2020 and are estimated at $57$46 million in the aggregate for the years 20192021 through 2023.2025. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $71 million and $82$67 million at both December 31, 20182020 and 2017, 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 $60approximately $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 resourcesliquidity 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 $475 million in 2020, $417 million in 2019 and $348 million in 2018, $312 million in 2017 and $300 million in 2016.2018. At December 31, 2018,2020, there was $560$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 averageweighted-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 $454 million in 2020, $137 million in 2019 and $195 million in 2018, $201 million in 2017 and $144 million in 2016.2018. Net periodic benefit (credit) for other postretirement benefit plans was $(59) million in 2020, $(49) million in 2019 and $(45) million in 2018, $(60) million in 2017 and $(88) million in 2016.2018. 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 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 4.00%2.10% to 4.40%2.80% at December 31, 2018,2020, compared with a range of 3.20% to 3.80%3.50% at December 31, 2017.2019.
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 2019,2021, 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 8.10%6.70%, compared to a range of 7.70%7.00% to 8.30%7.30% in 2018. 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 30% to 50%45% in U.S. equities, 15% to 30% in international equities, 30%35% to 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 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 $80 million favorable (unfavorable) impact on the Company’s net periodic benefit cost in 2018.2020. 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 $50$40 million favorable (unfavorable) impact on Merck’s net periodic benefit cost in 2018.2020. Required funding obligations for 20192021 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 toreflect 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 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 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 Cost of sales, Selling, general 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. Goodwill is assigned to reporting 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. 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 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 throughin 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 testsevaluates 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’sin 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. 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
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. 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, 20182020 and 2017,2019, 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, 2018,2020, the notes to consolidated financial statements, and the report dated February 27, 201925, 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)
2018 2017 2016202020192018
Sales$42,294
 $40,122
 $39,807
Sales$47,994 $46,840 $42,294 
Costs, Expenses and Other     Costs, Expenses and Other
Cost of sales13,509
 12,912
 14,030
Cost of sales15,485 14,112 13,509 
Selling, general and administrative10,102
 10,074
 10,017
Selling, general and administrative10,468 10,615 10,102 
Research and development9,752
 10,339
 10,261
Research and development13,558 9,872 9,752 
Restructuring costs632
 776
 651
Restructuring costs578 638 632 
Other (income) expense, net(402) (500) 189
Other (income) expense, net(886)139 (402)
33,593
 33,601
 35,148
39,203 35,376 33,593 
Income Before Taxes8,701
 6,521
 4,659
Income Before Taxes8,791 11,464 8,701 
Taxes on Income2,508
 4,103
 718
Taxes on Income1,709 1,687 2,508 
Net Income6,193
 2,418
 3,941
Net Income7,082 9,777 6,193 
Less: Net (Loss) Income Attributable to Noncontrolling Interests(27) 24
 21
Less: Net Income (Loss) Attributable to Noncontrolling InterestsLess: Net Income (Loss) Attributable to Noncontrolling Interests15 (66)(27)
Net Income Attributable to Merck & Co., Inc.$6,220
 $2,394
 $3,920
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$2.34
 $0.88
 $1.42
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$2.32
 $0.87
 $1.41
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders$2.78 $3.81 $2.32 
Consolidated Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
2018 2017 2016202020192018
Net Income Attributable to Merck & Co., Inc.$6,220
 $2,394
 $3,920
Net Income Attributable to Merck & Co., Inc.$7,067 $9,843 $6,220 
Other Comprehensive (Loss) Income Net of Taxes:     
Net unrealized gain (loss) on derivatives, net of reclassifications297
 (446) (66)
Net unrealized loss on investments, net of reclassifications(10) (58) (44)
Other Comprehensive Loss Net of Taxes:Other Comprehensive Loss Net of Taxes:
Net unrealized (loss) gain on derivatives, net of reclassificationsNet unrealized (loss) gain on derivatives, net of reclassifications(297)(135)297 
Net unrealized (loss) gain on investments, net of reclassificationsNet unrealized (loss) gain on investments, net of reclassifications(18)96 (10)
Benefit plan net (loss) gain and prior service (cost) credit, net of amortization(425) 419
 (799)Benefit plan net (loss) gain and prior service (cost) credit, net of amortization(279)(705)(425)
Cumulative translation adjustment(223) 401
 (169)Cumulative translation adjustment153 96 (223)
(361) 316
 (1,078) (441)(648)(361)
Comprehensive Income Attributable to Merck & Co., Inc.$5,859
 $2,710
 $2,842
Comprehensive Income Attributable to Merck & Co., Inc.$6,626 $9,195 $5,859 
The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions except per share amounts)
2018 201720202019
Assets   Assets
Current Assets   Current Assets
Cash and cash equivalents$7,965
 $6,092
Cash and cash equivalents$8,062 $9,676 
Short-term investments899
 2,406
Short-term investments0 774 
Accounts receivable (net of allowance for doubtful accounts of $119 in 2018
and $159 in 2017)
7,071
 6,873
Inventories (excludes inventories of $1,417 in 2018 and $1,187 in 2017
classified in Other assets - see Note 7)
5,440
 5,096
Accounts receivable (net of allowance for doubtful accounts of $85 in 2020
and $86 in 2019)
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)
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 assets4,500
 4,299
Other current assets5,541 4,277 
Total current assets25,875
 24,766
Total current assets27,764 27,483 
Investments6,233
 12,125
Investments785 1,469 
Property, Plant and Equipment (at cost)   Property, Plant and Equipment (at cost)
Land333
 365
Land350 343 
Buildings11,486
 11,726
Buildings12,645 11,989 
Machinery, equipment and office furnishings14,441
 14,649
Machinery, equipment and office furnishings16,649 15,394 
Construction in progress3,355
 2,301
Construction in progress7,324 5,013 
29,615
 29,041
36,968 32,739 
Less: accumulated depreciation16,324
 16,602
Less: accumulated depreciation18,982 17,686 
13,291
 12,439
17,986 15,053 
Goodwill18,253
 18,284
Goodwill20,238 19,425 
Other Intangibles, Net11,431
 14,183
Other Intangibles, Net14,604 14,196 
Other Assets7,554
 6,075
Other Assets10,211 6,771 
$82,637
 $87,872
$91,588 $84,397 
Liabilities and Equity   Liabilities and Equity
Current Liabilities   Current Liabilities
Loans payable and current portion of long-term debt$5,308
 $3,057
Loans payable and current portion of long-term debt$6,431 $3,610 
Trade accounts payable3,318
 3,102
Trade accounts payable4,594 3,738 
Accrued and other current liabilities10,151
 10,427
Accrued and other current liabilities13,053 12,549 
Income taxes payable1,971
 708
Income taxes payable1,575 736 
Dividends payable1,458
 1,320
Dividends payable1,674 1,587 
Total current liabilities22,206
 18,614
Total current liabilities27,327 22,220 
Long-Term Debt19,806
 21,353
Long-Term Debt25,360 22,736 
Deferred Income Taxes1,702
 2,219
Deferred Income Taxes1,015 1,470 
Other Noncurrent Liabilities12,041
 11,117
Other Noncurrent Liabilities12,482 11,970 
Merck & Co., Inc. Stockholders’ Equity   Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2018 and 2017
1,788
 1,788
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2020 and 2019
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 capital38,808
 39,902
Other paid-in capital39,588 39,660 
Retained earnings42,579
 41,350
Retained earnings47,362 46,602 
Accumulated other comprehensive loss(5,545) (4,910)Accumulated other comprehensive loss(6,634)(6,193)
77,630
 78,130
82,104 81,857 
Less treasury stock, at cost:
984,543,979 shares in 2018 and 880,491,914 shares in 2017
50,929
 43,794
Less treasury stock, at cost:
1,046,877,695 shares in 2020 and 1,038,087,496 shares in 2019
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’ equity26,701
 34,336
Total Merck & Co., Inc. stockholders’ equity25,317 25,907 
Noncontrolling Interests181
 233
Noncontrolling Interests87 94 
Total equity26,882
 34,569
Total equity25,404 26,001 
$82,637
 $87,872
$91,588 $84,397 
The accompanying notes are an integral part of this consolidated financial statement.

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Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
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, 2016
$1,788
 $40,222
 $45,348
 $(4,148) $(38,534) $91
 $44,767
Balance January 1, 2018Balance January 1, 2018$1,788 $39,902 $41,350 $(4,910)$(43,794)$233 $34,569 
Net income attributable to Merck & Co., Inc.
 
 3,920
 
 
 
 3,920
Net income attributable to Merck & Co., Inc.— — 6,220 — — — 6,220 
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)
Acquisition of The StayWell Company LLC
 
 
 
 
 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, 20161,788
 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, 20171,788
 39,902
 41,350
 (4,910) (43,794) 233
 34,569
Net income attributable to Merck & Co., Inc.
 
 6,220
 
 
 
 6,220
Adoption of new accounting standards (see Note 2)
 
 322
 (274) 
 
 48
Adoption of new accounting standardsAdoption of new accounting standards— — 322 (274)— — 48 
Other comprehensive loss, net of taxes
 
 
 (361) 
 
 (361)Other comprehensive loss, net of taxes— — — (361)— — (361)
Cash dividends declared on common stock ($1.99 per share)
 
 (5,313) 
 
 
 (5,313)Cash dividends declared on common stock ($1.99 per share)— — (5,313)— — — (5,313)
Treasury stock shares purchased
 (1,000) 
 
 (8,091) 
 (9,091)Treasury stock shares purchased— (1,000)— — (8,091)— (9,091)
Net loss attributable to noncontrolling interests
 
 
 
 
 (27) (27)Net loss attributable to noncontrolling interests— — — — — (27)(27)
Distributions attributable to noncontrolling interests
 
 
 
 
 (25) (25)Distributions attributable to noncontrolling interests— — — — — (25)(25)
Share-based compensation plans and other
 (94) 
 
 956
 
 862
Share-based compensation plans and other— (94)— — 956 — 862 
Balance December 31, 2018$1,788
 $38,808
 $42,579
 $(5,545) $(50,929) $181
 $26,882
Balance December 31, 20181,788 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 taxesOther 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 purchasedTreasury stock shares purchased— 1,000 — — (5,780)— (4,780)
Net loss attributable to noncontrolling interestsNet loss attributable to noncontrolling interests— — — — — (66)(66)
Distributions attributable to noncontrolling interestsDistributions attributable to noncontrolling interests— — — — — (21)(21)
Share-based compensation plans and otherShare-based compensation plans and other— (148)— — 759 — 611 
Balance December 31, 2019Balance December 31, 20191,788 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 taxesOther 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 purchasedTreasury stock shares purchased    (1,281) (1,281)
Net income attributable to noncontrolling interestsNet income attributable to noncontrolling interests     15 15 
Distributions attributable to noncontrolling interestsDistributions attributable to noncontrolling interests     (22)(22)
Share-based compensation plans and otherShare-based compensation plans and other (72)  444  372 
Balance December 31, 2020Balance December 31, 2020$1,788 $39,588 $47,362 $(6,634)$(56,787)$87 $25,404 
The accompanying notes are an integral part of this consolidated financial statement.



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Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
2018 2017 2016202020192018
Cash Flows from Operating Activities     Cash Flows from Operating Activities
Net income$6,193
 $2,418
 $3,941
Net income$7,082 $9,777 $6,193 
Adjustments to reconcile net income to net cash provided by operating activities:     Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization4,519
 4,676
 5,471
AmortizationAmortization1,899 1,973 3,103 
DepreciationDepreciation1,726 1,679 1,416 
Intangible asset impairment charges296
 646
 3,948
Intangible asset impairment charges1,718 1,040 296 
Charge for the acquisition of VelosBio Inc.Charge for the acquisition of VelosBio Inc.2,660 
Charge for the acquisition of Peloton Therapeutics, Inc.Charge for the acquisition of Peloton Therapeutics, Inc.0 993 
Charge for future payments related to collaboration license options650
 500
 
Charge for future payments related to collaboration license options0 650 
Provisional charge for one-time transition tax related to the enactment of U.S. tax legislation
 5,347
 
Charge related to the settlement of worldwide Keytruda patent litigation

 
 625
Deferred income taxes(509) (2,621) (1,521)Deferred income taxes(668)(556)(509)
Share-based compensation348
 312
 300
Share-based compensation475 417 348 
Other978
 190
 213
Other(49)184 978 
Net changes in assets and liabilities:     Net changes in assets and liabilities:
Accounts receivable(418) 297
 (619)Accounts receivable(1,002)294 (418)
Inventories(911) (145) 206
Inventories(855)(508)(911)
Trade accounts payable230
 254
 278
Trade accounts payable724 399 230 
Accrued and other current liabilities(341) (922) (2,018)Accrued and other current liabilities(1,138)376 (341)
Income taxes payable827
 (3,291) 124
Income taxes payable560 (2,359)827 
Noncurrent liabilities(266) (123) (809)Noncurrent liabilities(453)(237)(266)
Other(674) (1,087) 237
Other(2,426)(32)(674)
Net Cash Provided by Operating Activities10,922
 6,451
 10,376
Net Cash Provided by Operating Activities10,253 13,440 10,922 
Cash Flows from Investing Activities     Cash Flows from Investing Activities
Capital expenditures(2,615) (1,888) (1,614)Capital expenditures(4,684)(3,473)(2,615)
Purchase of Seagen Inc. common stockPurchase of Seagen Inc. common stock(1,000)
Purchases of securities and other investments(7,994) (10,739) (15,651)Purchases of securities and other investments(95)(3,202)(7,994)
Proceeds from sales of securities and other investments15,252
 15,664
 14,353
Proceeds from sales of securities and other investments2,812 8,622 15,252 
Acquisitions, net of cash acquired(431) (396) (780)
Acquisition of VelosBio Inc., net of cash acquiredAcquisition of VelosBio Inc., net of cash acquired(2,696)
Acquisition of ArQule, Inc., net of cash acquiredAcquisition of ArQule, Inc., net of cash acquired(2,545)
Acquisition of Antelliq Corporation, net of cash acquiredAcquisition of Antelliq Corporation, net of cash acquired0 (3,620)
Acquisition of Peloton Therapeutics, Inc., net of cash acquiredAcquisition of Peloton Therapeutics, Inc., net of cash acquired0 (1,040)
Other acquisitions, net of cash acquiredOther acquisitions, net of cash acquired(1,365)(294)(431)
Other102
 38
 482
Other130 378 102 
Net Cash Provided by (Used in) Investing Activities4,314
 2,679
 (3,210)
Net Cash (Used in) Provided by Investing ActivitiesNet Cash (Used in) Provided by Investing Activities(9,443)(2,629)4,314 
Cash Flows from Financing Activities     Cash Flows from Financing Activities
Net change in short-term borrowings5,124
 (26) 
Net change in short-term borrowings2,549 (3,710)5,124 
Payments on debt(4,287) (1,103) (2,386)Payments on debt(1,957)(4,287)
Proceeds from issuance of debt
 
 1,079
Proceeds from issuance of debt4,419 4,958 
Purchases of treasury stock(9,091) (4,014) (3,434)Purchases of treasury stock(1,281)(4,780)(9,091)
Dividends paid to stockholders(5,172) (5,167) (5,124)Dividends paid to stockholders(6,215)(5,695)(5,172)
Proceeds from exercise of stock options591
 499
 939
Proceeds from exercise of stock options89 361 591 
Other(325) (195) (118)Other(436)(325)
Net Cash Used in Financing Activities(13,160) (10,006) (9,044)Net Cash Used in Financing Activities(2,832)(8,861)(13,160)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash(205) 457
 (131)Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash253 17 (205)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash1,871
 (419) (2,009)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $4 million of restricted cash at January 1, 2018 included in Other Assets)6,096
 6,515
 8,524
Cash, Cash Equivalents and Restricted Cash at End of Year (includes $2 million of restricted cash at December 31, 2018 included in Other Assets)$7,967
 $6,096
 $6,515
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted CashNet (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash(1,769)1,967 1,871 
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $258 of restricted cash at January 1, 2020 included in Other Assets - see Note 6)Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $258 of restricted cash at January 1, 2020 included in Other Assets - see Note 6)9,934 7,967 6,096 
Cash, Cash Equivalents and Restricted Cash at End of Year (includes $103 of restricted cash at December 31, 2020 included in Other Assets - see Note 6)Cash, Cash Equivalents and Restricted Cash at End of Year (includes $103 of restricted cash at December 31, 2020 included in Other Assets - see Note 6)$8,165 $9,934 $7,967 
The accompanying notes are an integral part of this consolidated financial statement.

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Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1.    Nature of Operations
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 four2 operating segments, which are the Pharmaceutical Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical and Animal Health segments, both of which are the only reportable segments.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. 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. In 2017, Merck began 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 Animal Health segment discovers, develops, manufactures and markets animal health products, includinga 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 species, which thespecies. 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 previously had a Healthcare Services segment providesthat provided services and solutions that focusfocused 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 includesincluded activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018 (see Note 9).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. Subsequent to the spin-off, the historical results of the women’s health, biosimilars and established brands businesses will be reflected as discontinued operations in the Company’s consolidated financial statements.
2.    Summary of Accounting Policies
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates
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over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.
Acquisitions — 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 fair value 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. If the Company determines the assets acquired do not meet the

definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired in-process research and development (IPR&D) with no alternative future use is charged to expense and contingent consideration is not recognized at the acquisition date.
Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in Accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of equity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net.
Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories — Inventories are valued at the lower of cost or net realizable value. The cost of a substantial majority of U.S. pharmaceutical and vaccine inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.
Investments — Investments in marketable debt securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments in marketable debt securities are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in Other Comprehensive Income (OCI). 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. 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
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to other factors is recognized in OCI. Realized gains and losses for debt securities are included in Other (income) expense, net.
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.
Revenue Recognition — On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and subsequent amendments (ASC 606 or new guidance), using the modified retrospective method. Merck applied the new guidance to all contracts with customers within the scope of the standard that were in effect on January 1, 2018 and recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of retained earnings (see “Recently Adopted Accounting Standards” below). Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The new guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The new guidance introduces a 5-step model to recognize revenue when or as control is transferred: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when or as the performance obligations are satisfied. Changes to the Company’s revenue recognition policy as a result of adopting ASC 606 are described below. See Note 19 for disaggregated revenue disclosures.
Recognition of revenue requires evidence of a contract, probable collection of sales proceeds and completion of substantially all performance obligations. 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. Certain Merck entities, including U.S. entities, have contract terms under which control of the goods passes to the customer upon shipment; however, either pursuant to the terms of the contract or as a business practice, Merck retains responsibility for goods lost or damaged in transit. Prior to the adoption of the new standard, Merck would recognize revenue for these entities upon delivery of the goods. Under the new guidance, the Company is now recognizing revenue at time of shipment for these entities.
The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. This interpretation allows companies to recognize revenue for sales of vaccines into U.S. government stockpiles even though these sales might not meet the criteria for revenue recognition under other accounting guidance.
For businesses within the Company’s Healthcare Services segment and 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 if collection of accounts receivable is expected to be in excess of one year.
The U.S. provision for aggregate customer discounts covering chargebacks and rebates was $13.1 billion in 2020, $11.8 billion in 2019 and $10.7 billion in 2018, $10.7 billion in 2017 and $9.7 billion in 2016.2018. Chargebacks are discounts that occur when a contracted customer purchases through an intermediary wholesaler. The contracted customer generally purchases product from the wholesaler at its contracted price plus a 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 patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. The Company uses historical customer segment utilization mix, 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 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. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $245 $249
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million and $2.4$2.9 billion, respectively, at December 31, 20182020 and were $198$233 million and $2.4$2.2 billion, respectively, at December 31, 2017.2019.
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 generic competition, changes in formularies or launch of over-the-counter products, among others. 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 net 36 days from receipt of invoice and for U.S. animal health customers are typically net 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.
The following table provides the effects of adopting ASC 606 on the Consolidated Statement of Income:See Note 18 for disaggregated revenue disclosures.
Year Ended December 31, 2018As Reported Effects of Adopting ASC 606 Amounts Without Adoption of ASC 606
Sales$42,294
 $(2) $42,292
Cost of sales13,509
 (6) 13,503
Income before taxes8,701
 4
 8,705
Taxes on income2,508
 1
 2,509
Net income attributable to Merck & Co., Inc.6,220
 3
 6,223

The following table provides the effects of adopting ASC 606 on the Consolidated Balance Sheet:
December 31, 2018As Reported Effects of Adopting ASC 606 Amounts Without Adoption of ASC 606
Assets     
Accounts receivable$7,071
 $(13) $7,058
Inventories5,440
 7
 5,447
Liabilities     
Accrued and other current liabilities10,151
 (3) 10,148
Income taxes payable1,971
 (1) 1,970
Equity     
Retained earnings42,579
 (2) 42,577
Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 25 to 45 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Depreciation expense was $1.7 billion in 2020, $1.7 billion in 2019 and $1.4 billion in 2018, $1.5 billion in 2017 and $1.6 billion in 2016.2018.

Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $2.1$2.0 billion, $2.2 in 2020, $2.1 billion in 2019 and $2.1$2.1 billion in 2018, 2017 and 2016, respectively.2018.
Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized softwareThese costs are included in Property, plant and equipment and amortized beginning when. In addition, the software projectCompany capitalizes certain costs incurred to implement a cloud computing arrangement that is substantially complete and the asset is ready for its intended use.considered a service agreement, which are included in Other Assets. Capitalized software costs associated with projects that are being amortized over 6 to 10 years (including the Company’s on-going multi-year implementation of an enterprise-wide resource planning system) were $439 million and $449 million, net of accumulated amortization at December 31, 2018 and 2017, respectively. All other capitalized software costs are being amortized over periods ranging from 3 to 510 years, with the longer lives generally associated with enterprise-wide projects implemented over multiple years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting 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. 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).
Acquired Intangibles — Acquired intangibles include products and product rights, tradenameslicenses, trade names and patents, which are initially recorded at fair value, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 2024 years (see Note 8). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted
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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 carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired In-Process Research and Development — Acquired IPR&D that the Company acquires throughin 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 are 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 determination as to the 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. The Company testsevaluates 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. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.
Contingent Consideration — 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. TheIf the transaction is accounted for as an acquisition of a business, 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. Significant events that increase or decrease the probability of achieving development and regulatory milestones or that increase or decrease projected cash flows will result in corresponding increases or decreases in the fair values of the related contingent consideration obligations. If the transaction is accounted for as an acquisition of an asset rather than a business, 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.
Research and Development — Research and development is expensed as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the

activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Research and development expenses also include upfront and milestone payments related to asset acquisitions and licensing transactions involving clinical development programs that have not yet received regulatory approval.
Collaborative Arrangements — Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. When Merck is the principal on sales transactions with third parties, the Company recognizes sales, cost of sales and selling, general and administrative expenses on a gross basis. Profit sharing amounts it pays to its collaborative partners are recorded within Cost of sales. When the collaborative partner is the principal on sales transactions with third parties, the Company records profit sharing amounts received from its collaborative partners as alliance revenue (within Sales). Alliance revenue is recorded net of cost of sales and includes an adjustment to share commercialization costs between the partners in accordance with the collaboration agreement. The adjustment is determined by comparing the commercialization costs Merck has incurred directly and reported within Selling, general and administrative expenses with the costs the collaborative partner has incurred. Research and development costs Merck incurs related to collaborations are recorded within Research and development expenses. Cost reimbursements to the collaborative partner or payments received from the collaborative partner to share these costs pursuant to the terms of the collaboration agreements are recorded as increases or decreases to Research and development expenses.
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In addition, the terms of the collaboration agreements may require the Company to make payments based upon the achievement of certain developmental, regulatory approval or commercial milestones. Upfront and milestone payments payable by Merck to collaborative partners prior to regulatory approval are expensed as incurred and included in Research and development expenses. Payments due to collaborative partners upon or subsequent to regulatory approval are capitalized and amortized over the estimated useful life of the corresponding intangible asset to Cost of sales provided that future cash flows support the amounts capitalized. Sales-based milestones payable by Merck to collaborative partners are accrued when probable of being achieved and capitalized, subject to cumulative amortization catch-up.catch-up, when probable of being achieved. The amortization catch-up is calculated either from the time of the first regulatory approval for indications that were unapproved at the time the collaboration was formed, or from time of the formation of the collaboration for approved products. The related intangible asset that is recognized is amortized to Cost of sales over its remaining useful life, subject to impairment testing.
Share-Based Compensation — The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards.
Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable. When accruing these 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. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. 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 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. The Company recognizes interest

and penalties associated with uncertain tax positions as a component of Taxes on income. The Company accounts for the tax effects of the tax on global intangible low-taxed income (GILTI) of certain foreign subsidiaries in the Consolidated Statement of Income.income tax provision in the period the tax arises.
Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (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 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.
Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
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Recently Adopted Accounting Standards — In May 2014,June 2016, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition (ASU 2014-09) that applies to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The new standard was effective as of January 1, 2018 and was adopted using the modified retrospective method. The Company recorded a cumulative-effect adjustment upon adoption increasing Retained earnings by $5 million.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments (ASU 2016-01) and in 2018 issued related technical corrections (ASU 2018-03). The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The Company has elected to measure equity investments without readily determinable fair values at cost, adjusted for subsequent observable price changes and less impairments, which will be recognized in net income. The new guidance also changed certain disclosure requirements. ASU 2016-01 was effective as of January 1, 2018 and was adopted using a modified retrospective approach. The Company recorded a cumulative-effect adjustment upon adoption increasing Retained earnings by $8 million. ASU 2018-03 was also adopted as of January 1, 2018 on a prospective basis and did not result in any additional impacts upon adoption.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory (ASU 2016-16). The new guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs, replacing the prohibition against doing so. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The new standard was effective as of January 1, 2018 and was adopted using a modified retrospective approach. The Company recorded a cumulative-effect adjustment upon adoption increasing Retained earnings by $54 million with a corresponding decrease to Deferred Income Taxes.
In August 2017, the FASB issued new guidance on hedge accounting (ASU 2017-12) that is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and changes how companies assess effectiveness. The Company elected to early adopt this guidance as of January 1, 2018 on a modified retrospective basis. The new guidance was applied to all existing hedges as of the adoption date. For fair value hedges of interest rate risk outstanding as of the date of adoption, the Company recorded a cumulative-effect adjustment upon adoption to the basis adjustment on the hedged item resulting from applying the benchmark component of the coupon guidance. This adjustment decreased Retained earnings by $11 million. Also, in

accordance with the transition provisions of ASU 2017-12, the Company was required to eliminate the separate measurement of ineffectiveness for its cash flow hedging instruments existing as of the adoption date through a cumulative-effect adjustment to retained earnings; however, all such amounts were de minimis.
In February 2018, the FASB issued new guidance to address a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017 (TCJA) (ASU 2018-02). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as stranded tax effects). The new guidance allows for a reclassification of the stranded tax effects resulting from the TCJA from accumulated other comprehensive income to retained earnings thereby eliminating these stranded tax effects. The Company elected to early adopt the new guidance in the first quarter of 2018 and reclassified the stranded income tax effects of the TCJA, increasing Accumulated other comprehensive loss in the amount of $266 million with a corresponding increase to Retained earnings (see Note 18). The Company’s policy for releasing disproportionate income tax effects from Accumulated other comprehensive loss is to utilize the item-by-item approach.
The impact of adopting the above standards is as follows:
($ in millions)ASU 2014-09 (Revenue) ASU 2016-01 (Financial Instruments) ASU 2016-16 (Intra-Entity Transfers of Assets Other than Inventory) ASU 2017-12 (Derivatives and Hedging) ASU 2018-02 (Reclassification of Certain Tax Effects) Total
Assets - Increase (Decrease)           
Accounts receivable$5
         $5
Liabilities - Increase (Decrease)           
Income Taxes Payable      (3)   (3)
Debt      14
   14
Deferred Income Taxes    (54)     (54)
Equity - Increase (Decrease)           
Retained earnings5
 8
 54
 (11) 266
 322
Accumulated other comprehensive loss  (8)     (266) (274)
In March 2017, the FASB issued amended guidance on retirement benefits (ASU 2017-07) related to net periodic benefit cost for defined benefit plans that requires entities to (1) disaggregate the current service cost component from the other components of net benefit cost and present it with other employee compensation costs in the income statement within operations if such a subtotal is presented; (2) present the other components of net benefit cost separately in the income statement and outside of income from operations; and (3) only capitalize the service cost component when applicable. The Company adopted the new standard as of January 1, 2018 using a retrospective transition method as to the requirement for separate presentation in the income statement of service costs and other components, and a prospective transition method as to the requirement to limit the capitalization of benefit costs to the service cost component. The Company utilized a practical expedient that permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Upon adoption, net periodic benefit cost (credit) other than service cost of $(512) million and $(531) million for the years ended December 31, 2017 and 2016, respectively, was reclassified to Other (income) expense, net from the previous classification within Cost of sales, Selling, general and administrative expenses and Research and development expenses (see Note 15).
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The Company adopted the new standard effective as of January 1, 2018 using a retrospective application. There were no changes to the presentation of the Consolidated Statement of Cash Flows in the previous years presented as a result of adopting the new standard.

In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard was effective as of January 1, 2018 and was adopted using a retrospective application. The adoption of the new guidance did not have a material effect on the Company’s Consolidated Statement of Cash Flows.
In May 2017, the FASB issued guidance clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted the new standard effective as of January 1, 2018 and will apply the new guidance to future share-based payment award modifications should they occur.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a reporting unit exceeds its fair value with certain limitations. The Company adopted the new standard in the fourth quarter of 2018 and applied the new guidance for purposes of its fourth quarter goodwill impairment assessment. The adoption of the new guidance had an immaterial effect on its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted —In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases and subsequently issued several updates to the new guidance. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new standard is effective as of January 1, 2019 and will be adopted using a modified retrospective approach. Merck will elect the transition method that allows for application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company intends to elect available practical expedients. Merck has implemented a lease accounting software application and has completed data validation of the Company’s portfolio of leases, including its assessment of potential embedded leases. Upon adoption, the Company anticipates it will recognize approximately $1 billion of additional assets and corresponding liabilities on its consolidated balance sheet, subject to finalization.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments. The new guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The Company adopted the new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The new guidance isJanuary 1, 2020. There was no impact to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In April 2018, the FASB issued new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on itsCompany’s consolidated financial statements and may elect to early adopt this guidance.upon adoption.
In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under the recently issued guidance on revenue recognition guidance (ASC 606). The Company retrospectively adopted the new guidance effective January 1, 2020, which resulted in minor changes to the presentation of information related to the Company’s collaborative arrangements (see Note 4 and Note 18).
In December 2019, the FASB issued amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The Company adopted the new guidance effective January 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
In January 2020, the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of accounting and measuring certain purchased options and forward contracts to acquire investments. The Company adopted the new guidance effective January 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
Recently Issued Accounting Standard Not Yet Adopted — In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The optional guidance is effective for interimupon issuance and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is tocan be applied on a modified retrospectiveprospective basis at any time between January 1, 2020 through a cumulative-effect adjustment directly to retained earnings.December 31, 2022. The Company is currently evaluating the impact of adoption on its consolidated financial statements.


3.    Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues to pursue acquisitions and the acquisition of businesses and establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
Recently Announced Transaction2020 Transactions
In December 2018,2020, 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 up to $255 million of future contingent regulatory approval milestone payments and tiered royalties ranging from 10% to 20%. OncoImmune’s lead therapeutic candidate MK-7110 (also known as CD24Fc) is being evaluated for the treatment of patients hospitalized with coronavirus disease 2019 (COVID-19). The transaction was accounted 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 for a 20% ownership interest in the new entity, which was valued at $33 million resulting in a $17 million premium. Merck also
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recognized other net liabilities of $22 million. The Company recorded Research and development expenses of $462 million in 2020 related to this transaction.
Also in December 2020, Merck acquired VelosBio Inc. (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. Merck recorded net assets of $180 million (primarily cash) and Research and development expenses of $2.7 billion in 2020 related to the transaction.
In September 2020, Merck and Seagen Inc. (Seagen, formerly known as Seattle Genetics, Inc.) 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 for breast cancer and other solid tumors. The collaboration will pursue a broad joint development program evaluating ladiratuzumab vedotin as monotherapy and in combination with Keytruda (pembrolizumab) in triple-negative breast cancer, hormone receptor-positive breast cancer and other LIV-1-expressing solid tumors. The companies will equally share profits worldwide. Under the terms of the agreement, Merck made an upfront payment of $600 million and a $1.0 billion equity investment in 5 million shares of Seagen common stock at a price of $200 per share. Merck recorded $616 million in Research and development expenses in 2020 related to this transaction reflecting the upfront payment as well as a $16 million premium relating to the equity shares based on the price of Seagen common stock on the closing date. Seagen is also eligible to receive future contingent milestone payments of up to $2.6 billion, including $850 million in development milestones and $1.75 billion in 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. Merck will be responsible for marketing applications seeking approval in its territories, supported by the positive results from the HER2CLIMB clinical trial. Merck will also co-fund a portion of the Tukysa global development plan, which encompasses several ongoing and planned trials across HER2-positive cancers, including breast, colorectal, gastric and other cancers set forth in a global product development plan. Merck will solely fund and conduct country-specific clinical trials necessary to support anticipated regulatory applications in its territories. 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 of up to $65 million and will receive tiered royalties ranging from 20% to 33% based on annual sales levels of Tukysa in Merck’s territories.
Additionally in September 2020, Merck acquired a biologics manufacturing facility located in Dunboyne, Ireland from Takeda Pharmaceutical Company Limited for €256 million ($302 million). The transaction was accounted for as an acquisition of an asset. Merck recorded property, plant and equipment of $289 million and other net assets of $13 million. There are no future contingent payments associated with the acquisition.
In July 2020, Merck acquired the U.S. rights to Sentinel Flavor Tabs and Sentinel Spectrum Chews from Virbac Corporation for $410 million. Sentinel products provide protection against common parasites in dogs. The transaction was accounted for as an acquisition of an asset. Merck recognized intangible assets of $401 million related to currently marketed products and inventory of $9 million at the acquisition date. The estimated fair values of the identifiable intangible assets related to currently marketed products were determined using an income approach. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products will be amortized over their estimated useful lives of 15 years. There are no future contingent payments associated with the acquisition.
Also in July 2020, Merck and Ridgeback Biotherapeutics LP (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 treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize molnupiravir and related molecules. Under the terms of the agreement, Ridgeback Bio received an upfront payment and also is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones, as well as a share of the net profits of molnupiravir and related molecules, if approved. Merck
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and Ridgeback are committed to ensure that any medicines developed for SARS-CoV-2 (the causative agent of COVID-19) will be accessible and affordable globally.
In June 2020, Merck acquired privately held Themis Bioscience GmbH (Themis), a company focused on vaccines (including a COVID-19 vaccine candidate, V591) and immune-modulation therapies for infectious diseases and cancer for $366 million. The acquisition originally provided for Merck to make additional contingent payments of up to $740 million. The transaction was accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was $97 million at the acquisition date utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone payments. Merck recognized intangible assets for IPR&D of $136 million, cash of $59 million, deferred tax assets of $70 million and other net liabilities of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $230 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. Actual cash flows are likely to be different than those assumed. In January 2021, the Company announced it was discontinuing development of V591 as discussed below. As a result, in 2020, the Company recorded an IPR&D impairment charge of $90 million within Research and development expenses. The Company also recorded a reduction in Research and development expenses resulting from a decrease in the related liability for contingent consideration of $45 million since future contingent milestone payments have been reduced to $450 million in the aggregate, including up to $60 million for development milestones, up to $196 million for regulatory approval milestones, and up to $194 million for commercial milestones.
In May 2020, Merck and the International AIDS Vaccine Initiative, Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. The agreement provided for an upfront payment by Merck of $6.5 million and also provided for future contingent payments based on sales. Merck also signed an agreement with the Biomedical Advanced Research and Development Authority (BARDA), part of the office of the Assistant Secretary for Preparedness and Response within an agency of the United States Department of Health and Human Services, to provide initial funding support to Merck for this effort. In January 2021, the Company announced it was discontinuing development of V590 as discussed below.
In January 2021, the Company announced the discontinuation of the 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. Due to the discontinuation, the Company recorded a charge of $305 million in 2020, of which $260 million was reflected in Cost of sales and related to fixed-asset and materials write-offs, as well as the recognition of liabilities for purchase commitments. The remaining $45 million of costs were reflected in Research and development expenses and represent amounts related to the Themis acquisition noted above (an IPR&D impairment charge, partially offset by a reduction in the related liability for contingent consideration).
In January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases. Total consideration paid of $2.7 billion included $138 million of share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of ArQule. The Company incurred $95 million of transaction costs directly related to the acquisition of ArQule, consisting almost entirely of share-based compensation payments to settle non-vested equity awards attributable to postcombination service. These costs were included in Selling, general and administrative expenses in 2020. ArQule’s lead investigational candidate, MK-1026 (formerly known as ARQ 531), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies. The transaction was accounted for as an acquisition of a business.

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The estimated fair value of assets acquired and liabilities assumed from ArQule is as follows:
($ in millions)January 16, 2020
Cash and cash equivalents$145 
IPR&D MK-1026 (formerly ARQ 531) (1)
2,280 
Licensing arrangement for ARQ 08780 
Deferred income tax liabilities(361)
Other assets and liabilities, net34 
Total identifiable net assets2,178 
Goodwill (2)
512 
Consideration transferred$2,690 
(1)    The estimated fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 12.5%. Actual cash flows are likely to be different than those assumed.
(2)    The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.
2019 Transactions
In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly known as PT2977), is a novel investigational oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.2 billion; additionally, former Peloton shareholders will be eligible to receive $50 million upon U.S. regulatory approval, $50 million upon first commercial sale in the United States, and up to $1.05 billion of sales-based milestones. The transaction was accounted for as an acquisition of an asset. Merck recorded cash of $157 million, deferred tax liabilities of $52 million, and other net liabilities of $4 million at the acquisition date, as well as Research and development expenses of $993 million in 2019 related to the transaction.
On April 1, 2019, Merck acquired Antelliq GroupCorporation (Antelliq) signed a definitive agreement under which Merck will acquire Antelliq from funds advised by BC Partners. Antelliq is, a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck will make a cash payment of approximately €2.1paid $2.3 billion (approximately $2.4 billion based on exchange rates at the time of the announcement) to acquire all outstanding shares of Antelliq and will assume Antelliq’s debt of €1.1spent $1.3 billion (approximately $1.3 billion), which it intends to repay shortlyAntelliq’s debt. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:
($ in millions)April 1, 2019
Cash and cash equivalents$31 
Accounts receivable73 
Inventories93 
Property, plant and equipment60 
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 assets2,275 
Goodwill (2)
1,376 
Consideration transferred$3,651 
(1)    The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
(2)    The goodwill recognized is largely attributable to anticipated synergies expected to arise after the closingacquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.

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The Company’s results for 2019 include eight months of activity for Antelliq, while the Company’s results in 2020 include 13 months of activity. The Company incurred $47 million of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected in Selling, general and administrative expenses in 2019.
Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $156 million, cash of $83 million and other net assets of $42 million. The excess of the acquisition. The transaction is subjectconsideration transferred over the fair value of net assets acquired of $20 million was recorded as goodwill that was allocated to clearance by antitrust and competition law authorities and other customary closing conditions,the Pharmaceutical segment and is expectednot deductible for tax purposes. The fair values of the identifiable intangible assets related to close in the second quarter of 2019.IPR&D were determined using an income approach. Actual cash flows are likely to be different than those assumed.
2018 Transactions
In 2018, the Company recorded an aggregate charge of $423 million within Cost of sales in conjunction with the termination of a collaboration agreement entered into in 2014 with Samsung Bioepis Co., Ltd. (Samsung) for insulin glargine. The charge reflects a termination payment of $155 million, which represents the reimbursement of all fees previously paid by Samsung to Merck under the agreement, plus interest, as well as the release of Merck’s ongoing obligations under the agreement. The charge also included fixed asset abandonment charges of $137 million, inventory write-offs of $122 million, as well as other related costs of $9 million. The termination of this agreement hashad no impact on the Company’s other collaboration with Samsung.
In June 2018, Merck acquired Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD 502 million ($378 million). The transaction provided Merck with full rights to Cavatak (V937, formerlyV937 (formerly known as CVA21), Viralytics’san investigational oncolytic immunotherapy.Cavatak is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells. Cavatak is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Keytruda. Under a previous agreement between Merck and Viralytics, a study is investigating the use of the Keytruda and Cavatak combination in melanoma, prostate, lung and bladder cancers. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $34 million (primarily cash) at the acquisition date and Research and development expenses of $344 million in 2018 related to the transaction. There are no future contingent payments associated with the acquisition.
In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 4).
2017 Transactions
In October 2017, Merck acquired Rigontec GmbH (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, MK-4621 (formerly RGT100), is currently in Phase I development evaluating treatment in patients with various tumors. Under the terms of the agreement, Merck made an upfront cash payment of €119 million ($140 million) and may make additional contingent payments of up to €349 million (of which €184 million are related to the achievement of research milestones and regulatory approvals and €165 million are related to the achievement of commercial targets). The transaction was accounted for as an acquisition of an asset and the upfront payment is reflected within Research and development expenses in 2017.

In July 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types (see Note 4).
In March 2017, Merck acquired a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include products for livestock, horses, and companion animals. Under the terms of the agreement, Merck acquired 93.5% of the shares of Vallée for $358 million. Of the total purchase price, $176 million was placed into escrow pending resolution of certain contingent items. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $297 million related to currently marketed products, net deferred tax liabilities of $102 million, other net assets of $32 million and noncontrolling interest of $25 million. In addition, the Company recorded liabilities of $37 million for contingencies identified at the acquisition date and corresponding indemnification assets of $37 million, representing the amounts to be reimbursed to Merck if and when the contingent liabilities are paid. The excess of the consideration transferred over the fair value of net assets acquired of $156 million was recorded as goodwill. The goodwill was allocated to the Animal Health segment and is not deductible for tax purposes. The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach. The probability-adjusted future net cash flows of each product were discounted to present value utilizing a discount rate of 15.5%. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products are being amortized over their estimated useful lives of 15 years. In the fourth quarter of 2017, Merck acquired an additional 4.5% interest in Vallée for $18 million, which reduced the noncontrolling interest related to Vallée.
2016 Transactions
In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), gefapixant, is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated for the treatment of refractory, chronic cough and for the treatment of endometriosis-related pain. Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for IPR&D of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were discounted to present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed. In 2018, as a result of the achievement of a clinical development milestone, Merck made a $175 million payment, which was accrued for at estimated fair value at the time of acquisition as noted above. The contingent consideration liability was then remeasured at current fair value at each subsequent reporting period until payment was made (see Note 6).
In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in Research and development expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share costs and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with Keytruda. Moderna and Merck each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.

In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provided Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed. In 2017, as a result of the achievement of a clinical development milestone, Merck made a $100 million payment, which was accrued for at estimated fair value at the time of acquisition as noted above. The contingent consideration liability was then remeasured at current fair value at each subsequent reporting period until payment was made (see Note 6).
Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J) company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi, a fully human monoclonal antibody. The Company has marketing rights to both products throughout Europe, Russia and Turkey. Remicade lost market exclusivity in major European markets in 2015 and the Company no longer has market exclusivity in any of its marketing territories. The Company continues to have market exclusivity for Simponi in all of its marketing territories. All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J. The Company’s marketing rights with respect to these products will revert to Janssen Pharmaceuticals, Inc. in the second half of 2024.
4.    Collaborative Arrangements
Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below.


AstraZeneca
In July 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of
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advanced ovarian, breast, pancreatic and breast cancer.prostate cancers. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies willare also jointly developdeveloping and commercializecommercializing AstraZeneca’s selumetinib,Koselugo (selumetinib), an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications. In April 2020, Koselugo was approved by the U.S. Food and Drug Administration (FDA) for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 who have symptomatic, inoperable plexiform neurofibromas. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and selumetinibKoselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities.
Gross profitsProfits from Lynparza and selumetinibKoselugo product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib.Koselugo. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib.Koselugo. AstraZeneca is currently the principal on Lynparza and Koselugo sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research

and development expenses. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.
As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion in 2017 and will makemade payments of up to $750 million over a multi-year period for certain license options (of which $250 million was paid in December 2017, $400 million was paid in December 2018 and $100 million is expected bewas paid in December 2019). The Company recorded an aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and future license option payments.payments were reflected in Research and development expenses in 2017. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory and sales-based milestones.
In 2018,2020, Merck determined it was probable that annual sales of Lynparza in the future would trigger three$400 million of sales-based milestone payments from Merck to AstraZeneca aggregating $600 million.AstraZeneca. Accordingly, in 2018, Merck recorded $600$400 million of liabilities and a corresponding increaseincreases to the intangible asset related to Lynparza, and recognized $58 million of cumulative amortization expense within Cost of sales. During 2018, one of the sales-based milestones was triggered, resulting in a $150 million paymentLynparza. Prior to AstraZeneca. In 2018,2020, Merck made an additional $100 millionaccrued sales-based milestone payment,payments aggregating $1.0 billion related to Lynparza, of which $550 million, $200 million and $250 million was accrued forpaid to AstraZeneca in 2017 when the Company deemed to the payment to be probable. The remaining $3.4 billion of potential2020, 2019 and 2018, respectively. Potential future sales-based milestone payments of $2.7 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.
In 2020, 2019 and 2018, Lynparza received approval in the United States for the treatment of certain patients with metastatic breast cancer and for use in the first-line maintenance setting for advanced ovarian cancer,regulatory approvals triggering capitalized milestone payments of $160 million, $60 million and $140 million, respectively, in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.76$1.4 billion remain under the agreement.
The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $743 million$1.3 billion at December 31, 20182020 and is included in Other Assets on the Consolidated Balance Sheet.Intangibles, Net. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

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Summarized financial information related to this collaboration is as follows:
Years Ended December 31202020192018
Alliance revenue - Lynparza$725 $444 $187 
Alliance revenue - Koselugo8 
Total alliance revenue$733 $444 $187 
Cost of sales (1)
247 148 93 
Selling, general and administrative160 138 48 
Research and development133 168 152 
December 3120202019
Receivables from AstraZeneca included in Other current assets
$215 $128 
Payables to AstraZeneca included in Accrued and other current liabilities (2)
423 577 
Years Ended December 312018 2017
Alliance revenue$187
 $20
    
Cost of sales (1)
93
 4
Selling, general and administrative48
 1
Research and development (2)
152
 2,419
    
December 312018 2017
Receivables from AstraZeneca included in Other current assets
$52
 $12
Payables to AstraZeneca included in Accrued and other current liabilities (3)
405
 543
Payables to AstraZeneca included Other Noncurrent Liabilities (3)
250
 100
(1) Represents amortization of capitalized milestone payments.
(2) Amount for 2017 includes $2.35 billion related to the upfront payment and future license option payments.
(3) Includes accrued milestone and license option payments.
Eisai
In March 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor discovered by Eisai. Lenvima is currently approved for the treatment of certain types of thyroid cancer, hepatocellular carcinoma, in combination with everolimus for certain patients with renal cell carcinoma, and in combination with Keytruda for the treatment of certain patients with endometrial carcinoma. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Merck’s anti-PD-1 therapy, Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share grossapplicable profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies in accordance with the collaboration agreement and reflected in Research and development expenses. Certain expenses incurred solely by Merck or Eisai are not shareable under the collaboration agreement, including costs incurred in excess of agreed upon caps and costs related to certain combination studies of Keytruda and Lenvima.

Under the agreement, Merck made an upfront payment to Eisai of $750 million in 2018 and willagreed to make payments of up to $650 million for certain option rights through 2021 (of which $325 million will bewas paid in March 2019, $200 million is expected to bewas paid in March 2020 and $125 million is expected to be paid in March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in 2018 related to the upfront payment and future option payments. In addition, the agreement provides for additional contingent payments from Merck to Eisai related to receive up to $385 million associated with the successful achievement of certain clinicalsales-based and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima.milestones.
In 2018,2020, Merck determined it was probable that annual sales of Lenvima in the future would trigger three sales-based milestone payments aggregating $400 million from Merck to Eisai aggregating $268 million.Eisai. Accordingly, in 2018, Merck recorded $268liabilities of $400 million of liabilities and a corresponding increaseincreases to the intangible asset related to Lenvima. Prior to 2020, Merck accrued sales-based milestone payments aggregating $950 million related to Lenvima, of which $500 million and recognized $24$50 million of cumulative amortization expense within Cost of sales. The remaining $3.71 billion of potentialwas paid to Eisai in 2020 and 2019, respectively. Potential future sales-based milestone payments of $2.6 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.
In 2020 and 2018, Lenvima was approved for the treatment of patients with unresectable hepatocellular carcinoma in the United States, the European Union, Japan and China,received regulatory approvals triggering capitalized milestone payments to Eisai of $10 million and $250 million, in the aggregate.respectively, from Merck to Eisai. Potential future regulatory milestone payments of $135$125 million remain under the agreement.
The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $479 million$1.1 billion at December 31, 20182020 and is included in Other Assets on the Consolidated Balance Sheet.Intangibles, Net. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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Summarized financial information related to this collaboration is as follows:
Years Ended December 31202020192018
Alliance revenue - Lenvima$580 $404 $149 
Cost of sales (1)
271 206 39 
Selling, general and administrative73 80 13 
Research and development (2)
185 189 1,489 
December 3120202019
Receivables from Eisai included in Other current assets
$157 $150 
Payables to Eisai included in Accrued and other current liabilities (3)
335 700 
Payables to Eisai included in Other Noncurrent Liabilities (4)
600 525 
Year Ended December 312018
Alliance revenue$149
  
Cost of sales (1)
39
Selling, general and administrative13
Research and development (2)
1,489
  
December 312018
Receivables from Eisai included in Other current assets
$71
Payables to Eisai included in Accrued and other current liabilities (3)
375
Payables to Eisai included in Other Noncurrent Liabilities (3)
543
(1) Represents amortization of capitalized milestone payments.
(2) IncludesAmount for 2018 includes $1.4 billion related to the upfront payment and future option payments.
(3) Includes accrued milestone and future option payments.
(4) Includes accrued milestone payments.
Bayer AG
In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have implemented a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat,Verquvo (vericiguat), which iswas approved by the FDA in Phase 3 trials for worseningJanuary 2021 to reduce the risk of cardiovascular death and heart failure as well as opt-in rightshospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults. Verquvo is under review by regulatory authorities in other early-stage sGC compounds in development by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms.territories including the EU and Japan. Under the agreement, Bayer leads commercialization ofcommercializes Adempas in the Americas, while Merck leads commercializationcommercializes in the rest of the world. For vericiguatVerquvo, Merck will commercialize in the United States and other potential opt-in products, Bayer will lead commercializationcommercialize in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, bothworld. Both companies will share in development costs and profits on sales. Merck records sales andof Adempas (and will have the right to co-promoterecord sales of Verquvo) in territories where they are not the lead. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017. Revenue from Adempas includes sales in Merck’sits marketing territories, as well as alliance revenue. Alliance revenue represents Merck’s share of profits from the sale of Adempassales in Bayer’s marketing territories.territories, which are product sales net of cost of sales and commercialization costs. In addition, the agreement provides for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones.

InPrior to 2020, Merck accrued $725 million of sales-based milestone payments for this collaboration, of which $375 million and $350 million was paid to Bayer in 2020 and 2018, respectively. Following the 2021 FDA approval of Verquvo noted above, Merck determined it was probable that annual worldwide sales of Adempas and Verquvo in the future would trigger a $375the remaining $400 million sales-based milestone payment from Merck to Bayer.payment. Accordingly, Merck recordedwill record a $375liability of $400 million noncurrent liability and a corresponding increase to thein intangible assetassets related to Adempas, and recognized $106 millionthis collaboration in the first quarter of cumulative amortization expense within Cost of sales. In 2018, the Company made a $350 million milestone payment to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.2021.
The intangible asset balance related to Adempasthis collaboration (which includes the remaining acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $1.0 billion$849 million at December 31, 20182020 and is included in Other Intangibles, Neton the Consolidated Balance Sheet.. The amount is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to impairment testing.

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Summarized financial information related to this collaboration is as follows:
Years Ended December 31202020192018
Alliance revenue - Adempas$281 $204 $139 
Net sales of Adempas recorded by Merck220 215 190 
Total sales$501 $419 $329 
Cost of sales (1)
115 113 216 
Selling, general and administrative61 41 35 
Research and development63 126 127 
December 3120202019
Receivables from Bayer included in Other current assets
$65 $49 
Payables to Bayer included in Other Noncurrent Liabilities (2)
0 375 
Years Ended December 312018 2017 2016
Net product sales recorded by Merck$190
 $149
 $88
Merck’s profit share from sales in Bayer’s marketing territories139
 151
 81
Total sales329
 300
 169
      
Cost of sales (1)
216
 99
 133
Selling, general and administrative35
 27
 26
Research and development127
 101
 82
      
December 31  2018 2017
Receivables from Bayer included in Other current assets
  $32
 $33
Payables to Bayer included in Accrued and other current liabilities (2)
  
 350
Payables to Bayer included in Other Noncurrent Liabilities (2)
  375
 
(1) Includes amortization of intangible assets.
(2) IncludesRepresents accrued milestone payments.payment.
Aggregate amortization expense related to capitalized license costs recorded within Cost of sales was $186 million in 2018, $39 million in 2017 and $30 million in 2016. The estimated aggregate amortization expense for each of the next five years is as follows: 2019, $196 million; 2020, $193 million; 2021, $191 million; 2022, $187 million; 2023, $181 million.
5.    Restructuring
In 2010 and 2013, the Company commenced actions underearly 2019, Merck approved a new global restructuring programs designed to streamline its cost structure. The actions under these programs includeprogram (Restructuring Program) as part of a worldwide initiative focused on further optimizing the elimination of positions in sales, administrativeCompany’s manufacturing and headquarters organizations,supply network, 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 improveoverall operating model, it subsequently identified additional actions under the efficiencyRestructuring 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.
The Company recorded total2023, with the cumulative pretax costs of $658 million in 2018, $927 million in 2017 and $1.1 billion in 2016 related to restructuringbe incurred by the Company to implement the program activities. Since inception of the programs through December 31, 2018, Merck has recorded total pretax accumulated costs ofnow estimated to be approximately $14.1 billion and eliminated approximately 45,510 positions comprised of employee separations, as well as the elimination of contractors and vacant positions.$3.0 billion. The Company estimates that approximately two-thirds70% of the cumulative pretax costs arewill result in cash outlays, primarily related to employee separation expense.expense and facility shut-down costs. Approximately one-third30% of the cumulative pretax costs arewill be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $700 million in 2021 related to the Restructuring Program. Actions under previous global restructuring programs have been substantially completed.
The Company recorded total pretax costs of $883 million in 2020, $927 million in 2019 and $658 million in 2018 related to restructuring program activities. Since inception of the Restructuring Program through December 31, 2020, Merck has substantially completed the actions under these programs.
recorded total pretax accumulated costs of approximately $1.8 billion. For segment reporting, restructuring charges are unallocated expenses.


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The following table summarizes the charges related to restructuring program activities by type of cost:
Separation
Costs
Accelerated
Depreciation
OtherTotal
Year Ended December 31, 2020Year Ended December 31, 2020
Cost of salesCost of sales$0 $143 $32 $175 
Selling, general and administrativeSelling, general and administrative0 44 3 47 
Research and developmentResearch and development0 81 2 83 
Restructuring costsRestructuring costs385 0 193 578 
$385 $268 $230 $883 
Year Ended December 31, 2019Year Ended December 31, 2019    
Cost of salesCost of sales$$198 $53 $251 
Selling, general and administrativeSelling, general and administrative33 34 
Research and developmentResearch and development
Restructuring costsRestructuring costs572 66 638 
Separation
Costs
 
Accelerated
Depreciation
 Other Total $572 $233 $122 $927 
Year Ended December 31, 2018       Year Ended December 31, 2018    
Cost of sales$
 $10
 $11
 $21
Cost of sales$$10 $11 $21 
Selling, general and administrative
 2
 1
 3
Selling, general and administrative
Research and development
 (13) 15
 2
Research and development(13)15 
Restructuring costs473
 
 159
 632
Restructuring costs473 159 632 
$473
 $(1) $186
 $658
$473 $(1)$186 $658 
Year Ended December 31, 2017       
Cost of sales$
 $52
 $86
 $138
Selling, general and administrative
 2
 
 2
Research and development
 6
 5
 11
Restructuring costs552
 
 224
 776
$552

$60

$315

$927
Year Ended December 31, 2016       
Cost of sales$
 $77
 $104
 $181
Selling, general and administrative
 8
 87
 95
Research and development
 142
 
 142
Restructuring costs216
 
 435
 651
$216

$227

$626

$1,069
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. Positions eliminated under restructuring program activities were approximately 2,160 in 2018, 2,450 in 2017 and 2,625 in 2016.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows wereare sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2020, 2019 and 2018 2017 and 2016 includes$141 million, $267 million and $409 million, respectively, of asset abandonment, facility shut-down and other related costs.costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 14)13) and share-based compensation. Other activity also reflects net pretax losses resulting from sales of facilities and related assets of $151 million in 2016.
The following table summarizes the charges and spending relating to restructuring program activities:
Separation
Costs
Accelerated
Depreciation
OtherTotal
Restructuring reserves January 1, 2019$443 $$91 $534 
Expenses572 233 122 927 
(Payments) receipts, net(325)(136)(461)
Non-cash activity(233)(8)(241)
Restructuring reserves December 31, 2019690 69 759 
Expenses385 268 230 883 
(Payments) receipts, net(508)0 (301)(809)
Non-cash activity0 (268)38 (230)
Restructuring reserves December 31, 2020 (1)
$567 $0 $36 $603 
(1)    The remaining cash outlays are expected to be substantially completed by the end of 2023.
98
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Restructuring reserves January 1, 2017$395
 $
 $146
 $541
Expenses552
 60
 315
 927
(Payments) receipts, net(328) 
 (394) (722)
Non-cash activity
 (60) 61
 1
Restructuring reserves December 31, 2017619
 
 128
 747
Expenses473
 (1) 186
 658
(Payments) receipts, net(649) 
 (238) (887)
Non-cash activity
 1
 15
 16
Restructuring reserves December 31, 2018 (1)
$443
 $
 $91
 $534
The remaining cash outlays are expected to be substantially completed by the end of 2020.

6.    Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.


Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatilitychanges 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 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 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 isare recorded in 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.
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 Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.

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The Company also 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. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI, and remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component)components). Changes in fair value of the excluded components are recognized in OCI. In accordance with the new guidance adopted on January 1, 2018 (see Note 2), theThe Company has elected to recognizerecognizes in earnings the initial value of the excluded componentcomponents 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.
The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:
Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)
Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
Years Ended December 31202020192018202020192018
Net Investment Hedging Relationships
Foreign exchange contracts$26 $(10)$(18)$(19)$(31)$(11)
Euro-denominated notes385 (75)(183)0 
 
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 312018 2017 2016 2018 2017 2016
Net Investment Hedging Relationships           
Foreign exchange contracts$(18) $
 $2
 $(11) $
 $(1)
Euro-denominated notes(183) 520
 (193) 
 
 
(1) No amounts were reclassified from AOCI into income related to the sale of a subsidiary.


Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
In May 2018, fourFebruary 2020, 5 interest rate swaps with notional amounts aggregating $1.0 billionof $250 million each matured. These swaps effectively converted the Company’s $1.0$1.25 billion, 1.30%1.85% fixed-rate notes due 2018 to variable rate debt. In December 2018, in connection with the early repayment of debt, the Company settled three interest rate swaps with notional amounts aggregating $550 million. These swaps effectively converted a portion of the Company’s $1.25 billion, 5.00% notes due 20192020 to variable rate debt. At December 31, 2018,2020, the Company was a party to 1914 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.below:
2020
Debt InstrumentPar Value of DebtNumber of Interest Rate Swaps HeldTotal Swap Notional Amount
3.875% notes due 2021 (1)
$1,150 $1,150 
2.40% notes due 20221,000 1,000 
2.35% notes due 20221,250 1,250 
 2018
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.85% notes due 2020$1,250
 5
 $1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 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)LIBOR swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.


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The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges as of December 31:
 Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
 2018 2017 2018 2017
Balance Sheet Line Item in which Hedged Item is Included       
Loans payable and current portion of long-term debt$
 $983
 $
 $(17)
Long-Term Debt (1)
4,560
 5,146
 (82) (41)
(1) Amounts include hedging adjustment gains related to discontinued hedging relationships of $11 million at December 31, 2017.
Carrying Amount of Hedged LiabilitiesCumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
2020201920202019
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 Debt2,301 3,409 53 14 
Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments as of December 31:
  20202019
  Fair Value of
Derivative
U.S. Dollar
Notional
Fair Value of
Derivative
U.S. Dollar
Notional
 Balance Sheet CaptionAssetLiabilityAssetLiability
Derivatives Designated as Hedging Instruments       
Interest rate swap contractsOther current assets$1 $ $1,150 $$— $
Interest rate swap contractsOther Assets54  2,250 15 — 3,400 
Interest rate swap contractsAccrued and other current liabilities 0 0 — 1,250 
Foreign exchange contractsOther current assets12  3,183 152 — 6,117 
Foreign exchange contractsOther Assets45  2,030 55 — 2,160 
Foreign exchange contractsAccrued and other current liabilities 217 5,049 — 22 1,748 
Foreign exchange contractsOther Noncurrent Liabilities 1 52 — 53 
  $112 $218 $13,714 $222 $24 $14,728 
Derivatives Not Designated as Hedging Instruments       
Foreign exchange contractsOther current assets$70 $ $7,260 $66 $— $7,245 
Foreign exchange contractsAccrued 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 
   2018 2017
   
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 contractsOther assets $
 $
 $
 $2
 $
 $550
Interest rate swap contractsAccrued and other current liabilities 
 
 
 
 3
 1,000
Interest rate swap contractsOther noncurrent liabilities 
 81
 4,650
 
 52
 4,650
Foreign exchange contractsOther current assets 263
 
 6,222
 51
 
 4,216
Foreign exchange contractsOther assets 75
 
 2,655
 38
 
 1,936
Foreign exchange contractsAccrued and other current liabilities 
 7
 774
 
 71
 2,014
Foreign exchange contractsOther noncurrent liabilities 
 1
 89
 
 1
 20
   $338

$89

$14,390

$91

$127

$14,386
Derivatives Not Designated as Hedging Instruments             
Foreign exchange contractsOther current assets $116
 $
 $5,430
 $39
 $
 $3,778
Foreign exchange contractsAccrued and other current liabilities 
 71
 9,922
 
 90
 7,431
   $116
 $71
 $15,352
 $39
 $90
 $11,209
   $454
 $160
 $29,742
 $130
 $217
 $25,595
As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes at December 31:
20202019
AssetLiabilityAssetLiability
Gross amounts recognized in the consolidated balance sheet$182 $525 $288 $97 
Gross amounts subject to offset in master netting arrangements not offset in the consolidated balance sheet(156)(156)(84)(84)
Cash collateral posted/received0 (36)(34)
Net amounts$26 $333 $170 $13 

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 2018 2017
 Asset Liability Asset Liability
Gross amounts recognized in the consolidated balance sheet$454
 $160
 $130
 $217
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet(121) (121) (94) (94)
Cash collateral received(107) 
 (3) 
Net amounts$226
 $39
 $33
 $123
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The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:
Sales
Other (income) expense, net (1)
Other comprehensive income (loss)
Years Ended December 31202020192018202020192018202020192018
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)
 Sales 
Other (income) expense, net (1)
 Other comprehensive income (loss)
Years Ended December 312018 2017 2016 2018 2017 2016 2018 2017 2016
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded$42,294
 $40,122
 $39,807
 $(402) (500) 189
 $(361) $316
 $(1,078)
(Gain) loss on fair value hedging relationships                 
Interest rate swap contracts                 
Hedged items
 
 
 (27) (48) (29) 
 
 
Derivatives designated as hedging instruments
 
 
 50
 12
 (35) 
 
 
Impact of cash flow hedging relationships                 
Foreign exchange contracts                 
Amount of gain (loss) recognized in OCI on derivatives

 
 
 
 
 
 228
 (562) 210
(Decrease) increase in Sales as a result of AOCI reclassifications
(160) 138
 311
 
 
 
 160
 (138) (311)
(1) Interest expense is a component of Other (income) expense, net.
The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:
Amount of Derivative Pretax (Gain) Loss Recognized in Income
Years Ended December 31202020192018
Derivatives Not Designated as Hedging InstrumentsIncome Statement Caption
Foreign exchange contracts (1)
Other (income) expense, net$(12)$174 $(260)
Foreign exchange contracts (2)
Sales13 (8)
Interest rate contracts (3)
Other (income) expense, net9 
Forward contract related to Seagen common stockResearch and development expenses15 
    Amount of Derivative Pretax (Gain) Loss Recognized in Income
Years Ended December 31 Income Statement Caption 2018 2017 2016
Derivatives Not Designated as Hedging Instruments        
Foreign exchange contracts (1)
 Other (income) expense, net $(260) $110
 $132
Foreign exchange contracts (2)
 Sales (8) (3) 
(1)These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.
(2) These derivative contracts serve as economic hedges of forecasted transactions.
(3) These derivatives serve as economic hedges against rising treasury rates.
At December 31, 2018,2020, the Company estimates $186$331 million of pretax net unrealized gainslosses on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.


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Investments in Debt and Equity Securities
Information on investments in debt and equity securities at December 31 is as follows:
 
 20202019
 Amortized
Cost
Gross UnrealizedFair
Value
Amortized
Cost
Gross UnrealizedFair
Value
  
GainsLossesGainsLosses
U.S. government and agency securities$84 $0 $0 $84 $266 $$$269 
Foreign government bonds5 0 0 5 
Commercial paper0 0 0 0 668 668 
Corporate notes and bonds0 0 0 0 608 13 621 
Asset-backed securities0 0 0 0 226 227 
Total debt securities89 0 0 89 1,768 17 1,785 
Publicly traded equity securities (1)
1,787 838 
Total debt and publicly traded equity securities$1,876 $2,623 
 2018 2017
 
Fair
Value
 
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Amortized
Cost
 Gross Unrealized
  
Gains Losses Gains Losses
Corporate notes and bonds$4,920
 $4,985
 $3
 $(68) $9,806
 $9,837
 $9
 $(40)
Asset-backed securities1,275
 1,285
 1
 (11) 1,542
 1,548
 1
 (7)
U.S. government and agency securities892
 895
 2
 (5) 2,042
 2,059
 
 (17)
Foreign government bonds166
 167
 
 (1) 733
 739
 
 (6)
Mortgage-backed securities8
 8
 
 
 626
 634
 1
 (9)
Commercial paper
 
 
 
 159
 159
 
 
Total debt securities7,261

7,340

6

(85)
14,908

14,976

11

(79)
Publicly traded equity securities (1)
456
       275
 265
 16
 (6)
Total debt and publicly traded equity securities$7,717










$15,183

$15,241

$27

$(85)
(1) Pursuant to the adoption of ASU 2016-01 (see Note 2), beginning on January 1, 2018, changes in the fair value of publicly traded equity securities areUnrealized net gains recognized in net income. Unrealized net losses of $35 million were recognized in Other (income) expense, net during 2018 on equity securities still held at December 31, 2018.2020 were $163 million during 2020. Unrealized net gains recognized in Other (income) expense, net on equity securities still held at December 31, 2019 were $160 million during 2019.
At December 31, 2018,2020 and 2019, the Company also had $568$586 million and $420 million, respectively, of equity investments without readily determinable fair values included in Other Assets. During 2018,2020 and 2019, the Company recognized unrealized gains of $167$62 million and $20 million, respectively, in Other (income) expense, net, on certain of these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee. In addition, during 2018,2020 and 2019, the Company recognized unrealized losses of $26$3 million and $13 million, respectively, in Other (income) expense, net, related to certain of these investments based on unfavorable observable price changes.
Available-for-sale debt securities included Cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in Short-termequity investments totaled $894 without readily determinable fair values were $169 million at December 31, 2018. Of the remaining debt securities, $5.8 billion mature within five years. At December 31, 2018 and 2017, there were no debt securities pledged as collateral.$24 million, respectively.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.




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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below:
 Fair Value Measurements UsingFair Value Measurements Using
  Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
  20202019
Assets
Investments
Foreign government bonds$0 $5 $0 $5 $$$$
Commercial paper0 0 0 0 668 668 
Corporate notes and bonds0 0 0 0 621 621 
Asset-backed securities0 0 0 0 227 227 
U.S. government and agency securities0 0 0 0 209 209 
Publicly traded equity securities780 0 0 780 518 518 
 780 5 0 785 518 1,725 2,243 
Other assets (1)
U.S. government and agency securities84 0 0 84 60 60 
Publicly traded equity securities1,007 0 0 1,007 320 320 
1,091 0 0 1,091 380 380 
Derivative assets (2)
Forward exchange contracts0 90 0 90 169 169 
Interest rate swaps0 55 0 55 15 15 
Purchased currency options0 37 0 37 104 104 
 0 182 0 182 288 288 
Total assets$1,871 $187 $0 $2,058 $898 $2,013 $$2,911 
Liabilities
Other liabilities
Contingent consideration$0 $0 $841 $841 $$$767 $767 
Derivative liabilities (2)
Forward exchange contracts0 505 0 505 95 95 
Written currency options0 20 0 20 
Interest rate swaps0 0 0 0 
0 525 0 525 97 97 
Total liabilities$0 $525 $841 $1,366 $$97 $767 $864 
 Fair Value Measurements Using Fair Value Measurements Using
  
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
  2018 2017
Assets               
Investments               
Corporate notes and bonds$
 $4,835
 $
 $4,835
 $
 $9,678
 $
 $9,678
Asset-backed securities (1)

 1,253
 
 1,253
 
 1,476
 
 1,476
U.S. government and agency securities
 731
 
 731
 68
 1,767
 
 1,835
Foreign government bonds
 166
 
 166
 
 732
 
 732
Mortgage-backed securities
 
 
 
 
 547
 
 547
Commercial paper
 
 
 
 
 159
 
 159
Publicly traded equity securities147
 
 
 147
 104
 
 
 104
 147
 6,985
 
 7,132
 172
 14,359
 
 14,531
Other assets (2)
               
U.S. government and agency securities55
 106
 
 161
 
 207
 
 207
Corporate notes and bonds
 85
 
 85
 
 128
 
 128
Asset-backed securities (1)

 22
 
 22
 
 66
 
 66
Mortgage-backed securities
 8
 
 8
 
 79
 
 79
Foreign government bonds
 
 
 
 
 1
 
 1
Publicly traded equity securities309
 
 
 309
 171
 
 
 171
 364

221



585

171

481



652
Derivative assets (3)
               
Forward exchange contracts
 241
 
 241
 
 48
 
 48
Purchased currency options
 213
 
 213
 
 80
 
 80
Interest rate swaps
 
 
 
 
 2
 
 2
 

454



454



130



130
Total assets$511

$7,660

$

$8,171

$343

$14,970

$

$15,313
Liabilities               
Other liabilities               
Contingent consideration$
 $
 $788
 $788
 $
 $
 $935
 $935
Derivative liabilities (3)
               
Interest rate swaps
 81
 
 81
 
 55
 
 55
Forward exchange contracts
 74
 
 74
 
 162
 
 162
Written currency options
 5
 
 5
 
 
 
 
 

160



160



217



217
Total liabilities$

$160

$788

$948

$

$217

$935

$1,152
(1)    Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.
(1)
Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.
(2)
Investments included in other assets are restricted as to use, primarily for the payment of benefits under employee benefit plans.
(3)
(2)    The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
There were no transfers between Level 1 and Level 2 during 2018. not significant.
As of December 31, 2018, 2020 and 2019, Cash and cash equivalents of $8.0 include $6.8 billion include $7.2 and $8.9 billion, respectively, of cash equivalents (which would be considered Level 2 in the fair value hierarchy).

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Contingent Consideration
Summarized information about the changes in liabilities for contingent consideration associated with business acquisitions is as follows:
20202019
Fair value January 1$767 $788 
Additions97 
Changes in estimated fair value (1)
83 64 
Payments(106)(85)
Fair value December 31 (2)(3)
$841 $767 
 2018 2017
Fair value January 1$935
 $891
Changes in estimated fair value (1)
89
 141
Additions8
 3
Payments(244) (100)
Fair value December 31 (2)
$788
 $935
(1)Recorded in Cost of sales,Research and development expenses, Cost of salesand Other (income) expense, net.Includes cumulative translation adjustments.
(2) Balance at December 31, 20182020 includes $89$148 million recorded as a current liability for amounts expected to be paid within the next 12 months.
(3) At December 31, 2020 and 2019, $711 million and $625 million, respectively, of the liabilities relate to the termination of the Sanofi Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows and a risk-adjusted discount rate of 8% to present value the cash flows.
The additions to contingent consideration in 2020 relate to the acquisition of Themis. The changes in the estimated fair value of liabilities for contingent consideration in 20182020 and 2019 were largely attributable to increases in the liabilities recorded in connection with the termination of the SPMSDSanofi Pasteur MSD (SPMSD) joint venture in 2016 (see Note 9),2016. In 2020, the increase was partially offset by the reversal of a liabilitydecline related to the discontinuation of a COVID-19 vaccine program obtained in connection withthrough the acquisition of SmartCells (see Note 8). The changes in the estimated fair value of liabilities for contingent consideration in 2017 primarily relate to increases in the liabilities recorded in connection with the termination of the SPMSD joint venture and the clinical progression of a program related to the Afferent acquisition.Themis. The payments of contingent consideration in 2018 include $175 million related to the achievement of a clinical milestone in connection with the acquisition of Afferent (see Note 3). The remaining payments in 2018 relate to liabilities recorded in connection with the termination of the SPMSD joint venture. The payments of contingent consideration in 2017both years relate to the achievement of a clinical milestone in connection with the acquisition of IOmet (see Note 3).SPMSD liabilities described above.


Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at December 31, 2018,2020, was $25.6$36.0 billion compared with a carrying value of $25.1$31.8 billion and at December 31, 2017,2019, was $25.6$28.8 billion compared with a carrying value of $24.4$26.3 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.


Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the United States, Europe and EuropeChina and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business. 
The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc., which represented, in aggregate, approximately 40%45% of total accounts receivable at December 31, 2018.2020. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales.
The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. 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
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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, 2020 and 2019, the Company had collected $102 million and $256 million, respectively, on behalf of the financial institutions, which is reflected as restricted cash in Other current assets and the related obligation to remit the cash within Accrued and other current liabilities. The Company remitted the cash to the financial institutions in January 2021 and 2020, respectively. The net cash flows relating to these collections are reported as financing activities in the Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash collateral advanced by the Company to counterparties was $36 million at December 31, 2020. Cash collateral received by the Company from various counterparties was $107$34 million and $3 million at December 31, 2018

and 2017, respectively.2019. The obligation to return such collateral is recorded in Accrued and other current liabilities. No cash collateral was advanced by the Company to counterparties as of December 31, 2018 or 2017.
7.    Inventories
Inventories at December 31 consisted of:
20202019
Finished goods$1,963 $1,772 
Raw materials and work in process6,420 5,650 
Supplies206 207 
Total (approximates current cost)8,589 7,629 
Decrease to LIFO cost(82)(171)
 $8,507 $7,458 
Recognized as:
Inventories$6,310 $5,978 
Other assets2,197 1,480 
 2018 2017
Finished goods$1,658
 $1,334
Raw materials and work in process5,004
 4,703
Supplies194
 201
Total (approximates current cost)6,856
 6,238
Increase to LIFO costs1
 45
 $6,857
 $6,283
Recognized as:   
Inventories$5,440
 $5,096
Other assets1,417
 1,187
Inventories valued under the LIFO method comprised approximately $2.5$2.9 billion and $2.2$2.6 billion at December 31, 20182020 and 2017,2019, respectively. Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At December 31, 20182020 and 2017,2019, these amounts included $1.4$1.9 billion and $1.1$1.3 billion,, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $7$279 million and $80$168 million at December 31, 20182020 and 2017,2019, respectively, of inventories produced in preparation for product launches.
8.    Goodwill and Other Intangibles
The following table summarizes goodwill activity by segment:
 
PharmaceuticalAnimal HealthAll OtherTotal
Pharmaceutical Animal Health All Other Total
Balance January 1, 2017$16,075
 $1,708
 $379
 $18,162
Balance January 1, 2019Balance January 1, 2019$16,162 $1,870 $221 $18,253 
Acquisitions
 177
 
 177
Acquisitions19 1,322 1,341 
Impairments
 
 (38) (38)Impairments(162)(162)
Other (1)
(9) (8) 
 (17)
Other (1)
(7)(7)
Balance December 31, 2017 (2)
16,066
 1,877
 341
 18,284
Balance December 31, 2019 (2)
Balance December 31, 2019 (2)
16,181 3,192 52 19,425 
Acquisitions
 17
 24
 41
Acquisitions742 105 0 847 
Impairments
 
 (144) (144)
DivestituresDivestitures0 0 (54)(54)
Other (1)
96
 (24) 
 72
Other (1)
47 (29)2 20 
Balance December 31, 2018 (2)
$16,162
 $1,870
 $221
 $18,253
Balance December 31, 2020 (2)
Balance December 31, 2020 (2)
$16,970 $3,268 $0 $20,238 
(1) Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.
(2) Accumulated goodwill impairment losses were $531 million at both December 31, 20182020 and 20172019.
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The additions to goodwill in the Pharmaceutical segment in 2020 were $369 millionprimarily related to the acquisitions of ArQule and $225 million, respectively.
Themis (see Note 3). The additions to goodwill within the Animal Health segment in 20172019 primarily relate to the acquisition of ValléeAntelliq (see Note 3). The impairments of goodwill within other non-reportable segments in 2018 and 20172019 relate to certain businesses within the Healthcare Services segment.

The Healthcare Services segment was fully divested in the first quarter of 2020.
Other intangibles at December 31 consisted of:
 20202019
  
Gross
Carrying
Amount
Accumulated
Amortization
NetGross
Carrying
Amount
Accumulated
Amortization
Net
Products and product rights$45,087 $39,925 $5,162 $45,947 $38,852 $7,095 
Licenses4,177 1,387 2,790 3,185 824 2,361 
IPR&D3,228  3,228 1,032 — 1,032 
Trade names2,882 352 2,530 2,899 217 2,682 
Other2,223 1,329 894 2,261 1,235 1,026 
 $57,597 $42,993 $14,604 $55,324 $41,128 $14,196 
 2018 2017
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net
Products and product rights$46,615
 $37,585
 $9,030
 $46,693
 $34,950
 $11,743
IPR&D1,064
 
 1,064
 1,194
 
 1,194
Tradenames209
 107
 102
 209
 97
 112
Other2,403
 1,168
 1,235
 2,035
 901
 1,134
 $50,291
 $38,860
 $11,431
 $50,131
 $35,948
 $14,183
Acquired intangibles include products and product rights, tradenameslicenses, trade names and patents, which are initially recorded at fair value, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives. Some of the Company’s more significant acquired intangibles, on a net basis, related to human health marketed products (included in products and product rights above) at December 31, 20182020 include Zerbaxa, $2.7 billion;$551 million; Implanon/Nexplanon, $354 million; Gardasil/Gardasil 9, $276 million; Dificid, $228 million; Bridion, $185 million; Sivextro, $833$154 million; Implanon/Nexplanon $470 million; Dificidand Simponi, $395 million; Gardasil/Gardasil 9, $384 million; Bridion, $275 million; $132 million. Additionally, the Company had $5.4 billion of net acquired intangibles related to animal health marketed products at December 31, 2020, of which $2.5 billion relate primarily to trade names obtained through the 2019 acquisition of Antelliq (see Note 3). Some of the Company’s more significant net intangible assets included in licenses above at December 31, 2020 include Lynparza, $1.3 billion and Simponi, $194 million.Lenvima, $1.1 billion as a result of collaborations with AstraZeneca and Eisai (see Note 4). At December 31, 2020, IPR&D primarily relates to MK-1026 obtained through the acquisition of ArQule in 2020 (see Note 3) and MK-7264 (gefapixant) obtained through the acquisition of Afferent Pharmaceuticals in 2016. The Company has an intangible asset related to Adempas as a result of a collaboration with Bayer (see Note 4) that had a carrying value of $1.0 billion$849 million at December 31, 20182020 reflected in “Other” in the table above.
During 2017 and 2016, the Company recorded impairment charges related to marketed products and other intangibles of $58 million and $347 million, respectively, within Cost of sales. During 2017,In 2020, the Company recorded an intangible asset impairment charge of $47 million$1.6 billion within Cost of sales related to Intron A,Zerbaxa for injection, a combination antibacterial and beta-lactamase inhibitor for the treatment forof certain types of cancers. Sales of Intron A are being adversely affected bybacterial infections. In December 2020, the availability of new therapeutic options. In 2017,Company temporarily suspended sales of Intron A inZerbaxa, and subsequently issued a product recall, following the United States eroded more rapidly than previously anticipated byidentification of product sterility issues. The recall constituted a triggering event requiring the evaluation of the Zerbaxa intangible asset for impairment. The Company which led to changes in therevised its cash flow forecasts for Zerbaxa utilizing certain assumptions for Intron A. around the return to market timeline and anticipated uptake in sales thereafter. These revisions torevised cash flowsflow forecasts indicated that the Intron AZerbaxa intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair value of the intangible asset related to Intron AZerbaxa that, when compared with its related carrying value, resulted in the impairment charge noted above. The remaining chargesCompany also wrote-off inventory of $120 million to Cost of sales in 2017 relate2020 related to the Zerbaxa recall. The remaining intangible asset balance related to Zerbaxa was $551 million at December 31, 2020.
In 2019, the Company recorded impairment charges related to marketed products and other intangibles of customer relationship, tradename$705 million. Of this amount, $612 million related to Sivextro, a product for the treatment of acute bacterial skin and developed technology intangibles for certain businessesskin structure infections caused by designated susceptible Gram-positive organisms. As part of a reorganization and reprioritization of its internal sales force, the Company made the decision to cease promotion of Sivextro in the Healthcare Services segment. In 2016,U.S. market by the Company lowered itsend of 2019. This decision resulted in reduced cash flow projections for Zontivity, a product forSivextro, which indicated that the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease, following several business decisions that reduced sales expectations for Zontivity in the United States and Europe.Sivextro intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions and considered several different scenarios to determine its best estimate of the fair value of the intangible asset related to ZontivitySivextro that, when compared with its related carrying value, resulted in anthe impairment charge noted above.
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Table of $252 million. Also during 2016, the Company wrote-off $95 million that had been capitalized in connection with in-licensed products Grastek and Ragwitek, allergy immunotherapy tablets that, for business reasons, the Company returned to the licensor.Contents
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination as to the then useful life of the asset and begin amortization.
In 2020, the Company recorded a $90 million IPR&D impairment charge within Research and development expenses related to a decision to discontinue the development program for COVID-19 vaccine candidate V591 following Merck’s review of findings from a Phase 1 clinical study for the vaccine. In the study, V591 was 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 discontinuation of this development program also resulted in a reversal of the related liability for contingent consideration of $45 million (see Note 6).
In 2019, the Company recorded $172 million of IPR&D impairment charges. Of this amount, $155 million relates to the write-off of the intangible asset balance for programs obtained in connection with the acquisition of IOmet Pharma Ltd following a review of clinical trial results conducted by Merck, along with external clinical trial results for similar compounds. The discontinuation of this clinical development program also resulted in a reversal of the related liability for contingent consideration of $11 million.
In 2018, the Company recorded $152 million of IPR&D impairment charges within Research and development expenses.charges. Of this amount, $139 million relates to the write-off of the remaining intangible asset balance for a program obtained in connection with the SmartCells acquisition following a decision to terminate the program due to product development issues. The Company previously recorded an impairment charge in 2016 for the other programs obtained in connection with the acquisition of SmartCells as described below. The discontinuation of this clinical development program also resulted in a reversal of the related liability for contingent consideration of $60 million (see Note 6).
In 2017, the Company recorded $483 million of IPR&D impairment charges. Of this amount, $240 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 hepatitis C virus (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 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 external Data Monitoring Committee (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 related 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 impairment charge noted above. The IPR&D impairment charges in 2016 also included charges of $180 million and $143 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 related 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 included $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 related 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.million.
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 Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.
Aggregate amortization expense primarily recorded within Cost of sales was $2.9$1.9 billion in 2018, $3.22020, $2.0 billion in 20172019 and $3.8$3.1 billion in 2016.2018. The estimated aggregate amortization expense for each of the next five years is as follows: 2019, $1.5 billion; 2020, $1.2 billion; 2021, $1.1 billion;$1.5 billion; 2022, $1.1 billion;$1.5 billion; 2023, $1.1 billion.$1.4 billion; 2024, $1.3 billion; 2025, $1.2 billion.
9.    Joint Ventures and Other Equity Method Affiliates
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture (SPMSD) to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.0 billion for 2016.

On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated SPMSD and ended their joint vaccines operations in Europe. Under the terms of the termination, Merck acquired Sanofi’s 50% interest in SPMSD in exchange for consideration of $657 million comprised of cash, as well as future royalties of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024, which the Company determined had a fair value of $416 million on the date of termination. The Company accounted for this transaction as a step acquisition, which required that Merck remeasure its ownership interest (previously accounted for as an equity method investment) to fair value at the acquisition date. Merck in turn sold to Sanofi its intellectual property rights held by SPMSD in exchange for consideration of $596 million comprised of cash and future royalties of 11.5% on net sales of all Sanofi products that were previously sold by the joint venture through December 31, 2024, which the Company determined had a fair value of $302 million on the date of termination. Excluded from this arrangement are sales of Vaxelis (a jointly developed pediatric hexavalent combination vaccine that was approved by the European Commission in 2016 and by the U.S. Food and Drug Administration in 2018). The European marketing rights for Vaxelis were transferred to a separate equally-owned joint venture between Sanofi and Merck.
The net impact of the termination of the SPMSD joint venture is as follows:
Products and product rights (8-year useful life)$936
Accounts receivable133
Income taxes payable(221)
Deferred income tax liabilities(147)
Other, net47
Net assets acquired748
Consideration payable to Sanofi, net(392)
Derecognition of Merck’s previously held equity investment in SPMSD(183)
Increase in net assets173
Merck’s share of restructuring costs related to the termination(77)
Net gain on termination of SPMSD joint venture (1)
$96
(1) Recorded in Other (income) expense, net.
The estimated fair values of identifiable intangible assets related to products and product rights were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s projected net cash flows. The projected net cash flows were then discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed. Of the amount recorded for products and product rights, $468 million related to Gardasil/Gardasil 9.
The fair value of liabilities for contingent consideration related to Merck’s future royalty payments to Sanofi of $416 million (reflected in the consideration payable to Sanofi, net, in the table above) was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and a risk-adjusted discount rate of 8% used to present value the cash flows. Changes in the inputs could result in a different fair value measurement.
Based on an existing accounting policy election, Merck did not record the $302 million estimated fair value of contingent future royalties to be received from Sanofi on the sale of Sanofi products, but rather is recognizing such amounts as sales occur and the royalties are earned.
The Company incurred $24 million of transaction costs related to the termination of SPMSD included in Selling, general and administrative expenses in 2016.
Pro forma financial information for this transaction has not been presented as the results are not significant when compared with the Company’s financial results.

AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (AMI), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States. In 1998, Merck and Astra completed a restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (KBI), and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights. Merck earned revenue based on sales of KBI products and earned certain Partnership returns from AZLP.
On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI (and redeem Merck’s remaining interest in AZLP). A portion of the exercise price, which remained subject to a true-up in 2018 based on actual sales of Nexium and Prilosec from closing in 2014 to June 2018, was deferred and recognized as income as the contingency was eliminated as sales occurred. Once the deferred income amount was fully recognized, in 2016, the Company began recognizing income and a corresponding receivable for amounts that would be due to Merck from AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized income of $99 million in 2018, $232 million in 2017, and $98 million in 2016 (including $5 million of remaining deferred income) in Other (income) expense, net related to these amounts. In January 2019, the Company received $424 million from AstraZeneca in settlement of these amounts, which concludes the transactions related to the 2014 termination of Company’s relationship with AZLP.
10.    Loans Payable, Long-Term Debt and Other CommitmentsLeases
Loans Payable
Loans payable at December 31, 20182020 included $5.1$2.3 billion of notes due in 2021, $4.0 billion of commercial paper and $149$73 million of long-dated notes that are subject to repayment at the option of the holders. Loans payable at December 31, 20172019 included $3.0$1.9 billion of notes due in 20182020, $1.4 billion of commercial paper and $73$226 million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was 2.09%0.79% and 0.85%2.23% for the years ended December 31, 20182020 and 2017,2019, respectively.



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Long-Term Debt
Long-term debt at December 31 consisted of:
20202019
2.75% notes due 2025$2,493 $2,492 
3.70% notes due 20451,976 1,975 
2.80% notes due 20231,748 1,747 
3.40% notes due 20291,734 1,732 
4.00% notes due 20491,469 1,468 
2.35% notes due 20221,269 1,248 
4.15% notes due 20431,238 1,238 
1.45% notes due 20301,233 
1.875% euro-denominated notes due 20261,218 1,107 
2.45% notes due 20501,211 
2.40% notes due 20221,032 1,010 
0.75% notes due 2026991 
3.90% notes due 2039983 982 
2.35% notes due 2040982 
2.90% notes due 2024746 745 
6.50% notes due 2033719 722 
0.50% euro-denominated notes due 2024611 555 
1.375% euro-denominated notes due 2036606 551 
2.50% euro-denominated notes due 2034605 550 
3.60% notes due 2042491 490 
6.55% notes due 2037411 412 
5.75% notes due 2036338 338 
5.95% debentures due 2028306 306 
5.85% notes due 2039271 271 
6.40% debentures due 2028250 250 
6.30% debentures due 2026135 135 
3.875% notes due 20210 1,151 
1.125% euro-denominated notes due 20210 1,113 
Other294 148 
 $25,360 $22,736 
 2018 2017
2.75% notes due 2025$2,490
 $2,488
3.70% notes due 20451,974
 1,973
2.80% notes due 20231,745
 1,744
4.15% notes due 20431,237
 1,237
1.85% notes due 20201,231
 1,232
2.35% notes due 20221,214
 1,220
1.125% euro-denominated notes due 20211,134
 1,185
3.875% notes due 20211,132
 1,140
1.875% euro-denominated notes due 20261,127
 1,178
2.40% notes due 2022983
 993
6.50% notes due 2033726
 729
Floating-rate notes due 2020699
 699
0.50% euro-denominated notes due 2024565
 591
1.375% euro-denominated notes due 2036561
 587
2.50% euro-denominated notes due 2034560
 585
3.60% notes due 2042490
 489
6.55% notes due 2037414
 415
5.75% notes due 2036338
 338
5.95% debentures due 2028306
 306
5.85% notes due 2039270
 270
6.40% debentures due 2028250
 250
6.30% debentures due 2026135
 135
5.00% notes due 2019
 1,260
Other225
 309
 $19,806
 $21,353
Other (as presented in the table above) includes $223$294 million and $300$147 million at December 31, 20182020 and 2017,2019, respectively, of borrowings at variable rates that resulted in effective interest rates of 2.27%0.45% and 1.42%2.54% for 20182020 and 2017,2019, respectively.
With the exception of the 6.30% debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices.
In December 2018,June 2020, the Company exercised a make-whole provision on its $1.25issued $4.5 billion 5.00% notes due 2019 and repaid this debt. 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 connectionsenior unsecured notes consisting of $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 the tender offers and recognized a loss on extinguishment of debt of $191 million in 2017.upcoming maturities.
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.
Certain of the Company’s borrowings require that Merck comply with covenants and, at December 31, 2018,2020, the Company was in compliance with these covenants.
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The aggregate maturities of long-term debt for each of the next five years are as follows: 2019, no maturities; 2020, $1.9 billion; 2021, $2.3 billion;$2.3 billion; 2022, $2.2 billion;$2.3 billion; 2023, $1.7 billion.$1.7 billion; 2024, $1.4 billion; 2025, $2.5 billion.

The Company has a $6.0$6.0 billion credit facility that matures in June 2023.2024. 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.
Leases
The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of eight years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company does not record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.
Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments by asset class. On a quarterly basis, an updated incremental borrowing rate is determined based on the average remaining lease term of each asset class and the Company’s pretax cost of debt for that same term. The updated rates for each asset class are applied prospectively to new leases. The Company does not separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.
Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease cost was $346 million in 2020 and $339 million in 2019. Rental expense under operating leases, net of sublease income, was $322$322 million in 2018, $3272018. Cash paid for amounts included in the measurement of operating lease liabilities was $340 million in 20172020 and $292$281 million in 2016. The minimum aggregate rental commitments under noncancellable2019. Operating lease assets obtained in exchange for lease obligations was $495 million in 2020 and $129 million in 2019.
Supplemental balance sheet information related to operating leases is as follows:
December 3120202019
Assets
Other Assets (1)
$1,725 $1,073 
Liabilities
Accrued and other current liabilities300 236 
Other Noncurrent Liabilities1,362 768 
$1,662 $1,004 
Weighted-average remaining lease term (years)8.07.4
Weighted-average discount rate2.8 %3.2 %
(1) Includes prepaid leases that have no related lease liability.

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Maturities of operating leases liabilities are as follows: 2019, $188 million;
2021$336 
2022277 
2023252 
2024187 
2025162 
Thereafter665 
Total lease payments1,879 
Less: Imputed interest217 
$1,662 
At December 31, 2020, $198 million; 2021, $150 million; 2022, $134 million; 2023, $84 million and thereafter, $243 million. Thethe Company has no significant capital leases.had entered into additional real estate operating leases that had not yet commenced; the obligations associated with these leases total $475 million.
11.10.    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. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position,condition, results of operations or cash flows.
Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.liabilities.


Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax (Fosamax Litigation). As of December 31, 2018,2020, approximately 3,9003,520 cases have been filed and either are pending or conditionally dismissed (as noted below) against Merck in either federal or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.
In March 2011, Merck submitted a Motion to Transfer to the Judicial Panel on Multidistrict Litigation (JPML) seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. All federal cases involving allegations of Femur FractureFractures have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL, Glynn v. Merck, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the Glynn case and held that the plaintiff’s failure to warn claim was preempted by federal law.
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In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the Glynn case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL

court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. Merck filed a petition for a writ of certiorari toIn May 2019, the U.S. Supreme Court in August 2017, seeking reviewdecided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit’s decision.Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court’s opinion. In December 2017,November 2019, the Third Circuit remanded the cases back to the District Court in order to allow that court to determine in the first instance whether the plaintiffs’ state law claims are preempted by federal law under the standards described by the Supreme Court invitedin its opinion. Briefing on the Solicitor General to file a brief inissue is closed, and the case expressingparties await the viewsdecision of the United States, and in May 2018, the Solicitor General submitted a brief stating that the Third Circuit’s decision was wrongly decided and recommended that the Supreme Court grant Merck’s cert petition. The Supreme Court granted Merck’s petition in June 2018, and an oral argument before the Supreme Court was held on January 7, 2019. The final decision on the Femur Fracture MDL court’s preemption ruling is now pending before the SupremeDistrict Court.
Accordingly, as of December 31, 2018, nine2020, approximately 970 cases were actively pending in the Femur Fracture MDL, and approximately 1,055 cases have either been dismissed without prejudice or administratively closed pending final resolution by the Supreme Court of the appeal of the Femur Fracture MDL court’s preemption order.MDL.
As of December 31, 2018,2020, approximately 2,5552,270 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge James Hyland in Middlesex County. The parties selected an initial group of 30 cases to be reviewed through fact discovery. Two additional groups of 50 cases each to be reviewed through fact discovery were selected in November 2013 and March 2014, respectively. A further group of 25 cases to be reviewed through fact discovery, was selected by Merck in July 2015, and Merck has continued to select additional cases to be reviewed through fact discovery from 2016 to the present.reviewed.
As of December 31, 2018,2020, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California. In March 2014, the court directed that a group of 10 discovery pool cases be reviewed through fact discovery and subsequently scheduled the Galper v. Merck case, which plaintiffs selected, as the first trial. The Galper trial began in February 2015 and the jury returned a verdict in Merck’s favor in April 2015, and plaintiff appealed that verdict to the California appellate court. In April 2017, the California appellate court issued a decision affirming the lower court’s judgment in favor of Merck. The next Femur Fracture trial in California that was scheduled to begin in April 2016 was stayed at plaintiffs’ request and a new trial date has not been set.
Additionally, there are four4 Femur Fracture cases pending in other state courts.
Discovery is ongoingpresently stayed in the Femur Fracture MDL and in the state courts where Femur Fracture cases are pending and the Companycourt in California. Merck intends to defend against these lawsuits.


Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia and/or Janumet. As of December 31, 2018,2020, Merck is aware of approximately 1,2901,480 product users alleging that Januvia and/or Janumet caused the development of pancreatic cancer and other injuries.
Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). Outside of the MDL, the majority of claims have been filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).
In November 2015, the MDL and California State Court-inCourt, in separate opinions-grantedopinions, granted summary judgment to defendants on grounds of federal preemption.
Plaintiffs appealed in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery, which is ongoing.discovery. In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in the MDL and the California coordinated proceedings agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption issues and for renewing summary judgment and expert motions. Briefing of those motions is complete and hearings before both the MDL and California State Court judges took place on October 20 and December 8, 2020, respectively.
As of December 31, 2018, eight2020, 6 product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck intendsfiled a petition for leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the U.S. Supreme Court issued its opinion in Merck Sharp & Dohme Corp. v. Albrecht (relating to the Fosamax matter discussed above). Merck filed
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the opinion in Albrecht with the Illinois Supreme Court in June 2019. The petition for leave to appeal was decided in September 2019, in which the Illinois Supreme Court directed the intermediate appellate court to reconsider its earlier ruling. The Illinois Appellate Court issued a favorable decision concluding, consistent with Albrecht, that ruling.preemption presents a legal question to be resolved by the court. In May 2020, the Illinois Appellate Court issued a mandate to the state trial court, which, as of December 31, 2020, had not scheduled a case management conference.
In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against these lawsuits.



Vioxx
As previously disclosed, Merck isreached a defendant in a lawsuit brought bysettlement with the Attorney General of Utah to fully resolve the state’s previously disclosed civil lawsuit alleging that Merck misrepresented the safety of Vioxx. As part of the resolution, Merck paid the state $25 million. The lawsuit is pending in Utah state court. Utah seeks damages and penalties undersettlement does not constitute an admission by Merck of any liability or wrongdoing. This agreement marks the Utah False Claims Act. A bench trial in this matter is currently scheduled for July 2019.

Propecia/Proscar
As previously disclosed, Merck is a defendant in product liability lawsuitsfinal resolution of litigation involving Vioxx in the United States involving Propecia and/or Proscar. The lawsuits were filedStates. There is ongoing Vioxx litigation in various federal courts and in state court in New Jersey. The federal lawsuits were then consolidated for pretrial purposes in a federal multidistrict litigation before Judge Brian Cogan of the Eastern District of New York. The matters pending in state court in New Jersey were consolidated before Judge Hyland in Middlesex County (NJ Coordinated Proceedings).
As previously disclosed, on April 9, 2018, Merck and the Plaintiffs’ Executive Committee in the Propecia MDL and the Plaintiffs’ Liaison Counsel in the NJ Coordinated Proceedings entered into an agreement to resolve the above mentioned Propecia/Proscar lawsuits for an aggregate amount of $4.3 million. The settlement was subject to certain contingencies, including 95% plaintiff participation and a per plaintiff clawback if the participation rate was less than 100%. The contingencies were satisfied and the settlement agreement was finalized. After the settlement, fewer than 25 cases remain pending incountries outside the United States.
The Company intends to defend against any remaining unsettled lawsuits.

Governmental Proceedings
As previously disclosed, in the fall of 2018, the Company received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena sought information relating to any actual or potential business relationship or arrangement Merck has learnedhad with Practice Fusion, Inc. (PFI), a cloud-based, electronic health records (EHR) company that was acquired by Allscripts in January 2018. The Company cooperated with the government and responded to that subpoena. Subsequently, in May 2019, Merck received a second records subpoena from the VT USAO that broadened the government’s information request by seeking information relating to Merck’s relationship with any EHR company. Shortly thereafter, the VT USAO served a Civil Investigation Demand (CID) upon Merck similarly seeking information on the Company’s relationships with EHR vendors. The CID explains that the Prosecution Office of Milan, Italygovernment is investigating interactions between the Company’s Italian subsidiary, certain employees of the subsidiary and certain Italianconducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal health care providers. The Company understandsprograms that this is part of a larger investigation involving engagements between various health care companies and those health care providers. The Companyviolate the Federal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.
As previously disclosed, the United Kingdom (UK) Competition and Markets Authority (CMA) issuedin April 2019, Merck received a Statementset of Objections against the Company and MSD Sharp & Dohme Limited (MSD UK) in May 2017. In the Statement of Objections, the CMA alleges that MSD UK abused a dominant position through a discount program for Remicade over the period from March 2015 to February 2016. The Company and MSD UK are contesting the CMA’s allegations.
As previously disclosed, the Company has received an investigative subpoenainterrogatories from the California Insurance Commissioner’s Fraud Bureau (Bureau) seekingAttorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information from January 1, 2007 toconcerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the present related to the pricing and promotionresolution of Cubicin. The Bureau is investigating whether Cubist Pharmaceuticals, Inc., which the Company acquired in 2015, unlawfully induced the presentation of false claims for Cubicin to private insurers under the California Insurance Code False Claims Act. The Companythat litigation. Merck is cooperating with the California Attorney General’s investigation.
As previously disclosed, in June 2020, Merck received a CID from the U.S. Department of Justice. The CID requests answers to interrogatories, as well as various documents, regarding temperature excursions at a third-party storage facility containing certain Merck products. Merck is cooperating with the government’s investigation and intends to produce information and/or documents as necessary in response to the CID.
As previously disclosed, the Company’s subsidiaries in China have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.
As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the United States. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.



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Commercial and Other Litigation
ZetiaAntitrust Litigation
As previously disclosed, Merck, MSD, Schering Corporation and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. OnIn December 6, 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. On February 6,In August 2019, the district court adopted in full the report and recommendation of the magistrate judge issued a report and recommendation recommending thatwith respect to the district judge grant in part and deny in part defendants’Merck Defendants’ motions to dismiss on non-arbitration issues. On February 20,issues, thereby granting in part and denying in part Merck Defendants’ motions to dismiss. In addition, in June 2019, defendantsthe representatives of the putative direct purchaser class filed an amended complaint and, in August 2019, retailer opt-out plaintiffs filed objectionsan amended complaint. In December 2019, the district court granted the Merck Defendants’ motion to dismiss to the extent the motion sought dismissal of claims for overcharges paid by entities that purchased generic ezetimibe from Par Pharmaceutical, Inc. (Par Pharmaceutical) and dismissed any claims for such overcharges. In November 2019, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed motions for class certification. On August 21, 2020, the district court granted in part the direct purchasers’ motion for class certification and certified a class of 35 direct purchasers, and on November 2, 2020, the U.S. Court of Appeals for the Fourth Circuit granted the Merck Defendants’ motion for permission to appeal the district court’s order. Also, on August 14, 2020, the magistrate judge recommended that the court grant the motion for class certification filed by the putative indirect purchaser class. The Merck Defendants objected to this report and recommendation. After responsesrecommendation and are filed, the parties will awaitawaiting a decision from the district judge.court.
On August 10, 2020, the Merck Defendants filed a motion for summary judgment and other motions, and plaintiffs filed a motion for partial summary judgment, and other motions. Those motions are now fully briefed, and the court will likely hold a hearing on the competing motions. Trial in this matter has been adjourned.
On September 4, 2020, United Healthcare Services, Inc. filed a lawsuit in the United States District Court for the District of Minnesota against Merck and others (the UHC Action). The UHC Action makes similar allegations as those made in the Zetia class action. On September 23, 2020, the United States Judicial Panel on Multidistrict Litigation transferred the case to the Eastern District of Virginia to proceed with the multidistrict Zetia litigation already in progress.
On December 11, 2020, Humana Inc. filed a lawsuit in the Superior Court of the State of California, County of San Francisco, against Merck and others, alleging defendants violated state antitrust laws in multiple states. Also, on December 11, 2020, Centene Corporation and others filed a lawsuit in the Superior Court of the State of California, County of San Francisco, against the same defendants as Humana. Both lawsuits allege similar anticompetitive acts to those alleged in the Zetia class action.
Rotavirus Vaccines Antitrust Litigation
As previously disclosed, MSD is a defendant in putative class action lawsuits filed in 2018 on behalf of direct purchasers of RotaTeq, alleging violations of federal antitrust laws. The cases were consolidated in the Eastern District of Pennsylvania. OnIn January 23, 2019, the court denied MSD’s motions to compel arbitration and to dismiss the consolidated complaint. OnIn February 19, 2019, MSD appealed the court’s order on arbitration to the Third Circuit, and on February 22,Circuit. In October 2019, the court granted MSD’sThird Circuit vacated the district court’s order and remanded for limited discovery on the issue of arbitrability. On July 6, 2020, MSD filed a renewed motion to vacate existing deadlines incompel arbitration, and plaintiffs filed a cross motion for summary judgment as to arbitrability. On November 20, 2020, the district court in lightdenied MSD’s motion and granted plaintiffs’ motion. On December 4, 2020, MSD filed a notice of appeal to the appeal.Third Circuit.
Sales ForceBravecto Litigation
As previously disclosed, in May 2013, Ms. Kelli Smith filedJanuary 2020, the Company was served with a complaint against the Company in the U.S.United States District Court for the District of New Jersey, on behalf of herself and a putative class of female sales representatives and a putative sub-class of female sales representatives with children, claiming (a) discriminatory policies and practices in selection, promotion and advancement, (b) disparate pay, (c) differential treatment, (d) hostile work environment and (e) retaliation under federal and state discrimination laws. In January 2014, plaintiffs filed an amended complaint adding four additional named plaintiffs. In October 2014, the court denied the Company’s motion to dismiss or strike the class claims as premature. In September 2015, plaintiffs filed additional motions, including a motion for conditional certification under the Equal Pay Act; a motion to amend the pleadings seeking to add ERISA and constructive discharge claims and a Company subsidiary as a named defendant; and a motion for equitable relief. Merck filed papers in opposition to the motions. In April 2016, the court granted plaintiff’s motion for conditional certification but denied plaintiffs’ motions to extend the liability period for their Equal Pay Act claims back to June 2009. In April 2016, the Magistrate Judge granted plaintiffs’ request to amend the complaint to add the following: (i) a Company subsidiary as a corporate defendant; (ii) an ERISA claim and (iii) an individual constructive discharge claim for one of the named plaintiffs. Approximately 700 individuals opted-in to this action; the opt-in period has closed. In August 2017, plaintiffs filed their motion for class certification. This motion sought to certify a Title VII pay discriminationnationwide class action of purchasers or users of Bravecto (fluralaner) products in the United States or its territories between May 1, 2014 and also sought final collective action certification of plaintiffs’ Equal Pay Act claim.
On October 1, 2018, the parties entered into an agreement to fully resolve the Smith sales force litigation. As partDecember 27, 2019. The complaint contends Bravecto causes neurological events and alleges violations of the settlementNew Jersey Consumer
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Fraud Act, Breach of Warranty, Product Liability, and related theories. A similar case was filed in exchange for a full and general release of all individual and class claims, the Company agreed to pay $8.5 million. The settlement agreement, which contains an “opt-out” clause allowing Merck to pull out of the agreement if 30 or more individuals opt out, will be subject to court approval.
On December 18, 2018, plaintiffs filed a motion with the court seeking preliminary approval of the settlement.Quebec, Canada in May 2019.
Qui Tam Litigation
As previously disclosed, in June 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that hashad been filed against the Company under the federal False Claims Act by two2 former employees alleging, among other things, that the Company defrauded the U.S. government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R II vaccine. The complaint alleges the fraud took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit but notified the court that it declined to exercise that right. The two2 former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, as previously disclosed, two2 putative class action lawsuits on behalf of direct purchasers of the M‑M‑R II vaccine, which charge that the Company misrepresented the efficacy of the M-M-R II vaccine in violation of federal antitrust laws and various state consumer

protection laws, are pending in the Eastern District of Pennsylvania. In September 2014, the court denied Merck’s motion to dismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the then-pending antitrust suit. As a result, both the False Claims Act suit and the antitrust suits have proceeded into discovery, which is ongoing.now complete, and the parties have filed and briefed cross-motions for summary judgment, which are currently pending before the Court. The Company continues to defend against these lawsuits.
Merck KGaA Litigation
As previously disclosed, in January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the UK, Germany, Switzerland, Mexico, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the parties’ coexistence agreement. In December 2015,The litigation is ongoing in the Paris CourtUnited States with no trial date set, and also ongoing in numerous jurisdictions outside of First Instance issued a judgment finding that certain activities bythe United States; the Company directed towards France did not constitute trademark infringement and unfair competition while other activities were found to infringe and constitute unfair competition. The Company and KGaA appealed the decision, and the appeal was heardis defending those suits in May 2017. In June 2017, the French appeals court held that certain of the activities by the Company directed to France constituted unfair competition or trademark infringement and, in December 2017, the Company decided not to pursue any further appeal. In January 2016, the UK High Court issued a judgment finding that the Company had breached the co-existence agreement and infringed KGaA’s trademark rights as a result of certain activities directed towards the UK based on use of the word MERCK on promotional and information activity. As noted in the UK decision, this finding was not based on the Company’s use of the sign MERCK in connection with the sale of products or any material pharmaceutical business transacted in the UK. The Company and KGaA have both appealed this decision, and the appeal was heard in June 2017. In November 2017, the UK Court of Appeals affirmed the decision on the co-existence agreement and remitted for re-hearing issues of trademark infringement, the scope of KGaA’s UK trademarks for pharmaceutical products, and the relief to which KGaA would be entitled. The re-hearing was held, and no decision has been handed down. In November 2018, the District Court in Hamburg, Germany dismissed all of KGaA’s claims concerning KGaA’s EU trademark with respect to the territory of the EU. In accordance with the Judgment of the Court of Justice of the EU delivered in October 2017, the District Court in Hamburg further held that it had no jurisdiction over the claim by KGaA insofar as the claim related to the territory of the UK. KGaA has appealed this decision. Further decisions from the District Court in Hamburg, Germany, in connection with claims concerning KGaA’s EU trademark, German trademark and trade name rights as well as unfair competition law with respect to the territory of Germany are expected on February 28, 2019. In January 2019, the Mexican Trademark Office issued a decision on KGaA’s action. The court found no trademark infringement by the Company and dismissed all of KGaA’s claims for trademark infringement. The court ruled against the Company on KGaA’s unfair competition claim. Both KGaA and the Company have appealed this decision.each jurisdiction.

Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file abbreviated NDAsNew Drug Applications (NDAs) with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.
Inegy Bridion The patents protecting Inegy in Europe have expired but supplemental protection certificates (SPCs) have been granted toBetween January and November 2020, the Company in many European countries that will expire in April 2019. There arereceived multiple challenges toParagraph IV Certification Letters under the SPCs related to Inegy throughout Europe and generic products have been launched in Austria, France, Italy, Ireland, Spain, Portugal, Germany, and the Netherlands. The Company has filed for preliminary injunctions in many countries that are still pending decision. Preliminary injunctions are presently in force in Austria, Czech Republic, Greece, Norway, Portugal, and Slovakia. Preliminary injunctions have been denied or revoked in Germany, Ireland, the Netherlands and Spain. The Company is appealing those decisions. In France and Belgium, preliminary injunctions were granted against some companies and denied against others, and appeals are pending. The SPC was held valid in

merits proceedings in Portugal and France. The Company has filed and will continue to file actions for patent infringement seeking damages against those companies that launch generic products before April 2019.
Noxafil — In August 2015,Hatch-Waxman Act notifying the Company that generic drug companies have filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) in the United States in respect of that company’s applicationapplications to the FDA seeking pre-patent expiry approval to sell a generic versionversions of Noxafil. In October 2017, the district court held the patent valid and infringed. Actavis appealed this decision. While the appeal was pending, the parties reached a settlement, subject to certain terms of the agreement being met, whereby Actavis can launch its generic version prior to expiry of the patent and pediatric exclusivity under certain conditions.Bridion (sugammadex) Injection. In March, 2016,April and December 2020, the Company filed a lawsuit against Roxane Laboratories, Inc. (Roxane)patent infringement lawsuits in the United StatesU.S. District Courts for the District of New Jersey and the Northern District of West Virginia against those generic companies. All actions in respectthe District of that company’s application to theNew Jersey have been consolidated. These lawsuits, which assert one or more patents covering sugammadex and methods of using sugammadex, automatically stay FDA seeking pre-patent expiry approval to sell a generic version of Noxafil. In November 2017, the parties reached a settlement whereby Roxane can launch its generic version prior to expiry of the patent under certain conditions. In February 2016, the Companygeneric applications until June 2023 or until adverse court decisions, if any, whichever may occur earlier.
Mylan Pharmaceuticals Inc., Mylan API US LLC, and Mylan Inc. (Mylan) have filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par)motions to dismiss in the United States in respectDistrict of that company’s applicationNew Jersey for lack of venue and failure to the FDA seeking pre-patent expiry approval to sellstate a generic version of Noxafil injection. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January 2023, or earlier underclaim against certain conditions. In February 2018, the Company filed a lawsuit against Fresenius Kabi USA, LLC (Fresenius)defendants, and in the United States in respectNorthern District of that company’s applicationWest Virginia for failure to state a claim against certain defendants. The New Jersey motion has not yet been decided, and the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil. In November 2018, the Company reached a settlement with Fresenius, whereby Fresenius can launch its generic versionWest Virginia action is stayed pending resolution of the intravenous product priorNew Jersey motion.
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Januvia, Janumet, Janumet XR — The FDA has granted pediatric exclusivity with respect to expiryJanuvia, Janumet, and Janumet XR, which provides a further six months of the patent under certain conditions. In March 2018, the Company filed a lawsuit against Mylan Laboratories Limited in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil.
NasonexNasonex lost market exclusivity in the United States beyond the expiration of all patents listed in 2016. Priorthe FDA’s Orange Book. Including this exclusivity, key patent protection extends to January 2023. The Company anticipates that sales of Januvia and Janumetin April 2015,the United States will decline significantly after this loss of market exclusivity. However, Januvia, Janumet, and Janumet XR contain sitagliptin phosphate monohydrate and the Company filed ahas another patent infringement lawsuit against Apotex Inc.covering certain phosphate salt and Apotex Corp. (Apotex)polymorphic forms of sitagliptin, which, if determined to be valid, would preclude generic manufacturers from making sitagliptin phosphate salt and polymorphic forms before that patent, inclusive of pediatric exclusivity, expires in respect of Apotex’s marketed product that the Company believed was infringing.2027 (2027 salt/polymorph patent). In January 2018, the Company and Apotex settled this matter with Apotex agreeing to pay the Company $115 million plus certain other consideration.
Januvia, Janumet, Janumet XR — In February 2019, Par Pharmaceutical Inc. (Par Pharmaceutical) filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of a patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026. A judgment in its favor may allow Par Pharmaceutical to bring to market a generic version of Janumet XR following the expiration of key patent protection in 2022, but prior to the expiration of the later-granted patent it is challenging.2027 salt/polymorph patent. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection, in 2022, but prior to the expiration of the later-granted2027 salt/polymorph patent, owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026, and a later granted patent owned by the Company covering the Janumet formulation which, inclusive of pediatric exclusivity, expires in 2028. No schedule2029. The Company also filed a patent infringement lawsuit against Mylan in the Northern District of West Virginia. The Judicial Panel of Multidistrict Litigation entered an order transferring the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district. The U.S. District Court for the District of Delaware has been set byscheduled the court.
Gilead Patent Litigation and Oppositionlawsuits for a single three-day trial on invalidity issues in October 2021. The Court has scheduled separate one-day trials on infringement issues in November 2021 through January 2022, to the extent such trials are necessary. In the Company’s case against Mylan, the U.S. District Court for the Northern District of West Virginia has conditionally scheduled a three-day trial in December 2021 on all issues.
The Company through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against Gileadsettled with 9 generic companies providing that these generic companies can bring their products to the market in May 2027 or earlier under certain circumstances.
Additionally, in 2019, Mylan filed a petition for Inter Partes Review (IPR) at the United States Germany,Patent and France based on differentTrademark Office (USPTO) seeking invalidity of some, but not all, of the claims of the 2027 salt/polymorph patent, estateswhich other manufacturers joined. The USPTO instituted IPR proceedings in May 2020, finding a reasonable likelihood that would be infringed by Gilead’s sales of their two products, Sovaldi and Harvoni. Gilead opposed the European patent at the European Patent Office (EPO). Trial in the United Stateschallenged claims are not valid. A trial was held in December 2016February 2021 and a final decision is expected in May 2021. If the jury returned a verdictchallenges are successful, the unchallenged claims of the 2027 salt/polymorph patent will remain valid, subject to the court proceedings described above.
In Germany, two generic companies have sought the revocation of the Supplementary Protection Certificate (SPC) for Janumet. If the generic companies are successful, Janumet could lose market exclusivity in Germany as early as July 2022. Challenges to the Janumet SPC have also occurred in Portugal and Finland, and could occur in other European countries.
Nexplanon In June 2017, Microspherix LLC (Microspherix) sued the Company in the U.S District Court for the Company, awardingDistrict of New Jersey asserting that the manufacturing, use, sale and importation of Nexplanon infringed several of Microspherix’s patents that claim radio-opaque, implantable drug delivery devices. Microspherix is claiming damages of $2.54 billion.from September 2014 until those patents expire in May 2021. The Company submitted post-trial motions, including onbroughtIPR proceedings in the issuesUSPTO and successfully stayed the district court action. The USPTO invalidated some, but not all, of enhanced damages and future royalties. Gilead submitted post-trial motions for judgment as a matter of law. A hearing on the motions was held in September 2017. Also, in September 2017,claims asserted against the court denied the Company’s motion on enhanced damages, granted its motion on prejudgment interest and deferred its motion on future royalties. In February 2018, the court granted Gilead’s motion for judgment as a matter of law and found the patent was invalid for a lack of enablement.Company. The Company appealed this decision.the decisions finding claims valid, and the Court of Appeals for the Federal Circuit affirmed the USPTO’s decisions. The appellate briefingmatter is completedno longer stayed in the district court, and the Company is waiting forcurrently litigating the oral argument to be scheduled. The EPO opposition division revoked the European patent,invalidity and the Company appealed this decision. The cases in France and Germany have been stayed pending the final decisionnon-infringement of the EPO.


remaining asserted claims.
Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position,condition, results of operations or cash flows either individually or in the aggregate.


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Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 20182020 and 20172019 of approximately $245$250 million and $160$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.

Environmental Matters
As previously disclosed, Merck’s facilities in Oss, the Netherlands, were inspected in 2012 by the Province of Brabant (Province) pursuant to the Dutch Hazards of Major Accidents Decree and the sites’ environmental permits. The Province issued penalties for alleged violations of regulations governing preventing and managing accidents with hazardous substances, and the government also issued a fine for alleged environmental violations at one of the Oss facilities, which together totaled $235 thousand. The Company was subsequently advised that a criminal investigation had been initiated based upon certain of the issues that formed the basis of the administrative enforcement action by the Province. As previously disclosed, the matter was settled, without any admission of liability, for an aggregate payment of €400 thousand.
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. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the final costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position,condition, results of operations liquidity or capital resourcesliquidity of the Company. The Company has taken an active role in identifying and accruing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties.
In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $71 million and $82$67 million at both December 31, 20182020 and 2017, 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 $60approximately $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 resourcesliquidity for any year.
12.
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11.    Equity
The Merck certificate of incorporation authorizes 6,500,000,000 shares of common stock and 20,000,000 shares of preferred stock.


Capital Stock
A summary of common stock and treasury stock transactions (shares in millions) is as follows:
 202020192018
  
Common
Stock
Treasury
Stock
Common
Stock
Treasury
Stock
Common
Stock
Treasury
Stock
Balance January 13,577 1,038 3,577 985 3,577 880 
Purchases of treasury stock0 16 66 122 
Issuances (1)
0 (7)(13)(17)
Balance December 313,577 1,047 3,577 1,038 3,577 985 
 2018 2017 2016
  
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
Balance January 13,577
 880
 3,577
 828
 3,577
 796
Purchases of treasury stock
 122
 
 67
 
 60
Issuances (1) 

 (17) 
 (15) 
 (28)
Balance December 313,577
 985
 3,577
 880
 3,577
 828
(1)     Issuances primarily reflect activity under share-based compensation plans.
(1)
Issuances primarily reflect activity under share-based compensation plans.
On October 25,In 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers)(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, on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. The payments to the Dealers were recorded as reductions to shareholders’ equity, consistingUpon settlement of a $4 billion increase in treasury stock, which reflects the value of the initial 56.7 million shares received on October 29, 2018, and a $1 billion decrease in other-paid-in capital, which reflects the value of the stock held back by the Dealers pending final settlement. The number of shares of Merck’s common stock that Merck may receive, or may be required to remit, upon final settlement under the ASR agreements will be based uponin 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. Final settlement ofdiscount, bringing the transactiontotal shares received by Merck under the ASR agreements is expectedthis program to occur in the first half of 2019, but may occur earlier at the option of the Dealers, or later under certain circumstances. If Merck is obligated to make adjustment payments to the Dealers under the ASR agreements, Merck may elect to satisfy such obligations in cash or in shares of Merck’s common stock.64.4 million.
13.12.    Share-Based Compensation Plans
The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders.
At December 31, 2018, 1112020, 100 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled primarily with treasury shares.
Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-third each year over a three-yearthree-year period, with a contractual term of 7-107-10 years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU

distributions will be in shares of Company stock after the end of the vesting or performance period, subject to the terms applicable to such awards. PSU awards generally vest after three years. Prior to 2018, RSU awards generally vested after three years; beginning with awards granted in 2018, RSU awards generally vest one-third each year over a three-year period.
Total pretax share-based compensation cost recorded in 2020, 2019 and 2018 2017was $475 million, $417 million and 2016 was $348$348 million,, $312 million and $300 million, respectively, with related income tax benefits of $55$65 million,, $57 $57 million and $92$55 million,, respectively.
The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-freerisk-
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free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free interest rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior.
The weighted average exercise price of options granted in 2020, 2019 and 2018 2017was $77.67, $80.05 and 2016 was $58.15, $63.88 and $54.63$58.15 per option, respectively. The weighted average fair value of options granted in 2020, 2019 and 2018 2017was $9.93, $10.63 and 2016 was $8.26, $7.04 and $5.89$8.26 per option, respectively, and were determined using the following assumptions:
Years Ended December 312018 2017 2016Years Ended December 31202020192018
Expected dividend yield3.4% 3.6% 3.8%Expected dividend yield3.1 %3.2 %3.4 %
Risk-free interest rate2.9% 2.0% 1.4%Risk-free interest rate0.4 %2.4 %2.9 %
Expected volatility19.1% 17.8% 19.6%Expected volatility22.1 %18.7 %19.1 %
Expected life (years)6.1
 6.1
 6.2
Expected life (years)5.85.96.1
Summarized information relative to stock option plan activity (options in thousands) is as follows:
Number
of Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Number
of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding January 1, 201836,274
 $46.77
  
Outstanding January 1, 2020Outstanding January 1, 202017,868 $59.88 
Granted3,520
 58.15
  Granted3,564 77.67 
Exercised(14,598) 40.51
  Exercised(1,685)52.73 
Forfeited(1,389) 53.80
    Forfeited(301)67.73   
Outstanding December 31, 201823,807
 $51.89
 5.95 $584
Exercisable December 31, 201816,184
 $48.85
 4.82 $446
Outstanding December 31, 2020Outstanding December 31, 202019,446 $63.64 6.27$353 
Exercisable December 31, 2020Exercisable December 31, 202013,141 $58.30 5.13$309 
Additional information pertaining to stock option plans is provided in the table below:
Years Ended December 312018 2017 2016Years Ended December 31202020192018
Total intrinsic value of stock options exercised$348
 $236
 $444
Total intrinsic value of stock options exercised$51 $295 $348 
Fair value of stock options vested29
 30
 28
Fair value of stock options vested25 27 29 
Cash received from the exercise of stock options591
 499
 939
Cash received from the exercise of stock options89 361 591 
A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:
 RSUsPSUs
  
Number
of Shares
Weighted
Average
Grant Date
Fair Value
Number
of Shares
Weighted
Average
Grant Date
Fair Value
Nonvested January 1, 202013,527 $67.58 1,972 $69.18 
Granted6,627 77.79 996 77.82 
Vested(7,511)65.70 (824)64.01 
Forfeited(728)72.06 (44)80.06 
Nonvested December 31, 202011,915 $74.17 2,100 $75.08 
  RSUs PSUs
  
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested January 1, 2018 13,609
 $59.32
 1,868
 $60.03
Granted 7,270
 58.46
 1,081
 57.17
Vested (3,766) 59.66
 (758) 57.59
Forfeited (985) 59.30
 (152) 60.06
Nonvested December 31, 2018 16,128
 $58.85
 2,039
 $59.42
At December 31, 2018,2020, there was $560$678 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.
14.
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13.    Pension and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.


Net Periodic Benefit Cost
The net periodic benefit cost (credit) for pension and other postretirement benefit plans consisted of the following components:
Pension Benefits      Pension Benefits
U.S. International Other Postretirement BenefitsU.S.InternationalOther Postretirement Benefits
Years Ended December 312018 2017 2016 2018 2017 2016 2018 2017 2016Years Ended December 31202020192018202020192018202020192018
Service cost$326
 $312
 $282
 $238
 $252
 $238
 $57
 $57
 $54
Service cost$360 $293 $326 $301 $238 $238 $52 $48 $57 
Interest cost432
 454
 456
 178
 172
 204
 69
 81
 82
Interest cost431 458 432 137 177 178 57 69 69 
Expected return on plan assets(851) (862) (831) (431) (393) (382) (83) (78) (107)Expected return on plan assets(774)(817)(851)(415)(426)(431)(75)(72)(83)
Amortization of unrecognized prior service cost(50) (53) (55) (13) (11) (11) (84) (98) (106)Amortization of unrecognized prior service cost(49)(49)(50)(18)(12)(13)(73)(78)(84)
Net loss amortization232
 180
 119
 84
 98
 87
 1
 1
 3
Net loss (gain) amortizationNet loss (gain) amortization303 151 232 127 64 84 (18)(10)
Termination benefits19
 44
 23
 2
 4
 4
 3
 8
 4
Termination benefits10 31 19 3 2 
Curtailments10
 3
 5
 1
 (4) (1) (8) (31) (18)Curtailments10 14 10 0 (4)(11)(8)
Settlements5
 
 
 13
 5
 6
 
 
 
Settlements13 15 13 0 
Net periodic benefit cost (credit)$123
 $78
 $(1) $72
 $123
 $145
 $(45) $(60) $(88)Net periodic benefit cost (credit)$304 $81 $123 $150 $56 $72 $(59)$(49)$(45)
The changes in net periodic benefit cost (credit) year over year for pension plans are largely attributable to changes in the discount rate affecting net loss amortization.
In connection with restructuring actions (see Note 5), termination charges were recorded in 2018, 20172020, 2019 and 20162018 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments were recorded on pension and other postretirement benefit plans and settlements were recorded on certain U.S. and international pension plans as reflected in the table above.
The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 15)14), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted above.



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Obligations and Funded Status
Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows:
 Pension BenefitsOther
Postretirement
Benefits
U.S.International
  202020192020201920202019
Fair value of plan assets January 1$11,361 $9,648 $10,163 $8,580 $1,102 $968 
Actual return on plan assets1,908 2,165 1,026 1,505 175 203 
Company contributions199 130 387 262 19 14 
Effects of exchange rate changes0 746 31 0 
Benefits paid(751)(582)(215)(230)(93)(104)
Settlements(45)(117)(12)0 
Other0 59 27 18 21 
Fair value of plan assets December 31$12,672 $11,361 $12,049 $10,163 $1,221 $1,102 
Benefit obligation January 1$13,003 $10,620 $10,612 $9,083 $1,673 $1,615 
Service cost360 293 301 238 52 48 
Interest cost431 458 137 177 57 69 
Actuarial losses (gains) (1)
1,594 2,165 1,036 1,313 (98)21 
Benefits paid(751)(582)(215)(230)(93)(104)
Effects of exchange rate changes0 794 (3)
Plan amendments0 (64)0 
Curtailments11 18 (8)(1)
Termination benefits10 31 3 2 
Settlements(45)(117)(12)0 
Other0 55 27 18 18 
Benefit obligation December 31$14,613 $13,003 $12,534 $10,612 $1,607 $1,673 
Funded status December 31$(1,941)$(1,642)$(485)$(449)$(386)$(571)
Recognized as:
Other Assets$0 $$941 $837 $0 $
Accrued and other current liabilities(82)(92)(13)(18)(9)(10)
Other Noncurrent Liabilities(1,859)(1,550)(1,413)(1,268)(377)(561)
 Pension Benefits 
Other
Postretirement
Benefits
 U.S. International 
  2018 2017 2018 2017 2018 2017
Fair value of plan assets January 1$10,896
 $9,766
 $9,339
 $7,794
 $1,114
 $1,019
Actual return on plan assets(810) 1,723
 (289) 677
 (72) 161
Company contributions, net378
 58
 167
 226
 6
 (4)
Effects of exchange rate changes
 
 (352) 843
 
 
Benefits paid(772) (651) (202) (198) (80) (62)
Settlements(44) 
 (106) (17) 
 
Other
 
 23
 14
 
 
Fair value of plan assets December 31$9,648
 $10,896
 $8,580
 $9,339
 $968
 $1,114
Benefit obligation January 1$11,904
 $10,849
 $9,483
 $8,372
 $1,922
 $1,922
Service cost326
 312
 238
 252
 57
 57
Interest cost432
 454
 178
 172
 69
 81
Actuarial (gains) losses (1)
(1,258) 881
 (154) (7) (341) (87)
Benefits paid(772) (651) (202) (198) (80) (62)
Effects of exchange rate changes
 
 (387) 916
 (6) 3
Plan amendments
 
 10
 (22) (9) 
Curtailments13
 15
 (2) (3) 
 
Termination benefits19
 44
 2
 4
 3
 8
Settlements(44) 
 (106) (17) 
 
Other
 
 23
 14
 
 
Benefit obligation December 31$10,620
 $11,904
 $9,083
 $9,483
 $1,615
 $1,922
Funded status December 31$(972) $(1,008) $(503) $(144) $(647) $(808)
Recognized as:           
Other assets$
 $
 $659
 $828
 $
 $
Accrued and other current liabilities(47) (59) (14) (17) (10) (11)
Other noncurrent liabilities(925) (949) (1,148) (955) (637) (797)
(1) Actuarial (gains) losses in 2018 and 2017(gains) primarily reflect changes in discount rates.
At December 31, 20182020 and 2017,2019, the accumulated benefit obligation was $19.0$26.4 billion and $20.5$22.8 billion,, respectively, for all pension plans, of which $10.4$14.4 billion and $11.5$12.8 billion,, respectively, related to U.S. pension plans.


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Information related to the funded status of selected pension plans at December 31 is as follows:
U.S.International
2020201920202019
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation$14,613 $13,003 $8,951 $7,421 
Fair value of plan assets12,672 11,361 7,526 6,135 
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation$13,489 $12,009 $4,288 $2,476 
Fair value of plan assets11,685 10,484 3,033 1,501 
 U.S. International
 2018 2017 2018 2017
Pension plans with a projected benefit obligation in excess of plan assets       
Projected benefit obligation$10,620
 $11,904
 $6,251
 $3,323
Fair value of plan assets9,648
 10,896
 5,089
 2,352
Pension plans with an accumulated benefit obligation in excess of plan assets       
Accumulated benefit obligation$9,702
 $676
 $5,936
 $2,120
Fair value of plan assets8,966
 
 5,071
 1,346


Plan Assets
Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 —  Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 —  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —  Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 20182020 and 2017, $8262019, $942 million and $488$860 million,, respectively, or approximately 5% and 2%, respectively,4% of the Company’s pension investments were categorized as Level 3 assets.
If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

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The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:
 Fair Value Measurements UsingFair Value Measurements Using
  Level 1Level 2Level 3
NAV (1)
TotalLevel 1Level 2Level 3
NAV (1)
Total
20202019
U.S. Pension Plans
Cash and cash equivalents$5 $0 $0 $303 $308 $$$$236 $239 
Investment funds
Developed markets equities206 0 0 3,884 4,090 205 3,542 3,747 
Emerging markets equities169 0 0 927 1,096 165 723 888 
Mortgage and asset-backed securities0 89 0 0 89 
Government and agency obligations0 0 0 0 0 173 173 
Equity securities
Developed markets2,819 0 0 0 2,819 2,451 2,451 
Fixed income securities— 
Government and agency obligations0 2,236 0 0 2,236 2,094 2,094 
Corporate obligations0 1,994 0 0 1,994 1,582 1,582 
Mortgage and asset-backed securities0 33 0 0 33 178 178 
Other investments0 0 7 0 7 
Plan assets at fair value$3,199 $4,352 $7 $5,114 $12,672 $2,824 $3,854 $$4,674 $11,361 
International Pension Plans
Cash and cash equivalents$110 $1 $0 $20 $131 $70 $$$15 $86 
Investment funds
Developed markets equities475 4,286 0 118 4,879 546 3,761 96 4,403 
Government and agency obligations1,516 2,614 0 172 4,302 462 2,534 207 3,203 
Emerging markets equities154 0 0 92 246 66 96 90 252 
Corporate obligations5 12 0 172 189 11 109 125 
Other fixed income obligations9 11 0 4 24 15 
Real estate0 1 0 15 16 
Equity securities
Developed markets505 0 0 0 505 565 565 
Fixed income securities
Government and agency obligations3 486 0 3 492 376 379 
Corporate obligations1 174 0 2 177 135 136 
Mortgage and asset-backed securities0 70 0 0 70 61 61 
Other investments
Insurance contracts (2)
0 76 935 1 1,012 65 851 916 
Other1 5 0 0 6 16 21 
Plan assets at fair value$2,779 $7,736 $935 $599 $12,049 $1,727 $7,052 $851 $533 $10,163 
(1)    Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2020 and 2019.
(2)    The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.
123

 Fair Value Measurements Using Fair Value Measurements Using
  
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
 2018   2017  
U.S. Pension Plans               
Assets               
Cash and cash equivalents$40
 $
 $
 $40
 $6
 $
 $
 $6
Investment funds               
Developed markets equities169
 
 
 169
 390
 
 
 390
Emerging markets equities121
 
 
 121
 138
 
 
 138
Equity securities               
Developed markets2,172
 
 
 2,172
 2,743
 
 
 2,743
Fixed income securities               
Government and agency obligations
 1,509
 
 1,509
 
 757
 
 757
Corporate obligations
 1,246
 
 1,246
 
 900
 
 900
Mortgage and asset-backed securities
 262
 
 262
 
 240
 
 240
Other investments
 
 13
 13
 
 
 15
 15
Net assets in fair value hierarchy$2,502
 $3,017

$13

$5,532

$3,277

$1,897

$15

$5,189
Investments measured at NAV (1)
      4,116
       5,707
Plan assets at fair value      $9,648
       $10,896
International Pension Plans               
Assets      
       
Cash and cash equivalents$50
 $3
 $
 $53
 $54
 $19
 $
 $73
Investment funds      
       
Developed markets equities461
 3,071
 
 3,532
 562
 3,326
 
 3,888
Emerging markets equities56
 112
 
 168
 62
 176
 
 238
Government and agency obligations372
 2,082
 
 2,454
 249
 2,095
 
 2,344
Corporate obligations4
 7
 
 11
 5
 329
 
 334
Fixed income obligations7
 4
 
 11
 7
 4
 
 11
Real estate (2)

 1
 1
 2
 
 1
 2
 3
Equity securities      
       
Developed markets544
 
 
 544
 660
 
 
 660
Fixed income securities      
       
Government and agency obligations2
 291
 
 293
 2
 266
 
 268
Corporate obligations1
 113
 
 114
 1
 118
 
 119
Mortgage and asset-backed securities
 55
 
 55
 
 55
 
 55
Other investments      
       
Insurance contracts (3)

 66
 811
 877
 
 67
 470
 537
Other
 4
 1
 5
 
 6
 1
 7
Net assets in fair value hierarchy$1,497
 $5,809
 $813
 $8,119
 $1,602
 $6,462
 $473
 $8,537
Investments measured at NAV (1)
      461
       802
Plan assets at fair value      $8,580
       $9,339
Table of Contents
(1)
Certain investments that were measured at net asset value (NAV) per share or its equivalent as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2018 and 2017.
(2)
The plans’ Level 3 investments in real estate funds are generally valued by market appraisals of the underlying investments in the funds.
(3)
The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:
2018 2017 20202019
Insurance
Contracts
 
Real
Estate
 Other Total 
Insurance
Contracts
 
Real
Estate
 Other Total Insurance
Contracts
Real
Estate
OtherTotalInsurance
Contracts
Real
Estate
OtherTotal
U.S. Pension Plans               U.S. Pension Plans
Balance January 1$
 $
 $15
 $15
 $
 $
 $18
 $18
Balance January 1$0 $0 $9 $9 $$$13 $13 
Actual return on plan assets:               Actual return on plan assets:
Relating to assets still held at December 31
 
 (3) (3) 
 
 (2) (2)Relating to assets still held at December 310 0 (5)(5)(8)(8)
Relating to assets sold during the year
 
 4
 4
 
 
 4
 4
Relating to assets sold during the year0 0 5 5 
Purchases and sales, net
 
 (3) (3) 
 
 (5) (5)Purchases and sales, net0 0 (2)(2)(4)(4)
Balance December 31$

$

$13

$13

$

$

$15

$15
Balance December 31$0 $0 $7 $7 $$$$
International Pension Plans               International Pension Plans
Balance January 1$470
 $2
 $1
 $473
 $412
 $4
 $1
 $417
Balance January 1$851 $0 $0 $851 $811 $$$813 
Actual return on plan assets:               Actual return on plan assets:
Relating to assets still held at December 31(32) 
 
 (32) 52
 
 
 52
Relating to assets still held at December 31103 0 0 103 54 54 
Purchases and sales, net380
 (1) 
 379
 5
 (2) 
 3
Purchases and sales, net(17)0 0 (17)(14)(1)(1)(16)
Transfers into Level 3(7) 
 
 (7) 1
 
 
 1
Transfers out of Level 3Transfers out of Level 3(2)0 0 (2)
Balance December 31$811

$1

$1

$813

$470

$2

$1

$473
Balance December 31$935 $0 $0 $935 $851 $$$851 
The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:
 Fair Value Measurements UsingFair Value Measurements Using
  Level 1Level 2Level 3
NAV (1)
TotalLevel 1Level 2Level 3
NAV (1)
Total
  2020  2019  
Cash and cash equivalents$31 $0 $0 $28 $59 $52 $$$22 $74 
Investment funds
Developed markets equities19 0 0 355 374 19 324 343 
Emerging markets equities16 0 0 85 101 15 66 81 
Government and agency obligations1 0 0 0 1 16 17 
Mortgage and asset-backed securities0 8 0 0 8 
Equity securities— 
Developed markets258 0 0 0 258 225 225 
Fixed income securities
Government and agency obligations0 221 0 0 221 196 196 
Corporate obligations0 196 0 0 196 149 149 
Mortgage and asset-backed securities0 3 0 0 3 17 17 
Plan assets at fair value$325 $428 $0 $468 $1,221 $312 $362 $$428 $1,102 
 Fair Value Measurements Using Fair Value Measurements Using
  
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
  2018    2017   
Assets               
Cash and cash equivalents$78
 $
 $
 $78
 $97
 $
 $
 $97
Investment funds               
Developed markets equities16
 
 
 16
 37
 
 
 37
Emerging markets equities12
 
 
 12
 13
 
 
 13
Government and agency obligations1
 
 
 1
 1
 
 
 1
Equity securities               
Developed markets200
 
 
 200
 256
 
 
 256
Fixed income securities               
Government and agency obligations
 141
 
 141
 
 71
 
 71
Corporate obligations
 116
 
 116
 
 84
 
 84
Mortgage and asset-backed securities
 24
 
 24
 
 23
 
 23
Net assets in fair value hierarchy$307
 $281
 $
 $588
 $404
 $178
 $
 $582
Investments measured at NAV (1)
      380
       532
Plan assets at fair value      $968
       $1,114
(1)    Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2020 and 2019.
(1)
Certain investments that were measured at net asset value (NAV) per share or its equivalent as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2018 and 2017.
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 30% to 50%45% in U.S. equities, 15% to 30% in international equities, 30%35% to 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 deviation of returns of the target portfolio, which approximates 11%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the
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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.


Expected Contributions
Expected contributions during 20192021 are approximately $50$300 million for U.S. pension plans, approximately $150$170 million for international pension plans and approximately $15$35 million for other postretirement benefit plans.


Expected Benefit Payments
Expected benefit payments are as follows:
U.S. Pension BenefitsInternational Pension
Benefits
Other
Postretirement
Benefits
U.S. Pension Benefits 
International Pension
Benefits
 
Other
Postretirement
Benefits
2019$638
 $225
 $91
2020661
 213
 95
2021680
 221
 98
2021$816 $274 $85 
2022685
 239
 102
2022786 277 86 
2023709
 249
 105
2023781 284 87 
2024 — 20283,805
 1,349
 577
20242024772 285 89 
20252025782 287 91 
2026 — 20302026 — 20304,271 1,688 474 
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.


Amounts Recognized in Other Comprehensive Income
Net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI:
 Pension PlansOther Postretirement
Benefit Plans
U.S.International
Years Ended December 31202020192018202020192018202020192018
Net (loss) gain arising during the period$(448)$(816)$(397)$(407)$(227)$(505)$198 $112 $186 
Prior service (cost) credit arising during the period(1)(4)(4)62 (1)(10)(3)(11)
 $(449)$(820)$(401)$(345)$(228)$(515)$195 $101 $188 
Net loss (gain) amortization included in benefit cost$303 $151 $232 $127 $64 $84 $(18)$(10)$
Prior service credit amortization included in benefit cost(49)(49)(50)(18)(12)(13)(73)(78)(84)
 $254 $102 $182 $109 $52 $71 $(91)$(88)$(83)
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 Pension Plans 
Other Postretirement
Benefit Plans
 U.S. International 
Years Ended December 312018 2017 2016 2018 2017 2016 2018 2017 2016
Net (loss) gain arising during the period$(397) $(19) $(743) $(505) $309
 $(380) $186
 $170
 $(45)
Prior service (cost) credit arising during the period(4) (13) (10) (10) 22
 (2) 2
 (31) (19)
 $(401) $(32) $(753) $(515) $331
 $(382) $188
 $139
 $(64)
Net loss amortization included in benefit cost$232
 $180
 $119
 $84
 $98
 $87
 $1
 $1
 $3
Prior service (credit) cost amortization included in benefit cost(50) (53) (55) (13) (11) (11) (84) (98) (106)
 $182
 $127
 $64
 $71
 $87
 $76
 $(83) $(97) $(103)
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The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from AOCI into net periodic benefit cost during 2019 are $204 million and $(62) million, respectively, for pension plans (of which $141 million and $(50) million, respectively, relates to U.S. pension plans) and $(7) million and $(78) million, respectively, for other postretirement benefit plans.

Actuarial Assumptions
The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows:
 U.S. Pension and Other
Postretirement Benefit Plans
International Pension Plans
December 31202020192018202020192018
Net periodic benefit cost      
Discount rate3.40 %4.40 %3.70 %1.50 %2.20 %2.10 %
Expected rate of return on plan assets7.30 %8.10 %8.20 %4.40 %4.90 %5.10 %
Salary growth rate4.20 %4.30 %4.30 %2.80 %2.80 %2.90 %
Interest crediting rate4.90 %3.40 %3.30 %2.80 %2.90 %2.80 %
Benefit obligation      
Discount rate2.70 %3.40 %4.40 %1.10 %1.50 %2.20 %
Salary growth rate4.60 %4.20 %4.30 %2.80 %2.80 %2.80 %
Interest crediting rate4.70 %4.90 %3.40 %3.00 %2.80 %2.90 %
 
U.S. Pension and Other
Postretirement Benefit Plans
 International Pension Plans
December 312018
 2017
 2016
 2018
 2017
 2016
Net periodic benefit cost           
Discount rate3.70% 4.30% 4.70% 2.10% 2.20% 2.80%
Expected rate of return on plan assets8.20% 8.70% 8.60% 5.10% 5.10% 5.60%
Salary growth rate4.30% 4.30% 4.30% 2.90% 2.90% 2.90%
Benefit obligation           
Discount rate4.40% 3.70% 4.30% 2.20% 2.10% 2.20%
Salary growth rate4.30% 4.30% 4.30% 2.80% 2.90% 2.90%
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 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 and is determined on a plan basis. The expected rate of return withinfor each plan is developed considering long-term historical returns data, current market conditions, and actual returns on the plan assets. Using this reference information, the long-term return expectations for each asset category and a weighted averageweighted-average expected return for each plan’s target portfolio is developed according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2019,2021, 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 8.10%6.70%, as compared to a range of 7.70%7.00% to 8.30%7.30% in 2018. The decrease is primarily due to a modest shift in asset allocation. The change in the weighted-average expected return on U.S. pension and other postretirement benefit plan assets from 2016 to 2018 is due to the relative weighting of the referenced plans’ assets.2020.
The health care cost trend rate assumptions for other postretirement benefit plans are as follows:
December 3120202019
Health care cost trend rate assumed for next year6.6 %6.8 %
Rate to which the cost trend rate is assumed to decline4.5 %4.5 %
Year that the trend rate reaches the ultimate trend rate20322032
December 312018 2017
Health care cost trend rate assumed for next year7.0% 7.2%
Rate to which the cost trend rate is assumed to decline4.5% 4.5%
Year that the trend rate reaches the ultimate trend rate2032
 2032
A one percentage point change in the health care cost trend rate would have had the following effects:
 One Percentage Point
  
Increase Decrease
Effect on total service and interest cost components$11
 $(9)
Effect on benefit obligation88
 (74)


Savings Plans
The Company also maintains defined contribution savings plans in the United States. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2020, 2019 and 2018 2017were $166 million, $149 million and 2016 were $136$136 million,, $131 million and $126 million, respectively.



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15.14.    Other (Income) Expense, Net
Other (income) expense, net, consisted of:
Years Ended December 31202020192018
Interest income$(59)$(274)$(343)
Interest expense831 893 772 
Exchange losses145 187 145 
Income from investments in equity securities, net (1)
(1,338)(170)(324)
Net periodic defined benefit plan (credit) cost other than service cost(339)(545)(512)
Other, net(126)48 (140)
 $(886)$139 $(402)
Years Ended December 312018 2017 2016
Interest income$(343) $(385) $(328)
Interest expense772
 754
 693
Exchange losses (gains)145
 (11) 174
Income on investments in equity securities, net (1)
(324) (352) (43)
Net periodic defined benefit plan (credit) cost other than service cost(512) (512) (531)
Other, net(140) 6
 224
 $(402) $(500) $189
(1) Includes net realized and unrealized gains and losses onfrom investments in equity securities either owned directly or through ownership interests in investment funds.
Income Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period, while ownership interests in investment funds are accounted for on investments in equity securities, net, in 2018 reflects the recognition of unrealized net gains pursuant to the prospective adoption of ASU 2016-01 on January 1, 2018 (see Note 2). The increase in income on investments in equity securities, net, in 2017 was driven primarily by higher realized gains on sales.a one quarter lag.
Other, net (as presented in the table above) in 2019 includes $162 million of goodwill impairment charges related to certain businesses in the Healthcare Services segment (see Note 8).
Other, net in 2018 includes a gain of $115 million related to the settlement of certain patent litigation, (see Note 11), income of $99 million related to AstraZeneca’s option exercise (see Note 9)in 2014 in connection with the termination of the Company’s relationship with AstraZeneca LP (AZLP), and a gain of $85 million resulting from the receipt of a milestone payment for an out-licensed migraine clinical development program. Other, net in 2018 also includes $144 million of goodwill impairment charges related to certain businesses in the Healthcare Services segment (see Note 8), as well as $41 million of charges related to the write-down of assets held for sale to fair value in anticipation of the dissolution of the Company’s joint venture with Supera Farma Laboratorios S.A. in Brazil.
Other, net in 2017 includes income of $232 million related to AstraZeneca’s option exercise and a $191 million loss on extinguishment of debt (see Note 10).
Other, net in 2016 includes a charge of $625 million related to the previously disclosed settlement of worldwide patent litigation related to Keytruda, a gain of $117 million related to the settlement of other patent litigation, gains of $100 million resulting from the receipt of milestone payments for out-licensed migraine clinical development programs, and $98 million of income related to AstraZeneca’s option exercise.
Interest paid was $777$822 million in 2018, $7232020, $841 million in 20172019 and $686$777 million in 2016.2018.


16.15.    Taxes on Income
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
 202020192018
  
AmountTax RateAmountTax RateAmountTax Rate
U.S. statutory rate applied to income before taxes$1,846 21.0 %$2,408 21.0 %$1,827 21.0 %
Differential arising from:
Foreign earnings(1,242)(14.1)(1,020)(8.9)(245)(2.8)
GILTI and the foreign-derived intangible income deduction364 4.1 336 2.9 (25)(0.3)
R&D tax credit(110)(1.3)(118)(1.0)(96)(1.1)
Tax settlements(13)(0.2)(403)(3.5)(22)(0.3)
Acquisition of VelosBio559 6.3 
Restructuring105 1.2 39 0.3 56 0.6 
Acquisition of OncoImmune97 1.1 
State taxes67 0.8 (2)201 2.3 
Acquisition-related costs, including amortization46 0.5 95 0.8 267 3.1 
Valuation allowances42 0.5 113 1.0 269 3.1 
Acquisition of Peloton0 0 209 1.8 
Tax Cuts and Jobs Act of 20170 0 117 1.0 289 3.3 
Other(52)(0.5)(87)(0.7)(13)(0.1)
 $1,709 19.4 %$1,687 14.7 %$2,508 28.8 %
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 2018 2017 2016
  
Amount Tax Rate Amount Tax Rate Amount Tax Rate
U.S. statutory rate applied to income before taxes$1,827
 21.0 % $2,282
 35.0 % $1,631
 35.0 %
Differential arising from:           
Impact of the TCJA289
 3.3
 2,625
 40.3
 
 
Valuation allowances269
 3.1
 632
 9.7
 (5) (0.1)
Impact of purchase accounting adjustments, including amortization267
 3.1
 713
 10.9
 623
 13.4
State taxes201
 2.3
 77
 1.2
 173
 3.7
Restructuring56
 0.6
 142
 2.2
 145
 3.1
Foreign earnings(245) (2.8) (1,654) (25.4) (1,546) (33.2)
R&D tax credit(96) (1.1) (71) (1.1) (58) (1.3)
Tax settlements(22) (0.3) (356) (5.5) 
 
Other (1)
(38) (0.4) (287) (4.4) (245) (5.2)
 $2,508
 28.8 % $4,103
 62.9 % $718
 15.4 %
(1)
Other includes the tax effects of losses on foreign subsidiaries and miscellaneous items.
The Company’s 2017 effective tax rate reflected a provisional impact of 40.3% for the Tax Cuts and Jobs Act (TCJA), which was enacted onin December 22, 2017. Among other provisions,2017 and the TCJA reduced the U.S. federal corporate statutory tax rate from 35% to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on undistributed earnings of certain foreign subsidiaries, and creates new taxes on certain foreign sourced earnings.
The Company reflected the impact of the TCJA in its 2017 financial statements. However, since application of certain provisions of the TCJA remained subject to further interpretation, in certain instances the Company made reasonable estimates of the effects of the TCJA. In 2018, these amountsTCJA, which were since finalized as described below.
The one-time transition tax is based on the Company’s post-1986 undistributed earnings and profits (E&P). For a substantial portion of these undistributed E&P, the Company had not previously provided deferred taxes as these earnings were deemed by Merck to be retained indefinitely by subsidiary companies for reinvestment. The Company recorded a provisional amountresulted in 2017 for its one-time transition tax liability of $5.3 billion. This provisional amount was reduced by the reversal of $2.0 billion of deferred taxes that were previously recorded in connection with the merger of Schering-Plough Corporation in 2009 for certain undistributed foreign E&P. On the basis of revised calculations of post-1986 undistributed foreign E&P and finalization of the amounts held in cash or other specified assets, the Company recognized a measurement-period adjustment of $124 million in 2018 related to the transition tax obligation, with a corresponding adjustment toadditional income tax expense during the period, resulting in a revised transition tax obligation of $5.5 billion. The Company anticipates that it will be able to utilize certain foreign tax credits to partially reduce the transition tax payment. As permitted under the TCJA, the Company has elected to pay the one-time transition tax over a period of eight years. After payment of the amount due in 2018 theand 2019. The Company’s remaining transition tax liability under the TCJA, which has been reduced by payments and the utilization of foreign tax credits, was $3.0 billion at December 31, 2018, is $4.9 billion,2020, of which $275$390 million is included in Income Taxes Payabletaxes payable and the remainder of $4.6$2.6 billion is included in Other Noncurrent Liabilities. As a result of the transition tax under the TCJA, the Company has made a determination it is no longer indefinitely reinvested with respect to its undistributed earnings from foreign subsidiaries and has provided a deferred tax liability for foreign withholding taxtaxes that would apply.
In 2017, the The Company remeasuredremains indefinitely reinvested with respect to its deferredfinancial statement basis in excess of tax assets and liabilities at the new federal statutory tax rate of 21%, which resulted in a provisional deferred tax benefit of $779 million. On the basis of clarifications toits foreign subsidiaries. A determination of the deferred tax benefit calculation, the Company recorded measurement-period adjustments in 2018 of $32 million relatedliability with respect to deferred income taxes.
Beginning in 2018, the TCJA includes a tax on “global intangible low-taxed income” (GILTI) as defined in the TCJA. The Company has made an accounting policy election to account for the tax effects of the GILTI tax in the income tax provision in future periods as the tax arises.

this basis difference is not practicable.
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the United States, particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants (which begin to expire in 2022), where the earnings had been indefinitely reinvested, thereby yielding a favorable impact on the effective tax rate compared with the U.S. statutory rate of 35% in 2017 and 2016 and 21% in 2018. The foreign earnings. Towards the end of 2020, a new reduced tax rate differentials do not include the impact of intangible asset impairment charges, amortization of purchase accounting adjustments or restructuring costs. These items are presented separately as they each represent a significant, separately disclosed pretax cost or charge, and a substantial portion of each of these items relatesarrangement was agreed to jurisdictions with lower tax rates than the United States. Therefore, the impact of recording these expense items in lower tax rate jurisdictions is an unfavorable impact on the effective tax rate compared to the U.S. statutory rate of 35% in 2017 and 2016 and 21% in 2018.Switzerland for certain newly active legal entities.
Income before taxes consisted of:
Years Ended December 312018 2017 2016Years Ended December 31202020192018
Domestic$3,717
 $3,483
 $518
Domestic$(3,492)$439 $3,717 
Foreign4,984
 3,038
 4,141
Foreign12,283 11,025 4,984 
$8,701
 $6,521
 $4,659
$8,791 $11,464 $8,701 
Taxes on income consisted of:
Years Ended December 31202020192018
Current provision
Federal$962 $514 $536 
Foreign1,362 1,806 2,281 
State53 (77)200 
 2,377 2,243 3,017 
Deferred provision
Federal(605)(330)(402)
Foreign(40)(240)(64)
State(23)14 (43)
 (668)(556)(509)
 $1,709 $1,687 $2,508 
128

Years Ended December 312018 2017 2016
Current provision     
Federal$536
 $5,585
 $1,166
Foreign2,281
 1,229
 916
State200
 (90) 157
 3,017
 6,724
 2,239
Deferred provision     
Federal(402) (2,958) (1,255)
Foreign(64) 75
 (225)
State(43) 262
 (41)
 (509) (2,621) (1,521)
 $2,508
 $4,103
 $718
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Deferred income taxes at December 31 consisted of:
 20202019
  
AssetsLiabilitiesAssetsLiabilities
Product intangibles and licenses$141 $1,250 $442 $1,778 
Inventory related43 335 32 354 
Accelerated depreciation0 588 594 
Equity investments0 175 
Pensions and other postretirement benefits834 248 785 191 
Compensation related252  322 — 
Unrecognized tax benefits117  109 — 
Net operating losses and other tax credit carryforwards794  897 — 
Other808 81 764 84 
Subtotal2,989 2,677 3,351 3,001 
Valuation allowance(433) (1,100) 
Total deferred taxes$2,556 $2,677 $2,251 $3,001 
Net deferred income taxes $121  $750 
Recognized as:
Other Assets$894 $719 
Deferred Income Taxes $1,015  $1,470 
 2018 2017
  
Assets Liabilities Assets Liabilities
Product intangibles and licenses$720
 $1,640
 $307
 $2,256
Inventory related32
 377
 29
 499
Accelerated depreciation
 582
 28
 642
Pensions and other postretirement benefits565
 151
 498
 192
Compensation related291
 
 314
 
Unrecognized tax benefits174
 
 156
 
Net operating losses and other tax credit carryforwards715
 
 654
 
Other621
 66
 909
 52
Subtotal3,118
 2,816
 2,895
 3,641
Valuation allowance(1,348)   (900)  
Total deferred taxes$1,770
 $2,816
 $1,995
 $3,641
Net deferred income taxes  $1,046
   $1,646
Recognized as:       
Other assets$656
   $573
  
Deferred income taxes  $1,702
   $2,219
The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2018, $7152020, $464 million of deferred taxes on NOL carryforwards relate to foreign jurisdictions. Valuation allowances of $1.3 billion$433 million have been established on these foreign NOL carryforwards and other foreign deferred tax assets. TheIn addition, the Company has no$330 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards, relatingall of which are expected to U.S. jurisdictions.be fully utilized prior to expiry.
Income taxes paid in 2020, 2019 and 2018 2017were $2.7 billion, $4.5 billion and 2016 were $1.5$1.5 billion,, $4.9 billion and $1.8 billion, respectively. Tax benefits relating to stock option exercises were $55 million in 2020, $65 million in 2019 and $77 million in 2018, $73 million in 2017 and $147 million in 2016.2018.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
202020192018
Balance January 1$1,225 $1,893 $1,723 
Additions related to current year positions298 199 221 
Additions related to prior year positions110 46 142 
Reductions for tax positions of prior years (1)
(4)(454)(73)
Settlements (1)
(70)(356)(91)
Lapse of statute of limitations (2)
(22)(103)(29)
Balance December 31$1,537 $1,225 $1,893 
 2018 2017 2016
Balance January 1$1,723
 $3,494
 $3,448
Additions related to current year positions221
 146
 196
Additions related to prior year positions142
 520
 75
Reductions for tax positions of prior years (1) 
(73) (1,038) (90)
Settlements (1)
(91) (1,388) (92)
Lapse of statute of limitations(29) (11) (43)
Balance December 31$1,893
 $1,723
 $3,494
(1)    Amounts in 2019 reflects the settlement with the IRS discussed below.
(2) Amount in 2019 includes $78 million related to the divestiture of Merck’s Consumer Care business in 2014.
(1)
Amounts reflect the settlements with the IRS as discussed below.
If the Company were to recognize the unrecognized tax benefits of $1.9$1.5 billion at December 31, 2018,2020, the income tax provision would reflect a favorable net impact of $1.8 billion.$1.5 billion.

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The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 20182020 could decrease by up to approximately $750$160 million in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures.
Expenses for interestInterest and penalties associated with uncertain tax positions amounted to $51an expense (benefit) of $27 million in 2018, $1832020, $(101) million in 20172019 and $134$51 million in 2016.2018. These amounts reflect the beneficial impacts of various tax settlements, including thosethe settlement discussed below. Liabilities for accrued interest and penalties were $372$268 million and $341$243 million as of December 31, 20182020 and 2017,2019, respectively.

In 2017,2019, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2006-20112012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of approximately $2.8 billion.$107 million. The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $364 million net $234 million tax benefit in 2017.2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for, as well as adjustments to reserves for unrecognized tax benefits relating to years which remain open to examination that are affected by this settlement.for.
The IRS is currently conducting examinations of the Company’s tax returns for the years 2012 through 2014.2015 and 2016. In addition, various state and foreign tax examinations are in progress and for these jurisdictions, the Company’s income tax returns are open for examination for the period 2003 through 2018.2020.
17.16.    Earnings per Share
The calculations of earnings per share (shares in millions) are as follows:
Years Ended December 31202020192018
Net income attributable to Merck & Co., Inc.$7,067 $9,843 $6,220 
Average common shares outstanding2,530 2,565 2,664 
Common shares issuable (1)
11 15 15 
Average common shares outstanding assuming dilution2,541 2,580 2,679 
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$2.78 $3.81 $2.32 
Years Ended December 312018 2017 2016
Net income attributable to Merck & Co., Inc.$6,220
 $2,394
 $3,920
Average common shares outstanding2,664
 2,730
 2,766
Common shares issuable (1)
15
 18
 21
Average common shares outstanding assuming dilution2,679
 2,748
 2,787
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$2.34
 $0.88
 $1.42
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$2.32
 $0.87
 $1.41
(1)    Issuable primarily under share-based compensation plans.
(1)
Issuable primarily under share-based compensation plans.
In 2020, 2019 and 2018, 20175 million, 2 million and 2016, 6 million, 5 million and 13 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.




18.
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Table of Contents
17.   Other Comprehensive Income (Loss)
Changes in AOCI by component are as follows:
DerivativesInvestmentsEmployee
Benefit
Plans
Cumulative
Translation
Adjustment
Accumulated Other
Comprehensive
Income (Loss)
Balance January 1, 2018, net of taxes$(108)$(61)$(2,787)$(1,954)$(4,910)
Other comprehensive income (loss) before reclassification adjustments, pretax228 (108)(728)(84)(692)
Tax(55)169 (139)(24)
Other comprehensive income (loss) before reclassification adjustments, net of taxes173 (107)(559)(223)(716)
Reclassification adjustments, pretax157 (1)97 (2)170 (3)424 
Tax(33)(36)(69)
Reclassification adjustments, net of taxes124 97 134 355 
Other comprehensive income (loss), net of taxes297 (10)(425)(223)(361)
Adoption of ASU 2018-02(23)(344)100 (266)
Adoption of ASU 2016-01(8)(8)
Balance at December 31, 2018, net of taxes166 (78)(3,556)(2,077)(5,545)
Other comprehensive income (loss) before reclassification adjustments, pretax86 140 (948)112 (610)
Tax(15)192 (16)161 
Other comprehensive income (loss) before reclassification adjustments, net of taxes71 140 (756)96 (449)
Reclassification adjustments, pretax(261)(1)(44)(2)66 (3)(239)
Tax55 (15)40 
Reclassification adjustments, net of taxes(206)(44)51 (199)
Other comprehensive income (loss), net of taxes(135)96 (705)96 (648)
Balance at December 31, 2019, net of taxes31 18 (4,261)(4)(1,981)(6,193)
Other comprehensive income (loss) before reclassification adjustments, pretax(383)3 (599)64 (915)
Tax84 0 111 89 284 
Other comprehensive income (loss) before reclassification adjustments, net of taxes(299)3 (488)153 (631)
Reclassification adjustments, pretax2 (1)(21)(2)272 (3)0 253 
Tax0 0 (63)0 (63)
Reclassification adjustments, net of taxes2 (21)209 0 190 
Other comprehensive income (loss), net of taxes(297)(18)(279)153 (441)
Balance at December 31, 2020, net of taxes$(266)$0 $(4,540)(4)$(1,828)$(6,634)
(1)Relates to foreign currency cash flow hedges that were reclassified from AOCI to Sales.
(2)Represents net realized (gains) losses on the sales of available-for-sale investments that were reclassified from AOCI to Other (income) expense, net.
(3)    Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 13).
(4)Includes pension plan net loss of $5.4 billion and $5.1 billion at December 31, 2020 and 2019, respectively, and other postretirement benefit plan net gain of $391 million and $247 million at December 31, 2020 and 2019, respectively, as well as pension plan prior service credit of $255 million and $263 million at December 31, 2020 and 2019, respectively, and other postretirement benefit plan prior service credit of $244 million and $305 million at December 31, 2020 and 2019, respectively.

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Table of Contents
 Derivatives Investments 
Employee
Benefit
Plans
 
Cumulative
Translation
Adjustment
 
Accumulated Other
Comprehensive
Income (Loss)
Balance January 1, 2016, net of taxes$404
 $41
 $(2,407) $(2,186) $(4,148)
Other comprehensive income (loss) before reclassification adjustments, pretax210
 (38) (1,199) (150) (1,177)
Tax(72) 16
 363
 (19) 288
Other comprehensive income (loss) before reclassification adjustments, net of taxes138
 (22) (836) (169) (889)
Reclassification adjustments, pretax(314)
(1) 
(31)
(2) 
37
(3) 

 (308)
Tax110
 9
 
 
 119
Reclassification adjustments, net of taxes(204) (22) 37
 
 (189)
Other comprehensive income (loss), net of taxes(66) (44) (799) (169) (1,078)
Balance December 31, 2016, net of taxes338
 (3) (3,206) (2,355) (5,226)
Other comprehensive income (loss) before reclassification adjustments, pretax(561) 212
 438
 235
 324
Tax207
 (35) (106) 166
 232
Other comprehensive income (loss) before reclassification adjustments, net of taxes(354) 177
 332
 401
 556
Reclassification adjustments, pretax(141)
(1) 
(291)
(2) 
117
(3) 

 (315)
Tax49
 56
 (30) 
 75
Reclassification adjustments, net of taxes(92) (235) 87
 
 (240)
Other comprehensive income (loss), net of taxes(446) (58) 419
 401
 316
Balance December 31, 2017, net of taxes(108) (61) (2,787)
(4) 
(1,954) (4,910)
Other comprehensive income (loss) before reclassification adjustments, pretax228
 (108) (728) (84) (692)
Tax(55) 1
 169
 (139) (24)
Other comprehensive income (loss) before reclassification adjustments, net of taxes173
 (107) (559) (223) (716)
Reclassification adjustments, pretax157
(1) 
97
(2) 
170
(3) 

 424
Tax(33) 
 (36) 
 (69)
Reclassification adjustments, net of taxes124
 97
 134
 
 355
Other comprehensive income (loss), net of taxes297
 (10) (425) (223) (361)
          
Adoption of ASU 2018-02 (see Note 2)(23) 1
 (344) 100
 (266)
Adoption of ASU 2016-01 (see Note 2)
 (8) 
 
 (8)
          
Balance December 31, 2018, net of taxes$166

$(78)
$(3,556)
(4) 
$(2,077) $(5,545)
(1)
Relates to foreign currency cash flow hedges that were reclassified from AOCI to Sales.
(2)
Represents net realized (gains) losses on the sales of available-for-sale investments that were reclassified from AOCI to Other (income) expense, net. In 2017 and 2016, these amounts included both investments in debt and equity securities; however, as a result of the adoption of ASU 2016-01 (see Note 2), in 2018, these amounts relate only to investments in available-for-sale debt securities.
(3)
Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 14).
(4)
Includes pension plan net loss of $4.4 billion and $3.5 billion at December 31, 2018 and 2017, respectively, and other postretirement benefit plan net (gain) loss of $(170) million and $(16) million at December 31, 2018 and 2017, respectively, as well as pension plan prior service credit of $314 million and $326 million at December 31, 2018 and 2017, respectively, and other postretirement benefit plan prior service credit of $375 million and $383 million at December 31, 2018 and 2017, respectively.


19.18.    Segment Reporting
The Company’s operations are principally managed on a products basis and include four2 operating segments, which are the Pharmaceutical Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical and Animal Health segments, both of which are the only reportable segments. The Animal Health segment met the criteria for separate reporting and became a reportable segment in 2018.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. Sales of vaccines in most major European markets were marketed through the Company’s SPMSD joint venture until its termination on December 31, 2016 (see Note 9).
The Animal Health segment discovers, develops, manufactures and markets animal health products, includinga 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 species, which thespecies. 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 previously had a Healthcare Services segment providesthat provided services and solutions that focusfocused 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 includesincluded activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018 (see Note 9).2018.



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Table of Contents
Sales of the Company’s products were as follows:
Years Ended December 312018 2017 2016Years Ended December 31202020192018
U.S. Int’l Total U.S. Int’l Total U.S. Int’l TotalU.S.Int’lTotalU.S.Int’lTotalU.S.Int’lTotal
Pharmaceutical:                 Pharmaceutical:
Oncology                 Oncology
Keytruda$4,150
 $3,021
 $7,171
 $2,309
 $1,500
 $3,809
 $792
 $610
 $1,402
Keytruda$8,352 $6,028 $14,380 $6,305 $4,779 $11,084 $4,150 $3,021 $7,171 
Alliance revenue - Lynparza (1)
Alliance revenue - Lynparza (1)
417 308 725 269 176 444 127 61 187 
Alliance revenue - Lenvima (1)
Alliance revenue - Lenvima (1)
359 220 580 239 165 404 95 54 149 
Emend312
 210
 522
 342
 213
 556
 356
 193
 549
Emend18 127 145 183 205 388 312 210 522 
Temodar6
 209
 214
 16
 256
 271
 15
 268
 283
Alliance revenue - Lynparza127
 61
 187
 
 20
 20
 
 
 
Alliance revenue - Lenvima95
 54
 149
 
 
 
 
 
 
Vaccines (1)
                 
VaccinesVaccines
Gardasil/Gardasil 9
1,873
 1,279
 3,151
 1,565
 743
 2,308
 1,780
 393
 2,173
Gardasil/Gardasil 9
1,755 2,184 3,938 1,831 1,905 3,737 1,873 1,279 3,151 
ProQuad/M-M-R II/Varivax1,430
 368
 1,798
 1,374
 303
 1,676
 1,362
 279
 1,640
ProQuad/M-M-R II/Varivax1,378 500 1,878 1,683 592 2,275 1,430 368 1,798 
Pneumovax 23627
 281
 907
 581
 240
 821
 447
 193
 641
Pneumovax 23
727 359 1,087 679 247 926 627 281 907 
RotaTeq496
 232
 728
 481
 204
 686
 482
 169
 652
RotaTeq486 311 797 506 284 791 496 232 728 
Zostavax22
 195
 217
 422
 246
 668
 518
 168
 685
VaqtaVaqta103 67 170 130 108 238 127 112 239 
Hospital Acute Care                 Hospital Acute Care
Bridion386
 531
 917
 239
 465
 704
 77
 405
 482
Bridion583 615 1,198 533 598 1,131 386 531 917 
Noxafil353
 389
 742
 309
 327
 636
 284
 312
 595
Noxafil42 287 329 282 380 662 353 389 742 
PrevymisPrevymis119 162 281 84 81 165 46 27 72 
PrimaxinPrimaxin2 248 251 271 273 258 265 
CancidasCancidas7 207 213 242 249 12 314 326 
Invanz253
 243
 496
 361
 241
 602
 329
 233
 561
Invanz9 202 211 30 233 263 253 243 496 
Cubicin191
 176
 367
 189
 193
 382
 906
 181
 1,087
Cubicin46 106 152 92 165 257 191 176 367 
Cancidas12
 314
 326
 20
 402
 422
 25
 533
 558
Primaxin7
 258
 265
 10
 270
 280
 4
 293
 297
ZerbaxaZerbaxa74 56 130 63 58 121 42 45 87 
Immunology                 Immunology
Simponi
 893
 893
 
 819
 819
 
 766
 766
Simponi0 838 838 830 830 893 893 
Remicade
 582
 582
 
 837
 837
 
 1,268
 1,268
Remicade0 330 330 411 411 582 582 
Neuroscience                 Neuroscience
Belsomra96
 164
 260
 98
 112
 210
 84
 70
 154
Belsomra81 247 327 92 214 306 96 164 260 
Virology                 Virology
Isentress/Isentress HD513
 627
 1,140
 565
 639
 1,204
 721
 666
 1,387
Isentress/Isentress HD326 531 857 398 576 975 513 627 1,140 
Zepatier8
 447
 455
 771
 888
 1,660
 488
 67
 555
Zepatier60 107 167 118 252 370 447 455 
Cardiovascular                 Cardiovascular
Zetia45
 813
 857
 352
 992
 1,344
 1,588
 972
 2,560
Zetia(1)483 482 14 575 590 45 813 857 
Vytorin10
 487
 497
 124
 627
 751
 473
 668
 1,141
Vytorin12 171 182 16 269 285 10 487 497 
Atozet
 347
 347
 
 225
 225
 1
 146
 146
Atozet0 453 453 391 391 347 347 
Alliance revenue - Adempas (2)
Alliance revenue - Adempas (2)
259 22 281 194 10 204 134 139 
Adempas
 329
 329
 
 300
 300
 
 169
 169
Adempas0 220 220 215 215 190 190 
Diabetes                 Diabetes
Januvia1,969
 1,718
 3,686
 2,153
 1,584
 3,737
 2,286
 1,622
 3,908
Januvia1,470 1,836 3,306 1,724 1,758 3,482 1,969 1,718 3,686 
Janumet811
 1,417
 2,228
 863
 1,296
 2,158
 984
 1,217
 2,201
Janumet477 1,494 1,971 589 1,452 2,041 811 1,417 2,228 
Women’s Health                 Women’s Health
Implanon/NexplanonImplanon/Nexplanon488 192 680 568 219 787 495 208 703 
NuvaRing722
 180
 902
 564
 197
 761
 576
 202
 777
NuvaRing110 127 236 742 136 879 722 180 902 
Implanon/Nexplanon495
 208
 703
 496
 191
 686
 420
 186
 606
Diversified Brands                 Diversified Brands
Singulair20
 688
 708
 40
 692
 732
 40
 874
 915
Singulair18 444 462 29 669 698 20 688 708 
Cozaar/Hyzaar23
 431
 453
 18
 466
 484
 16
 494
 511
Cozaar/Hyzaar21 365 386 24 418 442 23 431 453 
ArcoxiaArcoxia0 258 258 288 288 335 335 
Nasonex23
 353
 376
 54
 333
 387
 184
 352
 537
Nasonex12 206 218 284 293 23 353 376 
Arcoxia
 335
 335
 
 363
 363
 
 450
 450
Follistim AQ115
 153
 268
 123
 174
 298
 157
 197
 355
Follistim AQ84 109 193 103 138 241 115 153 268 
Dulera186
 28
 214
 261
 26
 287
 412
 24
 436
Fosamax4
 205
 209
 6
 235
 241
 5
 279
 284
Other pharmaceutical (2)
1,228
 2,855
 4,090
 1,148
 2,917
 4,065
 1,261
 3,158
 4,420
Other pharmaceutical (3)
Other pharmaceutical (3)
1,555 3,152 4,709 1,416 3,204 4,615 1,231 3,308 4,546 
Total Pharmaceutical segment sales16,608

21,081

37,689

15,854

19,536

35,390

17,073

18,077

35,151
Total Pharmaceutical segment sales19,449 23,572 43,021 18,953 22,798 41,751 16,742 20,947 37,689 
Animal Health:                 Animal Health:
Livestock528
 2,102
 2,630
 471
 2,013
 2,484
 446
 1,841
 2,287
Livestock612 2,327 2,939 582 2,201 2,784 528 2,102 2,630 
Companion Animals710
 872
 1,582
 619
 772
 1,391
 543
 648
 1,191
Companion Animals872 892 1,764 724 885 1,609 710 872 1,582 
Total Animal Health segment sales1,238

2,974

4,212

1,090

2,785

3,875

989

2,489

3,478
Total Animal Health segment sales1,484 3,219 4,703 1,306 3,086 4,393 1,238 2,974 4,212 
Other segment sales (3)
248
 2
 250
 396
 1
 397
 385
 
 385
Other segment sales (4)
Other segment sales (4)
23 0 23 174 175 248 250 
Total segment sales18,094

24,057

42,151

17,340

22,322

39,662

18,447

20,566

39,014
Total segment sales20,956 26,791 47,747 20,433 25,885 46,319 18,228 23,923 42,151 
Other (4)
118
 26
 143
 84
 376
 460
 31
 763
 793
Other (5)
Other (5)
71 176 247 86 436 521 118 26 143 
$18,212
 $24,083

$42,294

$17,424
 $22,698

$40,122

$18,478
 $21,329

$39,807
$21,027 $26,967 $47,994 $20,519 $26,321 $46,840 $18,346 $23,949 $42,294 
U.S. plus international may not equal total due to rounding.
(1)
(1)     Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 4).
(2)     Alliance revenue represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 4).
(3)    Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(4)    Represents sales for the non-reportable segments of Healthcare Services (fully divested in the first quarter of 2020) and Alliances (which concluded in 2018).
(5)    Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales.
133

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 2018 and 2017 include sales in the European markets that were previously part of SPMSD. Amounts for 2016 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 do, however, include supply sales to SPMSD.
(2)
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(3)
Represents the non-reportable segments of Healthcare Services and Alliances.
(4)
Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in 2018, 2017 and 2016 also includes approximately $95 million, $85 million and $170 million, respectively, related to the sale of the marketing rights to certain products.

Consolidated revenuessales by geographic area where derived are as follows:
Years Ended December 31202020192018
United States$21,027 $20,519 $18,346 
Europe, Middle East and Africa13,600 12,707 12,213 
China3,624 3,207 2,184 
Japan3,376 3,583 3,212 
Asia Pacific (other than China and Japan)2,864 2,943 2,909 
Latin America2,274 2,469 2,415 
Other1,229 1,412 1,015 
 $47,994 $46,840 $42,294 
Years Ended December 312018 2017 2016
United States$18,212
 $17,424
 $18,478
Europe, Middle East and Africa12,213
 11,478
 10,953
Japan3,212
 3,122
 2,846
Asia Pacific (other than Japan and China)2,909
 2,751
 2,483
Latin America2,415
 2,339
 2,155
China2,184
 1,586
 1,435
Other1,149
 1,422
 1,457
 $42,294
 $40,122
 $39,807
A reconciliation of segment profits to Income before taxes is as follows:
Years Ended December 312018 2017 2016Years Ended December 31202020192018
Segment profits:     Segment profits:
Pharmaceutical segment$24,292
 $22,495
 $22,141
Pharmaceutical segment$29,722 $28,324 $24,871 
Animal Health segment1,659
 1,552
 1,357
Animal Health segment1,650 1,609 1,659 
Other segments103
 275
 146
Other segments1 (7)103 
Total segment profits26,054
 24,322
 23,644
Total segment profits31,373 29,926 26,633 
Other profits6
 26
 481
Other profits140 363 
Unallocated:     Unallocated:
Interest income343
 385
 328
Interest income59 274 343 
Interest expense(772) (754) (693)Interest expense(831)(893)(772)
Depreciation and amortization(1,334) (1,378) (1,585)Depreciation and amortization(1,602)(1,593)(1,352)
Research and development(8,853) (9,481) (9,218)Research and development(13,072)(9,499)(9,432)
Amortization of purchase accounting adjustments(2,664) (3,056) (3,692)Amortization of purchase accounting adjustments(1,168)(1,406)(2,664)
Restructuring costs(632) (776) (651)Restructuring costs(578)(638)(632)
Charge related to termination of collaboration agreement with Samsung(423) 
 
Loss on extinguishment of debt
 (191) 
Gain on sale of certain migraine clinical development programs
 
 100
Charge related to the settlement of worldwide Keytruda patent litigation

 
 (625)
Charge related to the termination of a collaboration with SamsungCharge related to the termination of a collaboration with Samsung0 (423)
Other unallocated, net(3,024) (2,576) (3,430)Other unallocated, net(5,530)(5,070)(3,006)
$8,701
 $6,521
 $4,659
Income Before TaxesIncome Before Taxes$8,791 $11,464 $8,701 
Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.
Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.

Other unallocated, net includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value of liabilities for contingent consideration, and other miscellaneous income or expense items.
In 2018, the Company adopted a new accounting standard related to the classification
134

Table of certain defined benefit plan costs (see Note 2), which resulted in a change to the measurement of segment profits. Net periodic benefit cost (credit) other than service cost is no longer included as a component of segment profits. Prior period amounts have been recast to conform to the new presentation.Contents
Equity (income) loss from affiliates and depreciation and amortization included in segment profits is as follows:
PharmaceuticalAnimal HealthAll OtherTotal
Pharmaceutical Animal Health All Other Total
Year Ended December 31, 2020Year Ended December 31, 2020      
Included in segment profits:Included in segment profits:
Equity (income) loss from affiliatesEquity (income) loss from affiliates$6 $0 $0 $6 
Depreciation and amortizationDepreciation and amortization690 164 1 855 
Year Ended December 31, 2019Year Ended December 31, 2019      
Included in segment profits:Included in segment profits:
Equity (income) loss from affiliatesEquity (income) loss from affiliates$$$$
Depreciation and amortizationDepreciation and amortization534 109 10 653 
Year Ended December 31, 2018          Year Ended December 31, 2018      
Included in segment profits:       Included in segment profits:
Equity (income) loss from affiliates$4
 $
 $
 $4
Equity (income) loss from affiliates$$$$
Depreciation and amortization243
 82
 10
 335
Depreciation and amortization411 82 10 503 
Year Ended December 31, 2017          
Included in segment profits:       
Equity (income) loss from affiliates$7
 $
 $
 $7
Depreciation and amortization125
 75
 12
 212
Year Ended December 31, 2016          
Included in segment profits:       
Equity (income) loss from affiliates$(105) $
 $
 $(105)
Depreciation and amortization160
 10
 13
 183
Property, plant and equipment, net, by geographic area where located is as follows:
December 312018 2017 2016December 31202020192018
United States$8,306
 $8,070
 $8,114
United States$10,526 $8,974 $8,306 
Europe, Middle East and Africa3,706
 3,151
 2,732
Europe, Middle East and Africa6,059 4,767 3,706 
Asia Pacific (other than Japan and China)684
 632
 623
Asia Pacific (other than China and Japan)Asia Pacific (other than China and Japan)761 714 684 
Latin America264
 271
 234
Latin America252 266 264 
China167
 150
 152
China217 174 167 
Japan159
 158
 164
Japan166 152 159 
Other5
 7
 7
Other5 
$13,291
 $12,439
 $12,026
$17,986 $15,053 $13,291 
The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented.

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Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of Merck & Co., Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheetssheet of Merck & Co., IncInc. and its subsidiaries (the “Company”) as of December 31, 20182020 and 2017,2019, 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, 2018,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for retirement benefits in 2018.


Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Customer Discount Accruals in the U.S. - Medicaid, Managed Care and Medicare Part D Rebates
As described in Note 2 to the consolidated financial statements, the Company records certain variable consideration including discounts, which are estimated at the time of sale generally using the expected value method. Amounts accrued for aggregate customer discounts as of December 31, 2020 in the U.S. are $3.1 billion and are evaluated on a quarterly 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. Certain of these discounts take the form of rebates, which are amounts owed based upon definitive contractual agreements or legal requirements with private sector (Managed Care) 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 patient usage, as well as inventory levels in the distribution channel to determine the contractual obligation to the benefit providers. Management uses historical customer segment utilization mix, 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.
The principal considerations for our determination that performing procedures relating to customer discount accruals in the U.S. - Medicaid, Managed Care, and Medicare Part D rebates is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing the provisions, as the provisions include assumptions related to changes to price and historical customer segment utilization mix, pertaining to forecasted customer claims that may not be fully paid until a subsequent period. This in turn led to a high degree of auditor judgment, subjectivity and effort in applying the procedures related to those assumptions and in evaluating the evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to customer discount accruals in the U.S. - Medicaid, Managed Care, and Medicare Part D rebates, including management’s controls over the assumptions used to estimate the corresponding rebate accruals. These procedures also included, among others, (i) developing an independent estimate of the rebate accruals by utilizing third party data on historical customer segment utilization mix in the U.S., changes to price, the terms of the specific rebate programs, and the historical trend of actual rebate claims paid, (ii) comparing the independent estimate to the rebate accruals recorded by management and (iii) testing actual rebate claims paid, including evaluating those claims for consistency with the contractual terms of the Company’s rebate agreements.
mrk-20201231_g2.jpg
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 27, 2019

25, 2021
We have served as the Company’s auditor since 2002.


(b)Supplementary Data
Selected quarterly financial data for 2018 and 2017 are contained in the Condensed Interim Financial Data table below.
Condensed Interim Financial Data (Unaudited)
137
($ in millions except per share amounts)
4th Q (1)
 
3rd Q (2)
 2nd Q 
1st Q (3)
2018 (4)
       
Sales$10,998
 $10,794
 $10,465
 $10,037
Cost of sales3,289
 3,619
 3,417
 3,184
Selling, general and administrative2,643
 2,443
 2,508
 2,508
Research and development2,214
 2,068
 2,274
 3,196
Restructuring costs138
 171
 228
 95
Other (income) expense, net110
 (172) (48) (291)
Income before taxes2,604
 2,665
 2,086
 1,345
Net income attributable to Merck & Co., Inc.1,827
 1,950
 1,707
 736
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$0.70
 $0.73
 $0.64
 $0.27
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$0.69
 $0.73
 $0.63
 $0.27
2017 (4) (5)
       
Sales$10,433
 $10,325
 $9,930
 $9,434
Cost of sales3,440
 3,307
 3,116
 3,049
Selling, general and administrative2,643
 2,459
 2,500
 2,472
Research and development2,314
 4,413
 1,782
 1,830
Restructuring costs306
 153
 166
 151
Other (income) expense, net(149) (207) (73) (71)
Income before taxes1,879
 200
 2,439
 2,003
Net (loss) income attributable to Merck & Co., Inc.(1,046) (56) 1,946
 1,551
Basic (loss) earnings per common share attributable to Merck & Co., Inc. common shareholders$(0.39) $(0.02) $0.71
 $0.56
(Loss) earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$(0.39) $(0.02) $0.71
 $0.56
(1)
Amounts for 2017 include a provisional net tax charge related to the enactment of U.S. tax legislation (see Note 16).
(2)
Amounts for 2017 include a charge related to the formation of a collaboration with AstraZeneca (see Note 4).
(3)
Amounts for 2018 include a charge related to the formation of a collaboration with Eisai (see Note 4).

(4) Amounts for 2018 and 2017 reflect acquisition and divestiture-related costs (see Note 8) and the impact
Table of restructuring actions (see Note 5).Contents
(5) Amounts have been recast as a result of the adoption, on January 1, 2018, of a new accounting standard related to the classification of certain defined benefit plan costs. There was no impact to net income as a result of adopting the new accounting standard (see Note 2).


Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.  Controls and Procedures.
Item 9A.      Controls and Procedures.
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Act)) are effective. For the fourth quarter of 2018,2020, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Act. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2018.2020. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has performed its own assessment of the effectiveness of the Company’s internal control over financial reporting and its attestation report is included in this Form 10-K filing.
Management’s Report
Management’s Responsibility for Financial Statements
Responsibility for the integrity and objectivity of the Company’s financial statements rests with management. The financial statements report on management’s stewardship of Company assets. These statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management’s best estimates and judgments. Nonfinancial information included in the Annual Report on Form 10-K has also been prepared by management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded, management maintains an effective system of internal controls and procedures, important elements of which include: careful selection, training and development of operating and financial managers; an organization that provides appropriate division of responsibility; and communications aimed at assuring that Company policies and procedures are understood throughout the organization. A staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis.
To ensure that personnel continue to understand the system of internal controls and procedures, and policies concerning good and prudent business practices, annually all employees of the Company are required to complete Code of Conduct training. This training reinforces the importance and understanding of internal controls by reviewing key corporate policies, procedures and systems. In addition, the Company has compliance programs, including an ethical business practices program to reinforce the Company’s long-standing commitment to high ethical standards in the conduct of its business.
The financial statements and other financial information included in the Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows. Our formal certification to the Securities and Exchange Commission is included in this Form 10-K filing.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued

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Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2018.2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018,2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
mrk-20201231_g3.jpg
mrk-20201231_g4.jpg
Kenneth C. FrazierRobert M. Davis
Chairman, President

and Chief Executive Officer
Executive Vice President, Global Services,

and Chief Financial Officer

Item 9B.Other Information.
Item 9B.    Other Information.
None.

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PART III
 
Item 10.Directors, Executive Officers and Corporate Governance.
Item 10.Directors, Executive Officers and Corporate Governance.
The required information on directors and nominees is incorporated by reference from the discussion under Proposal 1. Election of Directors of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021. Information on executive officers is set forth in Part I of this document on page 32.44.
The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934, if applicable, is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial“Stock Ownership Reporting Compliance”Information” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
The Company has a Code of Conduct — Our Values and Standards applicable to all employees, including the principal executive officer, principal financial officer, principal accounting officer and Controller. The Code of Conduct is available on the Company’s website at www.merck.com/about/code_of_conduct.pdf.company-overview/culture-and-values/code-of-conduct/values-and-standards. The Company intends to disclose future amendments to certain provisions of the Code of Conduct, and waivers of the Code of Conduct granted to executive officers and directors, if any, on the website within four business days following the date of any amendment or waiver. Every Merck employee is responsible for adhering to business practices that are in accordance with the law and with ethical principles that reflect the highest standards of corporate and individual behavior.
The required information on the identification of the audit committee and the audit committee financial expert is incorporated by reference from the discussion under the heading “Board Meetings and Committees” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
Item 11.Executive Compensation.
Item 11.Executive Compensation.
The information required on executive compensation is incorporated by reference from the discussion under the headings “Compensation Discussion and Analysis”,Analysis,” “Summary Compensation Table”,Table,” “All Other Compensation” table, “Grants of Plan-Based Awards” table, “Outstanding Equity Awards” table, “Option Exercises and Stock Vested” table, “Pension Benefits” table, “Nonqualified Deferred Compensation” table, Potential“Potential Payments Upon Termination or a Change in Control,Control”, including the discussion under the subheadings “Separation” and “Change in Control”,Control,” as well as all footnote information to the various tables, of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
The required information on director compensation is incorporated by reference from the discussion under the heading “Director Compensation” and related “Director Compensation”“2020 Schedule of Director Fees” table and “Schedule of“2020 Director Fees”Compensation” table of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
The required information under the headings “Compensation and Benefits Committee Interlocks and Insider Participation” and “Compensation and Benefits Committee Report” is incorporated by reference from the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.


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Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Stock Ownership Information” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
Equity Compensation Plan Information
The following table summarizes information about the options, warrants and rights and other equity compensation under the Company’s equity compensation plans as of the close of business on December 31, 2018.2020. The table does not include information about tax qualified plans such as the Merck U.S. Savings Plan.
Plan CategoryNumber of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders(1)
19,446,307(2)
$63.64 100,353,680 
Equity compensation plans not approved by security holders— — — 
Total19,446,307 $63.64 100,353,680 
(1)Includes options to purchase shares of Company Common Stock and other rights under the following shareholder-approved plans: the Merck & Co., Inc. 2010 and 2019 Incentive Stock Plans, and the Merck & Co., Inc. 2010 Non-Employee Directors Stock Option Plan.
(2)Excludes approximately 11,914,491 shares of restricted stock units and 2,099,739 performance share units (assuming maximum payouts) under the Merck Sharp & Dohme 2010 and 2019 Incentive Stock Plans. Also excludes 193,746 shares of phantom stock deferred under the MSD Employee Deferral Program and 564,209 shares of phantom stock deferred under the Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Plan Category 
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
 
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
 
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders(1)
 
23,807,101(2)

 $51.89
 110,977,283
Equity compensation plans not approved by security holders 
 
 
Total 23,807,101
 $51.89
 110,977,283
(1)
Includes options to purchase shares of Company Common Stock and other rights under the following shareholder-approved plans: the Merck Sharp & Dohme 2004, 2007 and 2010 Incentive Stock Plans, the Merck & Co., Inc. 2006 and 2010 Non-Employee Directors Stock Option Plans, and the Merck & Co., Inc. Schering-Plough 2002 and 2006 Stock Incentive Plans.
(2)
Excludes approximately 16,128,455 shares of restricted stock units and 2,039,065 performance share units (assuming maximum payouts) under the Merck Sharp & Dohme 2004, 2007 and 2010 Incentive Stock Plans. Also excludes 224,599 shares of phantom stock deferred under the MSD Employee Deferral Program and 582,155 shares of phantom stock deferred under the Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
The required information on transactions with related persons is incorporated by reference from the discussion under the heading “Related Person Transactions” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
The required information on director independence is incorporated by reference from the discussion under the heading “Independence of Directors” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.
Item 14.Principal Accountant Fees and Services.
Item 14.Principal Accountant Fees and Services.
The information required for this item is incorporated by reference from the discussion under Proposal 4.3. Ratification of Appointment of Independent Registered Public Accounting Firm for 20192021 beginning with the caption “Pre-Approval Policy for Services of Independent Registered Public Accounting Firm” through “Fees for Services Provided by the Independent Registered Public Accounting Firm” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2019.25, 2021.

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PART IV
 
Item 15.Exhibits and Financial Statement Schedules.
Item 15.Exhibits and Financial Statement Schedules.
(a)    The following documents are filed as part of this Form 10-K
1.    Financial Statements
Consolidated statement of income for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated statement of comprehensive income for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated balance sheet as of December 31, 20182020 and 20172019
Consolidated statement of equity for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated statement of cash flows for the years ended December 31, 2018, 20172020, 2019 and 20162018
Notes to consolidated financial statements
Report of PricewaterhouseCoopers LLP, independent registered public accounting firm
2.    Financial Statement Schedules
Schedules are omitted because they are either not required or not applicable.
Financial statements of affiliates carried on the equity basis have been omitted because, considered individually or in the aggregate, such affiliates do not constitute a significant subsidiary.
142

3.    Exhibits
Exhibit
Number
Description
3.1
3.2
4.1Indenture, dated as of April 1, 1991, between Merck Sharp & Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York), as Trustee (the 1991 Indenture) — Incorporated by reference to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No. 33-39349)
4.2
4.3
4.4
4.5
4.6
4.7

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Table of Contents
Exhibit
Number
Description
4.8
4.9
4.10Long-term debt instruments under which
*10.14.11
4.12
*10.1
*10.2
*10.3
*10.4
*10.5
*10.610.4
*10.7
*10.810.5
*10.910.6
*10.1010.7
*10.1110.8
10.12*10.9

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Exhibit
Number
Description
*10.1310.10
*10.1410.11
*10.15
*10.1610.12
10.17
*10.1810.13
*10.14
*10.1910.15
*10.20
*10.2110.16
*10.2210.17
*10.2310.18
10.2410.19
10.2510.20
10.2610.21
10.27
10.2810.22
21*10.23
*10.24
21
23
24.1
24.2

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31.1
31.2
32.1
32.2
Exhibit
Number
Description
31.1101.INSXBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
31.2101.SCHXBRL Taxonomy Extension Schema Document.
32.1101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
32.2101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101101.LABThe following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, formattedXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.Exhibit 101).
*Management contract or compensatory plan or arrangement.
Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.
Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and Exchange Commission on request.



Item 16.    Form 10-K Summary


Not applicable.



146

Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:    February 27, 201925, 2021
 
MERCK & CO., INC.
By:KENNETH C. FRAZIER
(Chairman, President and Chief Executive Officer)
MERCK & CO., INC.
By:KENNETH C. FRAZIER
(Chairman, President and Chief Executive Officer)
By:/s/ JENNIFER ZACHARY
Jennifer Zachary
(Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SignaturesTitleDate
SignaturesTitleDate
KENNETH C. FRAZIER
Chairman, President and Chief Executive Officer;
Principal Executive Officer; Director
February 27, 201925, 2021
ROBERT M. DAVISExecutive Vice President, Global Services, and Chief Financial Officer; Principal Financial OfficerFebruary 27, 201925, 2021
RITA A. KARACHUN
Senior Vice President Finance-Global Controller;
Principal Accounting Officer
February 27, 201925, 2021
LESLIE A. BRUNDirectorFebruary 27, 201925, 2021
THOMAS R. CECHDirectorFebruary 27, 201925, 2021
MARY ELLEN COEDirectorFebruary 25, 2021
PAMELA J. CRAIGDirectorFebruary 27, 201925, 2021
THOMAS H. GLOCERDirectorFebruary 27, 201925, 2021
ROCHELLE B. LAZARUSRISA J. LAVIZZO-MOUREYDirectorFebruary 27, 201925, 2021
JOHN H. NOSEWORTHYDirectorFebruary 27, 2019
PAUL B. ROTHMANDirectorFebruary 27, 201925, 2021
PATRICIA F. RUSSODirectorFebruary 27, 201925, 2021
CHRISTINE E. SEIDMANDirectorFebruary 25, 2021
INGE G. THULINDirectorFebruary 27, 201925, 2021
WENDELL P. WEEKSKATHY J. WARDENDirectorFebruary 27, 201925, 2021
PETER C. WENDELLDirectorFebruary 27, 201925, 2021
Jennifer Zachary, by signing her name hereto, does hereby sign this document pursuant to powers of attorney duly executed by the persons named, filed with the Securities and Exchange Commission as an exhibit to this document, on behalf of such persons, all in the capacities and on the date stated, such persons including a majority of the directors of the Company.
 
By:/S/ JENNIFER ZACHARY
Jennifer Zachary
(Attorney-in-Fact)


EXHIBIT INDEX
Exhibit
Number
By:
Description
3.1
3.2
4.1Indenture, dated as of April 1, 1991, between Merck Sharp & Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York), as Trustee (the 1991 Indenture) — Incorporated by reference to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No. 33-39349)
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and Exchange Commission on request.
*10.1
*10.2
*10.3
*10.4

/S/ JENNIFER ZACHARY
Exhibit
Number
Description
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18

Jennifer Zachary
Exhibit
Number
Description
*10.19
*10.20
*10.21
*10.22
*10.23
10.24
10.25
10.26
10.27
10.28
21
23
24.1
24.2
31.1
31.2
32.1
32.2
101The following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.(Attorney-in-Fact)
147
*Management contract or compensatory plan or arrangement.
Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.

141